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- Title
Time series model for GLWB with surrender benefit and stochastic interest rate: Dynamic withdrawal approach.
- Authors
Singh, Shakti; Arunachalam, Viswanathan; Selvamuthu, Dharmaraja
- Abstract
This study investigates the pricing problem of a variable annuity (VA) contract embedded with a guaranteed lifetime withdrawal benefit (GLWB) rider. VAs are annuities in which the value is linked to a bond and equity sub‐account fund. The guaranteed lifetime withdrawal benefit rider regularly provides a series of payments to the policyholder for the term of the policy while he/she is alive, regardless of portfolio performance. At the time of the policyholder's death, the remaining fund value is given to his nominee. Therefore, proper fund modeling is critical in the pricing of VA products. Several writers in the literature used a GBM model in which variance is considered to be constant to represent the fund value in a variable annuity contract. However, on the other hand, the returns on financial assets are non‐normally distributed in real life. A bit much Kurtosis, leverage effect, and Non‐zero Skewness characterize the returns. The generalized autoregressive conditional heteroscedastic (GARCH) models are also used for presenting a discrete framework for the pricing of GLWB. Still, the interest rate was kept constant without including the surrender benefit and the static withdrawal approach, which keeps the model far from the real scenario. Thus, in this research, the generalized GARCH models are used with surrender benefit and dynamic withdrawal strategy to develop a time series model for the pricing of annuity that overcomes the constraints of previous models. A numerical illustration and sensitivity analysis are used to examine the suggested model.
- Subjects
INTEREST rates; TIME series analysis; VARIABLE annuities; PORTFOLIO performance; GARCH model; SKEWNESS (Probability theory)
- Publication
Applied Stochastic Models in Business & Industry, 2023, Vol 39, Issue 3, p408
- ISSN
1524-1904
- Publication type
Article
- DOI
10.1002/asmb.2751