Three-Minute Thesis Competition 2015 - Faculty of Mathematics Heat, Junsen Tang
638 views · Published 1 April 2015 · 3:26 · Indexed 4 November 2026
Channel: uwaterloo · 2015 · Education
“Pricing and Hedging Variable Annuity With State-Dependent Fee” Hello everyone. Today I’m going to talk a very familiar topic – it’s about variable annuities. So a variable annuity contract is one of the retirement investment options between you and insurance company. With a variable annuity, usually you will make purchase payments until age sixty, age sixty-five and then begin receiving regular income from the insurance company. And you many consider some other financial instruments like mutual funds. They promise to follow the real market performance very closely and without any guarantees. But unlike the mutual fund, variable annuities will offer a kind of guarantee. One of the biggest issues of this additional guarantee is the cost. The variable annuity cost can be much higher than many other investments. For example, it’s a standard charge to start with the mortality expense charge. And it’s normally around 1.2 percent. The underlying fees, behind, for the investment bond order, also are separately counted. Much like added fees for the writers can directly up to three percent. Now three percent, you say, not like a big number. Three percent annually can create huge headwinds to your portfolio and over time. So, one of the natural questions arises. So, can these expensive fees buy the annuity insurance be fair enough to the policy holder? Otherwise, how can we improve it? In fact, the portfolio – in fact, the annuity… sorry. In fact, the annuity is basically very expensive – especially in the hedging program. The type that we prefer is typically very expensive. In the transition to variable annuity, charge a constant fee rate and it does not depend on the market conditions. So my research proposed a so-called state-dependent fees that that really consider about the real market conditions And including the volatility level. And we expect the state-dependent fee will lower the cost, on average, for the variable annuities for the policy holder. And for the insurer, it can provide better matching before the guarantees they offer and the premiums they collect. And from our research, we expect that we can price the variable annuities with state-dependent fees. And give some expressive formula for that and also improve the hedging program of the variable annuities. Thanks.
