Variable Annuities

Question 1

What is a step-up GMDB design?

Answer 1

minimum death benefit = highest AV on any past anniversary less than WDs since that anniversary

Question 2

What is the roll up GMDB design?

Answer 2

premiums accumulated at a specified interest rate adjusted for any withdrawals

GMDB(t) = GMDB(t-1) * (1+r) + Premiums(t) - WD (t)

r = usually 4-6%
GMDB is usually capped at 200% of premiums and stops at ages 75-80

Question 3

What are other GMWB designs?

Answer 3

1. GMWB = max (roll up, step up)
2. GMWB = % of contract gain at death

Question 4

What is the GMIB?

Answer 4

Guaranteed Minimum Income Benefit = When exercised, this converts a guaranteed amount into a fixed monthly pymt for life

Not very successful b/c p.h. do not like losing their AV when they go to annuitize

Question 5

What is the GMAB?

Answer 5

Guaranteed Minimum Accumulation Benefit = On any date the GMAB is payable, if the GMAB > AV, then the AV automatically increases to that level

Question 6

What is the GMWB? And how is it different from the GLWB (life)?

Answer 6

Guaranteed Minimum Withdrawal Benefit = fixed monthly payments for life, even when AV hits 0, however the guaranteed base is finite. Once that is reached, then no pymts.

GLWB is for life and the guaranteed base is unlimited

Question 7

What do the charges (as a % of assets) meant to cover?

Answer 7

• mortality and expense guarantees
• admin expenses
• profit
• rider charges for any GMDBs or GLBs

Question 9

What are 5 pricing considerations for VAs?

Answer 9

1. Lapses
2. Premium Persistency
3. Average Size
4. Expenses
5. Guaranteed Benefits

Question 10

Explain considerations on lapses when it comes to pricing VAs.

Answer 10

• VAs with guarantees must be priced with a dynamic lapse assumption because ITM levels will drive lapse behavior
• the level of asset income charges will impact AV and drive lapse behavior

Question 11

Explain the expenses associated with VAs?

Answer 11

• maintenance expenses are higher than fixed annuities
• commissions are lower than those on life insurance (VAs- low, trailing, whereas life - higher upfront comm)
• acquisition costs are recovered through asset-based charges, which are subject to equity risk

Question 12

How are guaranteed benefits priced?

Answer 12

• Priced stochastically
• Hedging costs are determined separately and included as a fixed expense

Question 13

Insurance companies need to set aside a reserve for the guaranteed benefits. Pricing the cost of the guarantee to fund the reserve requires assumptions about?

Answer 13

• future fund allocations
• mean and variance of total returns
• mortality for GMBs and also liftime payouts on GLWBs
• GLB utilization rates