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15. Taxation and policyholder behavior: the case of guaranteed minimum accumulation benefits

Author

Alonso Garcia, Jennifer, Sherris, Michael, Thirurajah, Samuel, Ziveyi, Jonathan, Alonso Garcia, Jennifer, Sherris, Michael, Thirurajah, Samuel, and Ziveyi, Jonathan

Abstract

This paper considers variable annuity (VA) contracts embedded with guaranteed minimum accumulation benefit (GMAB) riders when policyholder’s proceeds are taxed upon early surrender or maturity. These contracts promise the return of the premium paid by the policyholder, or a higher rolled-up value, at the end of the investment period. A partial differential equation valuation framework which exploits the numerical method of lines is used to determine fair fees that render the policyholder and insurer breakeven. Two taxation regimes are considered: one where capital gains are allowed to offset losses and a second where gains do not offset losses. Most insurance providers highlight the tax-deferred features of VA contracts. We show that the regime under which the insured is taxed significantly impacts prices. If losses are allowed to offset gains then this enhances the market, increasing the policyholder’s willingness to participate in the market compared to the case when losses are not allowed to offset gains. With fair fees from the policyholder’s perspective, we show that the net profit is generally positive for insurance companies offering the contract as a naked option without any hedge. We also show how investment policy, as reflected in the Sharpe ratio, impacts and interacts with policyholder persistency., SCOPUS: ar.j, info:eu-repo/semantics/published

Published
2024

16. Managing Systematic Mortality Risk in Life Annuities: An Application of Longevity Derivatives

Author

Fung, Man Chung, Ignatieva, Katja, and Sherris, Michael

Subjects
Quantitative Finance - Computational Finance, Quantitative Finance - Risk Management
Abstract

This paper assesses the hedge effectiveness of an index-based longevity swap and a longevity cap. Although swaps are a natural instrument for hedging longevity risk, derivatives with non-linear pay-offs, such as longevity caps, also provide downside protection. A tractable stochastic mortality model with age dependent drift and volatility is developed and analytical formulae for prices of these longevity derivatives are derived. Hedge effectiveness is considered for a hypothetical life annuity portfolio. The hedging of the life annuity portfolio is comprehensively assessed for a range of assumptions for the market price of longevity risk, the term to maturity of the hedging instruments, as well as the size of the underlying annuity portfolio. The model is calibrated using Australian mortality data. The results provide a comprehensive analysis of longevity hedging, highlighting the risk management benefits and costs of linear and nonlinear payoff structures., Comment: 23 pages; under review

Published
2015

26. Portfolio management for insurers and pension funds and COVID-19: targeting volatility for equity, balanced, and target-date funds with leverage constraints.

Author

Doan, Bao, Reeves, Jonathan J., and Sherris, Michael

Subjects
FINANCIAL crises, PENSION trust management, PORTFOLIO management (Investments), MARKET volatility, STOCK funds, EQUITY management, ASSET-liability management, BALANCED scorecard
Abstract

Insurers and pension funds face the challenges of historically low-interest rates and high volatility in equity markets, that have been accentuated due to the COVID-19 pandemic. Recent advances in equity portfolio management with a target volatility have been shown to deliver improved on average risk-adjusted return, after transaction costs. This paper studies these targeted volatility portfolios in applications to equity, balanced, and target-date funds with varying constraints on leverage. Conservative leverage constraints are particularly relevant to pension funds and insurance companies, with more aggressive leverage levels appropriate for alternative investments. We show substantial improvements in fund performance for differing leverage levels, and of most interest to insurers and pension funds, we show that the highest Sharpe ratios and smallest drawdowns are in targeted volatility-balanced portfolios with equity and bond allocations. Furthermore, we demonstrate the outperformance of targeted volatility portfolios during major stock market crashes, including the crash from the COVID-19 pandemic. [ABSTRACT FROM AUTHOR]

Published
2024
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31. Editorial

Author

Sherris, Michael

Published
2016

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