A policyholder's utility indifference valuation model for the guaranteed annuity option

TL;DR

This paper develops a utility indifference valuation model for guaranteed annuity options, quantifying the extra amount policyholders are willing to pay for conversion rights in life insurance products.

Contribution

It introduces a novel indifference valuation approach specifically for G.A.O, integrating financial and actuarial perspectives to assess policyholder preferences.

Findings

Quantifies policyholder willingness to pay for G.A.O.

Provides a new valuation framework for long-term guarantees.

Enhances understanding of policyholder decision-making in life insurance.

Abstract

Insurance companies often include very long-term guarantees in participating life insurance products, which can turn out to be very valuable. Under a guaranteed annuity options (G.A.O), the insurer guarantees to convert a policyholder's accumulated funds to a life annuity at a fixed rated when the policy matures. Both financial and actuarial approaches have been used to valuate of such options. In the present work, we present an indifference valuation model for the guaranteed annuity option. We are interested in the additional lump sum that the policyholder is willing to pay in order to have the option to convert the accumulated funds into a lifelong annuity at a guaranteed rate.