Assessing Guaranteed Minimum Income Benefits and Rationality of Exercising Reset Options in Variable

TL;DR

This paper analyzes the value and decision-making factors of guaranteed minimum income benefits and reset options in variable annuities, focusing on parameter sensitivity and interest rate thresholds.

Contribution

It introduces a model to evaluate the value of GMIB and the rationality of exercising reset options based on interest rate projections.

Findings

Sensitivity of GMIB value to various parameters

Critical interest rate value for exercising reset options

Insights into pricing and exercising strategies for policyholders and insurers

Abstract

A variable annuity is an equity-linked financial product typically offered by insurance companies. The policyholder makes an upfront payment to the insurance company and, in return, the insurer is required to make a series of payments starting at an agreed upon date. For a higher premium, many insurance companies offer additional guarantees or options which protect policyholders from various market risks. This research is centered around two of these options: the guaranteed minimum income benefit (GMIB) and the reset option. The sensitivity of various parameters on the value of the GMIB is explored, particularly the guaranteed payment rate set by the insurer. Additionally, a critical value for future interest rates is calculated to determine the rationality of exercising the reset option. This will be able to provide insight to both the policyholder and policy writer on how their future projections on the performance of the stock market and interest rates should guide their respective actions of exercising and pricing variable annuity options. This can help provide details into the value of adding options to a variable annuity for companies that are looking to make variable annuity policies more attractive in a competitive market.