Optimal consumption and allocation in variable annuities with Guaranteed Minimum Death Benefits
Insurance : Mathematics and Economics
GMDB, Variable annuity, Merton model, Expected utility
We determine the optimal allocation of funds between the fixed and variable subaccounts in a variable annuity with a GMDB (Guaranteed Minimum Death Benefit) clause featuring partial withdrawals by using a utility-based approach. The Merton method is applied by assuming that individuals allocate funds optimally in order to maximize the expected utility of lifetime consumption. It also reflects bequest motives by including the recipient’s utility in terms of the policyholder’s guaranteed death benefits. We derive the optimal transfer choice by the insured, and furthermore price the GMDB through maximizing the discounted expected utility of the policyholders and beneficiaries by investing dynamically in the fixed account and variable fund and withdrawing optimally.
Financial support from the Society of Actuaries under the CAE research grant.
Copyright © 2012 Elsevier B.V.
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Gao, J., & Ulm, E. R. (2012). Optimal consumption and allocation in variable annuities with Guaranteed Minimum Death Benefits. Insurance: Mathematics and Economics, 51(3), 586-598. doi: 10.1016/j.insmatheco.2012.08.003