"Should Variable Annuity Providers Discriminate by Purchase Age?"

Summer student research supported by the Center for Applied Mathematics, and led by Dr. Throsten Moenig.

The final research project, in partnership with students Michael Painter and Dane Schreiber, was recently invited to "Revise and Resubmit" by North American Actuarial Journal.

Abstract: In recent years, variable annuity products have become a popular investment vehicle, in part due to their favorable tax treatment. A policyholder of a variable annuity often directs the insurer to invest his/her money in the equity market and hence faces an uncertainty that the investment might lose value. To offset this risk, at least partially, the policyholder can purchase (for an additional fee) a guarantee such as a Guaranteed Minimum Death Benefit (GMDB) that guarantees a certain level of payout at the time of the policy holder’s death if that happens before the policy maturity. Similarly, a Guaranteed Minimum Accumulation Benefit (GMAB) ensures that the policyholder will be paid a certain minimum amount at maturity if the policy holder survives till then, even if the fund value drops below the minimum level. In this project, we will investigate whether the fees charged by the insurance companies reflect the benefits provided. In particular, we want to consider whether the fee should depend on the policyholder’s age at inception of the variable annuity, and to what extent insurers account for that in practice