Lapse-and-Reentry in Variable Annuities
Speaker: Thorsten Moenig, Temple University
Date & Time:
12:00 PM - 1:00 PM
Owens Science Hall (OWS) 250
Abstract: Section 1035 of the current US tax code allows policyholders to exchange their variable annuity (VA) policy for a similar product while maintaining tax-deferred status. This ``lapse-and-reentry'' strategy allows policyholders to potentially increase the value of the guarantees embedded in their VA policies. We show that for a return-of-premium death benefit guarantee this strategy is frequently optimal. This has severe repercussions for pricing. Therefore, we analyze various policy features that may help mitigate the incentive to lapse, and compare them regarding the insurer's average expense payments and their post-tax utility to the policyholder. We find that a ratchet-type guarantee and a state-dependent fee structure best mitigate the lapse-and-reentry problem, outperforming the typical surrender schedule. Further, our model indicates that when accounting for proper tax treatment, the policyholder prefers a variable annuity with either of these three policy features over a comparable stock investment.
Biosketch: Thorsten Moenig is an assistant professor of actuarial science at Temple University. His research focuses mostly on the impact of market frictions on policyholder behavior and contract design for variable annuity policies. His work has been published in the Journal of Risk and Insurance, the North American Actuarial Journal, and the Review of Finance. Dr. Moenig holds a Masters’ degree in Actuarial Science from the University of Connecticut and a PhD in Risk Management and Insurance from Georgia State University. Prior to joining Temple, he taught actuarial science at the University of St. Thomas.