University of Connecticut

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Actuarial Science Seminar
High-Water Mark Fee Structure in Variable Annuities
Dongchen Li (University of St. Thomas)

Monday, November 11, 2019
11:00am – 12:00pm

Storrs Campus
MONT 214

Abstract. The fee structure of variable annuities is important for both insurers and policyholders. If well designed, it can help increase policyholders' welfare as well as reduce insurers' risk exposure. This paper proposes a high-water mark fee structure which differs from the fee structures in the literature in the sense that it advocates charging more fees for good performance of the investment account and less for the converse. From insurers' perspective, the pricing of variable annuities under this fee structure is formulated within a stochastic optimal stopping framework and the corresponding optimal surrender regions are compared with those of the other two fee structures: the constant and the state-dependent fee structures. From policyholders' perspective, we examine two types of behaviour patterns, namely the deterministic and stochastic surrender behaviour. For the former, the mean and the variance of variable annuities' payoff are computed under the high-water mark fee structure and compared with those of the other two fee structures. We unearth that the high-water mark fee structure reduces the variance of variable annuities' payoff. For the latter, we consider a policyholder with mean-variance objective and discover that the high-water mark fee structure increases the policyholder's welfare.

Speaker bio: https://www.stthomas.edu/mathematics/faculty/dongchen-li.html

Contact:

Bin Zou, bin.zou@uconn.edu

Actuarial Science Seminar (primary), UConn Master Calendar

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