Impact of Flexible Periodic Premiums on Variable Annuity Guarantees |
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| Authors: | Carole Bernard Zhenyu Cui Steven Vanduffel |
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| Affiliation: | 1. Department of Accounting, Law and Finance, Grenoble Ecole de Management, Grenoble, France;2. Financial Engineering Division, School of Systems and Enterprises, Stevens Institute of Technology, Hoboken, New Jersey;3. Faculty of Economic and Social Sciences and Solvay Business School, Vrije Universiteit Brussel, Brussels, Belgium |
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| Abstract: | In this article, we study the fair fee of a flexible premium variable annuity (FPVA), in which the policyholder can choose to pay periodic premiums during the accumulation phase instead of a single initial premium. We are able to express fair fees using a fast and accurate approximation based on bounds on the price of the FPVA. We identify scenarios that are particularly costly for the insurer. Our study could help insurers estimate the magnitude of typical underpricing when offering flexible-premium variable annuities with the same fee as the corresponding single-premium variable annuity. |
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