Long guarantees with short duration: the rolling annuity |
| |
Authors: | Søren Fiig Jarner Michael Preisel |
| |
Institution: | 1. Quantitative Research, Danish Labour Market Supplementary Pension Fund (ATP), Hiller?d, Denmark.sj@atp.dk;3. Quantitative Research, Danish Labour Market Supplementary Pension Fund (ATP), Hiller?d, Denmark. |
| |
Abstract: | We present a new type of with-profits annuities which offer lifelong, yet hedgeable, guarantees. The rolling annuity gives a minimum lifelong guarantee at the time of contribution complemented with a series of guaranteed increases prior to retirement. Importantly, the initial guarantee and the subsequent increases are all set at prevailing market rates and hence are not known in advance. The structure of the guarantee implies that, prior to the last increase, the liability is equivalent to a zero-coupon bond maturing at the next increase and can therefore easily be hedged in the financial markets. Furthermore, the short duration implies that the financial and regulatory value will (essentially) coincide. We show financial fairness and we derive the reserve and thereby the hedging strategy. We also consider longevity risk, the duration profile, and report on a simulation study of the real value of the final payout. |
| |
Keywords: | With-profits annuity reserving hedging Solvency2 longevity risk duration real value |
|
|