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VA (Product (Pricing considerations (Expense, Size, Lapse => asset…
VA
Product
Mechanics
FV measured in units
unit value
Open-ended separate account structure
Unit Investment Trust
Annuitization pmt adjustment
Mostly single premium
Pricing considerations
Expense
Size
Lapse => asset charge income
Premium persistency
GMDB => fund allocation; mortality
Taxation
Capital gains => tax deferred @ income tax rate
Contributions => after-tax
Exclusion ratio => untaxed portion of ann. pmt (as a return of principal)
Backing Assets
FV => separate account
guarantees => general account
Charges
admin
GMXB fees
M&E
Expense risk: expense higher than expected
Mortality risk: longevity
Fund mgmt fees
Guar. Living Benefits
GMAB
GMIB
GMWB, GMLB
Risks
Hedging risks
Int rate risk
PH behavior risk
Counterparty risk
credit spread risk
Basis risk
GMDB shortfall risks
Asset shortfall
insufficient asset performance
can be hedged
Biometric shortfall
e.g. adverse mortality
can be minimized by diversification
Combination of above
Shortfall Formula
guar. pricing risks
theoretical price
risks
ignore frictional costs
model risk
ignore CoC
hedging price
replication risk
PH behavior risks
GMWB
PH behavior risk
Persistency risk (lapse)
Utilization risks => more utilizes this benefit than priced
Can't be hedged; long-term risks
Disruptive events
Market risk: hedging issue
embedded put option
rebalancing => hedging cost
stock movement
volatility
interest rate risk => int rate swap