An Analysis of Guaranteed Lifetime Withdrawal Benefits Linked to Target Volatility Portfolio

Abstract

GLWB is currently the most popular type of a variable annuity. GWLB promises the policyholder to annually withdraw a fixed amount from his investment account for the rest of his life, even if the value of the investment account drops to zero. However, from the insurer's point of view, GLWB contains several types of risk such as mortality risk, interest rate risk and financial risk. Target volatility strategy is used to create a dynamic re-balancing portfolio such that the overall volatility of portfolio maintains a stable level at all time. The strategy shifts the allocation of equity asset to non-risky asset in order to protect the portfolio from equity market crashes. Many insurance companies offer or consider GLWB linked to target volatility portfolios. This paper provides an extensive analysis of the GLWB linked to target volatility portfolio. In particular, we investigate the impact of stochastic volatility and mortality intensity on the pricing of the GLWB linked to target volatility portfolio. Moreover, we examine the lifetime probability of ruin for the target volatility portfolios.

Keywords: Target volatility portfolio, stochastic volatility, variable annuity, stochastic mortality intensity