Affordable and adequate annuities with stable payouts: Fantasy or reality?

Servaas van Bilsen, Daniël Linders

Research output: Contribution to journalArticle

Abstract

This paper introduces a class of unit-linked annuities that extends existing annuities by allowing portfolio shocks to be gradually absorbed into the annuity payouts. Consequently, our new class enables insurers to offer an affordable and adequate annuity with a stable payout stream. We show how to price and adequately hedge the annuity payouts in a general financial environment. In particular, our model accounts for various stylized facts of stock returns such as asymmetry and heavy-tailedness. Furthermore, the generality of our framework makes it possible to explore the impact of a parameter misspecification on the annuity price and the hedging performance.

Original languageEnglish (US)
Pages (from-to)19-42
Number of pages24
JournalInsurance: Mathematics and Economics
Volume86
DOIs
StatePublished - May 2019

Keywords

  • Buffering of portfolio shocks
  • General financial market
  • Model risk
  • Risk management framework
  • Unit-linked annuities

ASJC Scopus subject areas

  • Statistics and Probability
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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