Valuing Equity-Indexed Annuities

Serena Tiong

111 citations0/0 files storedNorth American Actuarial Journal

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Stochastic processes and financial applications Insurance and Financial Risk Management Probability and Risk Models

Abstract

Equity-indexed annuities have generated a great deal of interest and excitement among both insurers and their customers since they were first introduced to the marketplace in early 1995. Because of the embedded options in these products, the insurers are presented with some challenging mathematical problems when it comes to the pricing and management of equity indexed annuities. This paper explores the pricing aspect of three of the most common product designs: the point-to-point, the cliquet, and the lookback. Based on certain assumptions, we are able to present the pricing formulas in closed form for the three product designs. The method of Esscher transforms is the fundamental tool for pricing such deferred annuities.

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References

1973The Pricing of Options and Corporate Liabilities 1990Options, Futures, and Other Derivative Securities.1987Brownian Motion and Stochastic Flow Systems.1995Option pricing by Esscher transforms.1998Derivatives: The Theory and Practice of Financial Engineering 1997The Complete Guide to Option Pricing Formulas 1999Essentials of Stochastic Finance 1979Path Dependent Options: "Buy at the Low, Sell at the High"

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2003Pricing Guaranteed Life Insurance Participating Policies with Annual Premiums and Surrender Option 2003Valuation of Equity-Indexed Annuities Under Stochastic Interest Rates 2003Pricing equity-indexed annuities with path-dependent options 2017Equity-linked annuity pricing with cliquet-style guarantees in regime-switching and stochastic volatility models with jumps 2009Pricing Annuity Guarantees Under a Regime-Switching Model 2003Pricing Lookback Options and Dynamic Guarantees

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