Pricing Variable Annuities Embedding Various Guaranteed Minimum Benefits

Abstract:

With the acceleration of population aging in China, the variable annuities have drawn a lot of attentions due to its anti-inflation, pension and investment functions. This paper studies the valuation of variable annuities embedding various guaranteed minimum benefits. We propose a willow tree method for pricing variable annuities under the jump-diffusion model in three guarantee types, including return of premium, Roll-up and Ratchet types. Our tree structure can be easily extended to other stochastic models. The willow tree construction and pricing procedure are independent of each other. Thus, for different stochastic models, it does not need extra work and has better applicability. Finally, numerical experiments demonstrate the accuracy and high efficiency of the proposed method compared with Monte Carlo method.