Cheaper by the bundle: The interaction of frictions and option exercise in variable annuities
Abstract
Typical Variable Annuity products combine complex baseline contracts at substantial fees with optional guarantees. We argue this product design aligns with the benefits of bundling to the provider, to the extent that the baseline option features can reduce total replication value. This is possible due to market frictions, and particularly taxation rules, affecting policyholder exercise behavior. We demonstrate the relevance of this mechanism in the context of popular withdrawal guarantees, both theoretically and empirically. Specifically, we show that in the presence of personal taxes, adding on a common death benefit at baseline may decrease the total contract value to the provider.
Document Details
- Document Type
- Pub Defense Publication
- Publication Date
- Aug 05, 2022
- Source ID
- 10.1111/jori.12393
Entities
People
- Daniel Bauer
- Thorsten Moenig
Organizations
- Society of Actuaries
- Temple University
- United States Army Research Laboratory
- University of Wisconsin–Madison