A0596
Title: Pricing a guaranteed annuity option under a stochastic correlation setting
Authors: Yixing Zhao - Guangdong University of Foreign Studies (China) [presenting]
Rogemar Mamon - University of Western Ontario (Canada)
Abstract: Recent regulatory overhauls in North America and Europe require insurers to revise capital requirements across multiple insurance product domains. These cover unique challenges akin to guaranteed minimum benefits in variable annuities and risk correlations. The urgent need to establish robust pricing methodologies for option-embedded guarantees is addressed. The focus is on the pricing of a guaranteed annuity option (GAO), which offers investors with both growth prospects and downside protection. A stochastic correlation framework is proposed to capture the dynamic dependence between financial and longevity risks. When the traditional Monte-Carlo method is used as a baseline, the change of probability measures approach not only generates accurate GAO values but also features a remarkably efficient computation. An analysis of the magnitude and direction of the impact of the model parameters on GAO prices is also presented. Both the theoretical and applied contributions have central importance to insurers and regulators alike and to the concerted efforts to sustain the insurance sector's stability and consumer protection.
