Understanding the Riskiness of A GLWB Rider For FIAs

Insurance guarantees are exotic in nature because they have to take into consideration not only actuarial parameters (e.g. mortality) but have to address financial market guarantees and be tailored to more detail. Given that exotic derivatives can be, in general, very sensitive to all kinds of modeling assumptions, we immediately see that their appropriate modeling is a key for a company dealing with more and more narrow profit margins and lower returns on investments.

In this research paper, Pawel Konieczny, PhD, FRM, and Vice President of Insurance Solutions at Numerix, explores how GLWB guarantees have different risks when attached to an Fixed Index Annuities (FIA) vis-a-vis a Variable Annuity (VA). This paper assesses the risks associated with this rider and analyze how different modeling choices can affect these risks. In particular, the impacts of improving the estimate of future caps will be explored.

Highlights include:

• Challenges and Best Practices for Modeling Fixed Index Annuities
• Illustrations using Renewal Cap setting for Point to Point, Index Modeling, Point to Point Structure
• Renewal Cap Setting, Dynamic Cap Setting, Static Cap Setting
• Monthly Sum Caps (Cliquets), Impact of Modeling and Pricing Challenges