Reserving, pricing and hedging for policies with guaranteed annuity options [mp3 sound file]

Document description

This paper considers reserving and pricing methodologies for a pensions-type contract with a simple form of guaranteed annuity option. It considers only unit-linked contracts, but the methodologies and, to some extent, the numerical results would apply also to with profits contracts. The paper considers two approaches to reserving and pricing. The first section of the paper considers quantile, and conditional tail expectation, reserves. The second section of the paper considers the feasibility of using option pricing methodology to dynamically hedge a guaranteed annuity option. Finally, the paper describes several enhancements to the models and methodology which would make them even more realistic, though generally they would have the effect of increasing the required contingency reserves.<br>Keywords: guaranteed annuity options\; contingency reserves\; quantile reserves\; conditional tail expectations\; charging for contingency reserves\; mortality improvements\; quanto options\; option prices\; hedging proportions\; dynamic hedging\; empirical hedging\; hedging errors\; transaction costs\; practicability of hedging\; fat-tailed innovations\; stochastic mortality models\; stochastic hypermodels\; stochastic bridges\; Brownian bridges\; Ornstein-Uhlenbeck bridges.