Variable Annuity And The Pricing Of Guaranteed Minimum Benefits

On July 7,2010, China Insurance Regulatory Commission(CIRC) issued two notifications about the commencement of variable annuities(VA) in China and authorized qualified life insurance companies as well as pension companies to prepare to run pilot programs of VA. This means that variable annuities products which have been very successful abroad will formally enter Chinese insurance market.Variable annuities with guaranteed minimum benefits have started since the 1990s in the USA. In the following several years, it developed very well in North America, Japan and South Korea. Variable annuities are actually unit linked savings contracts with attaching guarantees. Comparing with other investment instruments, people prefer to buy variable annuities because they can benefit from the investment when the market goes up and have minimum guarantees when the market performs badly.Now the Chinese variable annuities market has just started and the insurance companies who got the authorizations are positively preparing for this new product. But there are very few literatures about VA inland, so this paper studies with strong practical significance. The article's target is to provide the academic background and operation way for variable annuity's application in China.Firstly, this paper talks about the background of variable annuities, the development of overseas markets and feasibility analysis in China. Then, it analyzes in detail the concept of variable annuities and the structure of the guaranteed minimum benefits in VA. We also identify risk exposures in variable annuities and introduce the risk hedging methods that are used in practice. Next, this paper studies pricing models for guaranteed minimum benefits in variable annuities which incorporated the considering of economic status transformation and does numerical analysis for GMWB with Regime-Switching model. Finally, the paper lists the difficulties of developing variable annuities in Chinese insurance market and gives the corresponding suggestions.