Coping with Longevity via Hedging : Fair Dynamic Valuation of Variable Annuities

This paper proposes a fair valuation approach to price variable annuity liabilities and embedded guarantee riders in a dynamic multi-period setting. The focus of the paper is on variable annuity with the Guaranteed Lifetime Withdrawal Benefit(GLWB) rider with exposure to both equity and longevity risks, and to offer a market-, actuarial-, and time-consistent fair dynamic valuation method.We find that the proposed approach is able to obtain fair management fee rates in line with those in the existing literature and surveys. Moreover, the fair valuation of liability, and in turn the price of the GLWB rider, can be substantially reduced if longevity risk in the annuity portfolio is appropriately managed