SURRENDER EFFECTS ON POLICY RESERVES: A SIMULATION ANALYSIS OF INVESTMENT GUARANTEE CONTRACTS

The assumption of dynamic lapse behavior is path-dependence related to the performance of underlying assets. This causes the pricing and reserving of investment guarantee products to be more difficult to deal with. The lack of actual experience of such policyholders’ behavior is also an essential problem when launching such guarantee products. The purpose of this paper is to attempt to measure the impact of dynamic surrender assumptions on policy reserves of investment guarantee contracts. We consider a single-premium version of a variable annuity, deducted periodically by a fixed percentage of policyholders’ account as margin offset, with six-year deferred maturity benefit. This deferred maturity benefit is a kind of investment guarantee. Utilizing two dynamic policyholders’ lapse formula suggested by American Academy of Actuaries and the Swiss Reinsurance company, the simulation results show markets condition assumptions have a tremendous effects upon the magnitude of reserves. This implies that it is a crucial part of risk management considerations for such products. Reserves adequacy testing is necessary when market condition shifts dramatically. The numerical implementation of the simulation results allow us to identify some comparative statistical properties and to identify the appropriate reserving routine of variable annuity with investment guarantee.