Group for Research in Decision Analysis

Couverture du risque de taux d’intérêt dans les fonds distincts*

Mathieu Boudreault Professor, Department of Mathematics, Université du Québec à Montréal, Canada

Variable annuities are investment vehicles offered by insurance companies that combine a life insurance policy with long-term financial guarantees. These guarantees expose the insurer to market risks, such as volatility and interest rate risks, which can only be managed with a hedging strategy. The objective of this article is to study the effectiveness of dynamic Greeks-based hedging strategies for mitigating interest rate risk in variable annuities with a guaranteed minimum accumulation benefit (GMAB) or guaranteed minimum withdrawal benefit (GMWB) rider. Our analysis centers on three important practical issues: (i) the importance of hedging interest rate risk in rising and volatile interest rate environments, (ii) the robustness of interest rate hedges to model uncertainty, and (iii) the impact of guarantee features (maturity versus withdrawal benefits) on the performance of the hedging strategy. Overall, we find that simple interest rate hedges are robust to model risk and lead to a significant risk reduction for the insurer in both GMAB and GMWB contracts. Moreover, our results suggest that implementing sophisticated hedging models is of second-order importance, and the benefits of using such models are only clear in specific settings.

*This seminar will be presented in French.

This seminar is only open to students and members of GERAD. We would highly appreciate if you could confirm your attendance. Pizza and non alcoholic beverages will be available; you can also bring your own lunch.