Xiaolu Tan

Guaranteed Minimum Income benefit are variable annuities contract, which offer the policyholder the possibility to con- vert the guarantee level into an annuities income for life. This paper focuses on the optimal customer behavior assuming the maximization of the discounted expected future cash flows over the full life of the contract duration. Using convenient scaling properties of the contract value enables to reduce the complexity (dimension) of the problem and to characterize the policyholder’s decision as a function of the contract moneyness across four main choices: zero withdrawals, guaranteed withdrawals, lapse and the income period election. Sensitivities to key drivers such as the market volatility, the interest rate and the roll-up rate illustrate how crucial are not only the environment, but also the product design features, in order to ensure a fair and robust pricing for both customer and life insurer. In particular, the authors find that most empirical contracts are usually underpriced compared to mean optimal behavior pricing, which empirically translated into multiple updates of behavior assumptions and re-reserving by life insurers in the recent years.