Valuing variable annuities with path-dependent surrender guarantees under regime-switching Lévy models

AbstractVariable annuities with complex surrender features are nowadays increasingly popular for managing longevity risks. The study of their accurate pricing and sensitivity analysis is one of the main actuarial research topics. This paper studies the valuation problem of variable annuity contracts with guaranteed minimum maturity benefits on a set of predetermined discrete tenor dates under regime-switching Lévy models. Extending from existing vanilla payoffs, we consider the guaranteed minimum maturity benefits with lookback and geometric average features. We customise the dynamic programming principle to solve the corresponding optimal stopping problem, relying on some semi-analytical valuation formulae resulting from an acute Fourier cosine series expansion. Finally, numerical illustrations are provided to show the accuracy and efficiency of the proposed method. We also demonstrate the use of our proposed method in a range of sensitivity analysis exercises, which shed light on the pricing and risk management of complex variable annuity products.Keywords: Variable annuitiesregime-switching Lévy modeldynamic programmingFourier cosine series expansion AcknowledgmentsThe authors would like to thank the anonymous referee for useful suggestions.Disclosure statementNo potential conflict of interest was reported by the author(s).Additional informationFundingThe research of Zhimin Zhang was supported by the National Natural Science Foundation of China [11871121, 12171405] and the Fundamental Research Funds for the Central Universities [2021CDSKXYJG012,2020CDJSK02ZH03].