Risk Management Mode Of The Guaranteed Minimum Accumulation Benefit In Variable Annuities

With the accelerated development of the population aging and empty nest inChina, pension situation is becoming increasingly grim. At present, China’s socialendowment insurance system has a huge gap of pension, in urgent need of the supportof the commercial endowment insurance to ease pension pressure. To enrich theendowment insurance products and adjust the structure of the insurance market, ChinaInsurance Regulatory Commission (CIRC) issued “Notice on carrying out variableannuity insurance” and “Variable annuity insurance management interim measures” in2011, announcing the start of a pilot program on variable annuities.Variable annuity is the mainstream product on the market of western endowmentinsurance. Briefly speaking, it is the combination of investment linked insurance,guaranteed minimum benefits and annuity payment. The research object of the thesis,Guaranteed Minimum Accumulation Benefit (GMAB), promises policyholder that thefinal payment will not be less than a certain proportion of the highest account value. Inpoor market conditions, GMAB may bring greater losses to the insurance company.How to control the risk of GMAB is the first consideration for developing this kind ofproduct.This thesis first describes the development history of Variable annuity, and thenuses numerical analysis to present the operation of GMAB. Later it introduces the mainrisks of GMAB and common hedge approaches abroad. Finally, taking the two riskmanagement modes approved by the CIRC as cut-in point, it explores the theoreticalbasis, operation process, advantages and disadvantages for the two modes. Moreover,the Constant Proportion portfolio insurance (CPPI）is optimized. Due to the lack ofactual data, this thesis uses Monte Carlo method to simulate the effects of theinvestment multiplier in CPPI and volatility in internal hedge on account value, andpresents the scenario simulation of three risk management modes under differentmarket conditions. This thesis analyzes risk management mode from the qualitativeand quantitative angle, the simulation results are in accordance with the actualsituation, hoping to play a reference role in the insurance company to choose riskmanagement mode of Variable Annuities.