MCFAM Seminar - The impact of the fee structure on the optimal investment strategies of variable annuity policyholders

Speaker: Adriana Ocejo, University of North Carolina

Abstract: We study a portfolio optimization problem involving the loss averse policyholder of a variable annuity with a guaranteed minimum maturity benefit. This financial guarantee is financed via a fee withdrawn directly from the investment account, which affects the net investment return. A fair pricing constraint is defined in terms of the risk-neutral value of the final contract payout. We propose a new fee structure that adjusts to the investment mix maximizing policyholder’s utility while keeping the contract fairly priced. We seek the investment strategy that maximizes the policyholder’s expected utility of terminal wealth after the application of a financial guarantee and subject to the fair pricing constraint. We assume that the policyholder’s risk attitude is relative to a reference level, risk seeking towards losses and risk-averse towards gains. We solve the associated constrained stochastic control problem using a martingale approach and analyze the impact of the fee structure on the optimal investment strategies and payoff. Numerical results show that it is possible to find an optimal portfolio for a wide range of fees, while keeping the contract fairly priced.

Bio: Adriana Ocejo received her Ph.D. degree from The University of Warwick University in 2014. She is currently an Assistant Professor and the Mathematics Honors Director at the University of North Carolina at Charlotte. Dr. Ocejo’s research interests lie at the intersection of Probability, Stochastic Control, Mathematical Finance, and Actuarial Science. She has presented her work in many international conferences, including the International Congress on Insurance: Mathematics and Economics, the Latin American Congress of Probability and Mathematical Statistics, and the International Congress on Actuarial Science and Quantitative Finance, to name a few.