Mathematical Programming

, 75:177 | Cite as

A stochastic programming model for funding single premium deferred annuities

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Abstract

Single Premium Deferred Annuities (SPDAs) are investment vehicles, offered to investors by insurance companies as a means of providing income past their retirement age. They are mirror images of insurance policies. However, the propensity of individuals to shift part, or all, of their investment into different annuities creates substantial uncertainties for the insurance company. In this paper we develop amultiperiod, dynamic stochastic program that deals with the problem of funding SPDA liabilities. The model recognizes explicitly the uncertainties inherent in this problem due to both interest rate volatility and the behavior of individual investors. Empirical results are presented with the use of the model for the funding of an SPDA liability stream using government bonds, mortgage-backed securities and derivative products.

Keywords

Stochastic programming Asset-liability management Insurance 
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Copyright information

© The Mathematical Programming Society, Inc. 1996

Authors and Affiliations

  1. 1.Management Science and Information Systems DepartmentUniversity of Texas at AustinAustin
  2. 2.Department of Public and Business AdministrationUniversity of CyprusNicosiaCyprus

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