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.
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Research partially supported by NSF grants CCR-9104042 and SES-91-00216, and AFOSR grant 91-0168. Computing resources were made available by AHPCRC at the University of Minnesota, by NPAC at Syracuse University, New York, and by the GRASP Laboratory at Computer Science Department at University of Pennsylvania.
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Nielsen, S.S., Zenios, S.A. A stochastic programming model for funding single premium deferred annuities. Mathematical Programming 75, 177–200 (1996). https://doi.org/10.1007/BF02592151
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DOI: https://doi.org/10.1007/BF02592151