Grant: Discovery Grants Program - Individual

I propose to investigate the evolution of equity-indexed annuity (EIA) portfolios as well as their associated risk management. An equity-indexed annuity is an insurance product whose benefits are linked to the performance of an equity market. It provides limited participation in the performance of an equity index (e.g. S&P 500) while guaranteeing a minimum rate of return. Introduced by Keyport Life Insurance Co. in 1995, equity-indexed annuities have been the most innovative insurance product introduced in recent years. They have become increasingly popular since their debut and their sales have broken the $20 billion barrier ($23.1 billion) in 2004, reaching $27.3 billion in 2005. Since equity-indexed annuities have reached a critical mass with a total asset of $93 billion in 2005, I propose to investigate a global approach that evaluates the dynamic evolution of these portfolios in a realistic framework. Equity-indexed annuities usually incorporate some death, surrender, and accumulation guarantees that protect policyholders. The costs of these guarantees are evaluated based on financial and actuarial models. I am primarily interested in the application of the "Greeks" to the risk management of EIA portfolios. The Greeks measure the portfolio's sensitivity with respect to some financial parameters. Each Greek considers a different aspect of the risk and provides the position to hold in underlying financial instruments in order to reduce the financial risks of portfolios. The Greeks are well known in risk management and I would like to extend their applications to equity-indexed annuity portfolios.