ABSTRACT
This chapter introduces variable annuities and the computational challenges associated with their valuation. Variable annuities (VA) are considered long-term insurance products with investment features that can be used by policyholders to accumulate wealth. A VA is a contractual agreement between a policyholder and an insurance company. It has been considered a tax-deferred retirement product with two phases: the accumulation phase and the payout phase. Using Monte Carlo simulation to value a large portfolio of VA contracts is extremely time-consuming : first, long-term projection is usually involved as VA contracts are long-term contracts; second, each contract has its peculiar characteristics and needs to be modeled appropriately. The outer loop involves projecting the VA liabilities along real-world scenarios, which reflect realistic assumptions about the market. The policyholder makes a single lump-sum payment of $100,000 with a maximum annual withdrawal of $8,000.
