This article develops a contingent claims valuation analysis to numerically price a salary-connected guarantee on an individual pension account (IPA). The results indicate that a principal guarantee without a reset feature is worth little, while the death benefit contributes little to the guarantee value. Deferred proportional funding is an alternative to reduce problems from the difficulty in modeling salary behavior, because the deferred proportional fee is found to be affected less by the salary behavior than the up-front guarantee value. Moreover, if the lapse is possible, then the time value of a longer contract is diluted by a greater expected lapse loss and therefore the guarantee is not necessarily more valuable for a younger individual. Given the individual age, the high type of death rate with no lapse carries the most expensive guarantee for all scenarios.
Asian Finance Association and Taiwan Finance Association 2012 Joint International Conference