A New Premium Principle for Equity-Indexed Annuities

Abstract

In this article, we introduce a premium principle for equity-indexed annuities (EIAs). Traditional actuarial loadings that protect insurance companies against risks cannot be extended to the valuation of EIAs since these products are embedded with various financial guarantees. We proposed a loaded premium that protects the issuers against the financial and mortality risks. We first obtain the fair premium based on a fair value of the equity-linked contract using arbitrage-free theory. Assuming a specific risk level for hedging errors, we obtain a new participation rate based on a security loading. A detailed numerical analysis is performed for a point-to-point EIA.