Where less is more : reducing variable annuity fees to benefit policyholder and insurer

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      <subfield code="a">Where less is more</subfield>
      <subfield code="b">: reducing variable annuity fees to benefit policyholder and insurer</subfield>
      <subfield code="c">Carole Bernard, Thorsten Moenig</subfield>
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      <subfield code="a">In the United States, variable annuities (VAs) are popular long-term personal investment vehicles. Recently, however, sales have begun to dwindle. In fact, financial advisers have long argued against investing in VAs due to the products' high fees. VA providers charge these feestypically at a constant rate throughout the policy periodto cover their expenses and the costs of embedded guarantees, and lowering this constant fee rate could make the VA unprofitable. Instead, we propose and analyze a simple change to the fee structure that would lower fee rates overall (and thus make the product more attractive to investors) without reducing the insurer's profit. The key insight is that this time-dependent fee rate (with moderate frontloading) implicitly discourages policy lapses and exchanges, which reduces the providers' policy acquisition expenses. Taking into account financially optimal lapse (and reentry) decisions, we determine the optimal timing and rate of the fee reduction for a competitive as well as for an innovative VA provider. An important characteristic of this feature is that it can be implemented easily and effectively to both new and existing VA policies.</subfield>
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      <subfield code="a">Moening, Thorsten</subfield>
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      <subfield code="t">The Journal of risk and insurance</subfield>
      <subfield code="d">Nueva York : The American Risk and Insurance Association, 1964-</subfield>
      <subfield code="x">0022-4367</subfield>
      <subfield code="g">02/09/2019 Volumen 86 Número 3 - septiembre 2019 , p. 761-782</subfield>