G
gruhaa
Member
Thanks Lindsay. Your explanation is really helpfulYes, if the reserve held against the future GAO is calculated on a prudent basis, then the release of the prudential margins will be a positive part of the PVIF. However, bear in mind that the reserves are therefore higher than they need to be (by the amount of prudential margin) and so the 'net asset' part of EV will be lower accordingly.
A guaranteed annuity option is like a swaption (basically, an option on interest rates), because it comes into the money when interest rates change. The strike would be the interest rate at which the guaranteed minimum annuity rate was priced. See Chapter 15 Section 6.5 for further description of this idea. [Alternatively a GAO could be considered to be equivalent to a bond option, where the strike is the price which would generate the required minimum return supporting the guaranteed annuity rate.]