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Guaranteed Annuity Option - Stochastic calc

S

ST6_aspirant

Member
Hi,

My question relates to Question Bank 3.14

To calculate the cost of guarantee, why do we need to know the inflation rate from a stochastic model? We would want to know just the stochastic investment yield at the projected retirement date, so that we can calculate the COG. Unless, we are also trying to project the expenses in the annuity payout period and taking account of them to calculate the new purchase price and hence the shortfall vis-a-vis the guaranteed purchase price (or guaranteed annuity, either way)

Thanks!
 
Hi

Apologies for the delay in replying. I think that you're correctly on to the explanation with your mention of expenses when the annuity is in payment. :)

The model needs to calculate what the "normal" annuity rates offered at retirement would be, so that it can compare these with the the guaranteed annuity rates to determine the COG.

The "normal" annuity rates would depend on assumed yields, longevity and expenses, including inflation.

Best wishes
Lynn
 
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