Study on Target-Volatility Fund Performance and Its impact on GLWB/DB’s Hedge Cost and Reserve Amount

In the wake of the recent financial crisis, the importance of effective and robust risk management strategies for variable annuities (VA) is once more emphasized and life insurance companies are seeking new product innovations which incorporate those strategies. As a consequence, a number of new VA product innovations beneficial for both customers and life insurers have been proposed. The product innovations mainly fall into two categories: one is on the benefit level and the other is on the fund level. In this paper, we introduce one of the risk management strategies embedded in VA funds, called a volatility targeting strategy, demonstrate the performance of the target-volatility fund, and study the impact of the strategy on the hedge cost and reserve amount of a GLWB/DB product.