Stochastic Valuation of Segregated Fund Contracts in an Emerging Market

Emmanuel Thompson and Rohana Ambagaspitiya

Journal of Finance and Investment Analysis, 2014, vol. 3, issue 2, 2

Abstract: Stochastic valuation modeling is an important area for financial professionals who deal in products such as equity insurance, especially segregated fund contracts. A stochastic analysis of the guarantee liabilities under any given segregated fund contract requires a credible long-term model of the underlying equity (stock) return process. This paper introduced econometric models far less complex than the Wilkie model for valuing and managing financial risks associated with combined guaranteed minimum maturity benefit and minimum death benefit (GMMB/GMDB) regarding segregated fund contracts in an emerging market (India). Finally, we assess the valuation model via simulation under the GMMB/GMDB for a life age 50 with varying assumptions about the margin offset. The simulation results clearly indicate that, the net present value of outgo is mostly in the negative.

Date: 2014
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