On the Bayesian Risk Evaluation of Minimum Guarantees in Variable Annuities

Byoung Hark Yoo (), Ko Bangwon () and Kwon Hyuk-Sung
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Ko Bangwon: Department of Statistics and Actuarial Science, Soongsil University, Seoul, The Republic of Korea
Kwon Hyuk-Sung: Department of Statistics and Actuarial Science, Soongsil University, Seoul, The Republic of Korea

Asia-Pacific Journal of Risk and Insurance, 2016, vol. 10, issue 1, 21-43

Abstract: Long-term equity return models have a substantial impact on calculating reserves and capital requirements for minimum guarantees in variable annuities (VAs). Under a Bayesian statistical framework, we reinvestigate the standard long-term equity return models (independent lognormal, regime-switching lognormal and stochastic log volatility models) with the Korean equity market data. Our empirical analysis shows that the long-term behaviors of the Korean market are best described by the regime-switching lognormal models, and there can be significant difference in the amount of the reserves and the capital requirements depending on the model selection. The long-term nature of the VA contracts requires that more caution be paid for modeling the mean part of the stochastic log volatility model.

Keywords: Bayesian approach; regime-switching model; stochastic log volatility model; lognormal model; GMAB (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1515/apjri-2015-0007

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