A hybrid data mining framework for variable annuity portfolio valuation

Hyukjun Gweon and Shu Li

ASTIN Bulletin, 2023, vol. 53, issue 3, 580-595

Abstract: A variable annuity is a modern life insurance product that offers its policyholders participation in investment with various guarantees. To address the computational challenge of valuing large portfolios of variable annuity contracts, several data mining frameworks based on statistical learning have been proposed in the past decade. Existing methods utilize regression modeling to predict the market value of most contracts. Despite the efficiency of those methods, a regression model fitted to a small amount of data produces substantial prediction errors, and thus, it is challenging to rely on existing frameworks when highly accurate valuation results are desired or required. In this paper, we propose a novel hybrid framework that effectively chooses and assesses easy-to-predict contracts using the random forest model while leaving hard-to-predict contracts for the Monte Carlo simulation. The effectiveness of the hybrid approach is illustrated with an experimental study.

Date: 2023
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