Efficient valuation of guaranteed minimum accumulation benefits in regime switching jump diffusion models with lapse risk

Zhimin Zhang and Wei Zhong

Applied Mathematics and Computation, 2024, vol. 478, issue C

Abstract: We present a streamlined valuation method for the guaranteed minimum accumulation benefits incorporated within variable annuity contracts. At each contract renewal date, the insurer updates the policyholder's account value to the higher of the guaranteed value and the equity-linked investment value. In addition, we introduce lapse risks into the variable annuity contract, modeling the lapse decision under the assumption of stochastic intensity. Utilizing a combination of continuous-time Markov chain approximation and the Fourier cosine series expansion method, we derive closed-form valuation formulas under regime switching jump diffusion models. Numerical simulations showcase the precision and effectiveness of the proposed approach.

Keywords: Variable annuity; GMAB; Regime switching jump diffusion model; Lapse risk; CTMC; COS method (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:478:y:2024:i:c:s0096300324002947

DOI: 10.1016/j.amc.2024.128833

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