Fast and efficient nested simulation for large variable annuity portfolios: A surrogate modeling approach

X. Sheldon Lin and Shuai Yang

Insurance: Mathematics and Economics, 2020, vol. 91, issue C, 85-103

Abstract: The nested-simulation is commonly used for calculating the predictive distribution of the total variable annuity (VA) liabilities of large VA portfolios. Due to the large numbers of policies, inner-loops and outer-loops, running the nested-simulation for a large VA portfolio is extremely time consuming and often prohibitive. In this paper, the use of surrogate models is incorporated into the nested-simulation algorithm so that the relationship between the inputs and the outputs of a simulation model is approximated by various statistical models. As a result, the nested-simulation algorithm can be run with much smaller numbers of different inputs. Specifically, a spline regression model is used to reduce the number of outer-loops and a model-assisted finite population estimation framework is adapted to reduce the number of policies in use for the nested-simulation. From simulation studies, our proposed algorithm is able to accurately approximate the predictive distribution of the total VA liability at a significantly reduced running time.

Keywords: Variable annuity portfolio; Nested-simulation; Surrogate modeling; Spline regression; Population sampling (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:91:y:2020:i:c:p:85-103

DOI: 10.1016/j.insmatheco.2020.01.002

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