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Risk measurement of a guaranteed annuity option under a stochastic modelling framework

Huan Gao, Rogemar Mamon and Xiaoming Liu

Mathematics and Computers in Simulation (MATCOM), 2017, vol. 132, issue C, 100-119

Abstract: We address the problem of setting capital reserves for a guaranteed annuity option (GAO). The modelling framework for the loss function of GAO is developed. A one-decrement actuarial model is considered in which death is the only decrement, and the interest and mortality risk factors follow correlated affine structures. Risk measures are determined using moment-based density method and benchmarked with the Monte-Carlo simulation. Bootstrap technique is utilised to assess the variability of risk measure estimates. We establish the relation between a desired level of risk measure accuracy and required sample size under the constraints of computing time and memory. A sensitivity analysis of parameters is further conducted, and our numerical investigations provide practical considerations for insurers in meeting certain regulatory requirements.

Keywords: Affine models; Moment-based method; Risk measures; Correlated risk factors; Insurance with option-embedded features (search for similar items in EconPapers)
Date: 2017
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