The Valuation of a Guaranteed Minimum Maturity Benefit under a Regime-Switching Framework

Rogemar Mamon, Heng Xiong and Yixing Zhao

North American Actuarial Journal, 2021, vol. 25, issue 3, 334-359

Abstract: Global insurance markets have become more sophisticated in recent times in response to the evolving needs of populations that tend to live longer. Policy holders desire the benefits of longevity/mortality protection while taking advantage of investment growth opportunities in equity markets. As a result, insurers incorporate payment guarantees in new insurance products, known as equity-linked contracts, whose values are dependent on prices of risky assets. A guaranteed minimum maturity benefit (GMMB) is now common in many equity-linked contracts. We develop an integrated pricing framework for a GMMB focusing on segregated fund contracts. More specifically, we construct hidden Markov models (HMMs) for a stock index, interest rate, and mortality rate. The dependence between these risk factors is characterized explicitly. We assume that the stock index follows a Markov-modulated geometric Brownian motion and the interest and mortality rates have Markov-modulated affine dynamics. A series of measure changes is employed to obtain a semi-closed-form solution for the GMMB price. A Fourier transform method is applied to numerically approximate the prices more efficiently. Recursive HMM filtering is used in our model calibration. Numerical investigations in our article demonstrate the accuracy of GMMB prices and an extensive analysis is included to systematically examine how risk factors affect the value of a GMMB.

Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/10920277.2019.1703753 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:uaajxx:v:25:y:2021:i:3:p:334-359

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/uaaj20

DOI: 10.1080/10920277.2019.1703753

Access Statistics for this article

North American Actuarial Journal is currently edited by Kathryn Baker

More articles in North American Actuarial Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().