Abstract
A variable annuity is a popular life insurance product that comes with financial guarantees. Using Monte Carlo simulation to value a large variable annuity portfolio is extremely time-consuming. Metamodeling approaches have been proposed in the literature to speed up the valuation process. In metamodeling, a metamodel is first fitted to a small number of variable annuity contracts and then used to predict the values of all other contracts. However, metamodels that have been investigated in the literature are sophisticated predictive models. In this paper, we investigate the use of linear regression models with interaction effects for the valuation of large variable annuity portfolios. Our numerical results show that linear regression models with interactions are able to produce accurate predictions and can be useful additions to the toolbox of metamodels that insurance companies can use to speed up the valuation of large VA portfolios.
Highlights
IntroductionA variable annuity (VA) is a life insurance product created by insurance companies to address concerns that many people have about outliving their assets
A variable annuity (VA) is a life insurance product created by insurance companies to address concerns that many people have about outliving their assets (Ledlie et al 2008; The Geneva AssociationReport 2013)
We see that the main idea of metamodeling is to build a predictive model based on a small number of representative VA contracts in order to reduce the number of contracts that are valued by Monte Carlo simulation
Summary
A variable annuity (VA) is a life insurance product created by insurance companies to address concerns that many people have about outliving their assets Under a VA contract, the policyholder makes one lump-sum or a series of purchase payments to the insurance company and in turn, the insurance company makes benefit payments to the policyholder beginning immediately or at some future date. A typical VA has two phases: the accumulation phase and the payout phase. The policyholder builds assets for retirement by investing the money in some investment funds provided by the insurer. The policyholder receives benefit payments in either a lump-sum, periodic withdrawals or an ongoing income stream. The amount of benefit payments is tied to the performance of the investment portfolio selected by the policyholder
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