Stochastic evaluation of life insurance contracts: Model point on asset trajectories and measurement of the error related to aggregation
AbstractIn this paper,11Version of 2012/07/08. we are interested in the optimization of computing time when using Monte-Carlo simulations for the pricing of the embedded options in life insurance contracts. We propose a very simple method which consists in grouping the trajectories of the initial process of the asset according to a quantile. The measurement of the distance between the initial process and the discretized process is realized by the L2-norm. L2 distance decreases according to the number of trajectories of the discretized process. The discretized process is then used in the valuation of the life insurance contracts. We note that a wise choice of the discretized process enables us to correctly estimate the price of a European option. Finally, the error due to the valuation of a contract in Euro using the discretized process can be reduced to less than 5%.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 51 (2012)
Issue (Month): 3 ()
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Web page: http://www.elsevier.com/locate/inca/505554
Life Insurance contracts; Unit-linked contracts; Embedded options; TMG guarantee; ALM; Stochastic models; Monte-Carlo simulation;
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