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Stochastic evaluation of life insurance contracts: Model point on asset trajectories and measurement of the error related to aggregation

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Author Info

  • Nteukam T., Oberlain
  • Planchet, Frédéric

Abstract

In 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 Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 51 (2012)
Issue (Month): 3 ()
Pages: 624-631

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Handle: RePEc:eee:insuma:v:51:y:2012:i:3:p:624-631

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Web page: http://www.elsevier.com/locate/inca/505554

Related research

Keywords: Life Insurance contracts; Unit-linked contracts; Embedded options; TMG guarantee; ALM; Stochastic models; Monte-Carlo simulation;

References

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  1. Laurent Devineau & Stéphane Loisel, 2009. "Construction d'un algorithme d'accélération de la méthode des «simulations dans les simulations» pour le calcul du capital économique Solvabilité II," Post-Print hal-00365363, HAL.
  2. Michael B. Gordy & Sandeep Juneja, 2010. "Nested Simulation in Portfolio Risk Measurement," Management Science, INFORMS, vol. 56(10), pages 1833-1848, October.
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  4. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
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Cited by:
  1. Julien Vedani & Laurent Devineau, 2012. "Solvency assessment within the ORSA framework: issues and quantitative methodologies," Papers 1210.6000, arXiv.org, revised Oct 2012.
  2. Julien Vedani & Laurent Devineau, 2012. "Solvency assessment within the ORSA framework: issues and quantitative methodologies," Working Papers hal-00744351, HAL.

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