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

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  • Gao, Huan
  • Mamon, Rogemar
  • Liu, Xiaoming

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.

Suggested Citation

  • Gao, Huan & Mamon, Rogemar & Liu, Xiaoming, 2017. "Risk measurement of a guaranteed annuity option under a stochastic modelling framework," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 132(C), pages 100-119.
    • Handle: RePEc:eee:matcom:v:132:y:2017:i:c:p:100-119
    DOI: 10.1016/j.matcom.2016.07.003
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    Cited by:

    1. Zhao, Yixing & Mamon, Rogemar & Gao, Huan, 2018. "A two-decrement model for the valuation and risk measurement of a guaranteed annuity option," Econometrics and Statistics, Elsevier, vol. 8(C), pages 231-249.
    2. Zhao, Yixing & Mamon, Rogemar, 2018. "An efficient algorithm for the valuation of a guaranteed annuity option with correlated financial and mortality risks," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 1-12.
    3. Heng Xiong & Rogemar Mamon, 2018. "Putting a price tag on temperature," Computational Management Science, Springer, vol. 15(2), pages 259-296, June.
    4. Yixing Zhao & Rogemar Mamon & Heng Xiong, 2021. "Claim reserving for insurance contracts in line with the International Financial Reporting Standards 17: a new paid-incurred chain approach to risk adjustments," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-26, December.

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