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On the Bayesian Risk Evaluation of Minimum Guarantees in Variable Annuities

Author

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  • Yoo Byoung Hark

    (Department of Economics, Soongsil University, Seoul, The Republic of Korea)

  • Ko Bangwon

    (Department of Statistics and Actuarial Science, Soongsil University, Seoul, The Republic of Korea)

  • Kwon Hyuk-Sung

    (Department of Statistics and Actuarial Science, Soongsil University, Seoul, The Republic of Korea)

Abstract

Long-term equity return models have a substantial impact on calculating reserves and capital requirements for minimum guarantees in variable annuities (VAs). Under a Bayesian statistical framework, we reinvestigate the standard long-term equity return models (independent lognormal, regime-switching lognormal and stochastic log volatility models) with the Korean equity market data. Our empirical analysis shows that the long-term behaviors of the Korean market are best described by the regime-switching lognormal models, and there can be significant difference in the amount of the reserves and the capital requirements depending on the model selection. The long-term nature of the VA contracts requires that more caution be paid for modeling the mean part of the stochastic log volatility model.

Suggested Citation

  • Yoo Byoung Hark & Ko Bangwon & Kwon Hyuk-Sung, 2016. "On the Bayesian Risk Evaluation of Minimum Guarantees in Variable Annuities," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 10(1), pages 21-43, January.
    • Handle: RePEc:bpj:apjrin:v:10:y:2016:i:1:p:21-43:n:3
    DOI: 10.1515/apjri-2015-0007
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    References listed on IDEAS

    as
    1. Feng, Runhuan & Volkmer, Hans W., 2014. "Spectral Methods For The Calculation Of Risk Measures For Variable Annuity Guaranteed Benefits," ASTIN Bulletin, Cambridge University Press, vol. 44(3), pages 653-681, September.
    2. Hartman, Brian M. & Heaton, Matthew J., 2011. "Accounting for regime and parameter uncertainty in regime-switching models," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 429-437.
    3. Feng, Runhuan & Volkmer, Hans W., 2012. "Analytical calculation of risk measures for variable annuity guaranteed benefits," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 636-648.
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    Cited by:

    1. Bauer Jan, 2020. "Hedging of Variable Annuities under Basis Risk," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 14(2), pages 1-34, July.

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