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Regression-based algorithms for life insurance contracts with surrender guarantees

Author

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  • Anna Rita Bacinello
  • Enrico Biffis
  • Pietro Millossovich

Abstract

We present a general framework for pricing life insurance contracts embedding a surrender option. The model allows for several sources of risk, such as uncertainty in mortality, interest rates and other financial factors. We describe and compare two numerical schemes based on the Least Squares Monte Carlo method, emphasizing underlying modeling assumptions and computational issues.

Suggested Citation

  • Anna Rita Bacinello & Enrico Biffis & Pietro Millossovich, 2010. "Regression-based algorithms for life insurance contracts with surrender guarantees," Quantitative Finance, Taylor & Francis Journals, vol. 10(9), pages 1077-1090.
    • Handle: RePEc:taf:quantf:v:10:y:2010:i:9:p:1077-1090
    DOI: 10.1080/14697680902960242
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    Citations

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    Cited by:

    1. Mahayni, Antje & Schneider, Judith C., 2012. "Variable annuities and the option to seek risk: Why should you diversify?," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2417-2428.
    2. Massimo Costabile & Fabio Viviano, 2020. "Testing the Least-Squares Monte Carlo Method for the Evaluation of Capital Requirements in Life Insurance," Risks, MDPI, vol. 8(2), pages 1-13, May.
    3. Nielsen, J. Aase & Sandmann, Klaus & Schlögl, Erik, 2011. "Equity-linked pension schemes with guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 547-564.
    4. Christian Hilpert & Jing Li & Alexander Szimayer, 2014. "The Effect of Secondary Markets on Equity-Linked Life Insurance With Surrender Guarantees," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(4), pages 943-968, December.
    5. Christophette Blanchet-Scalliet & Etienne Chevalier & Idris Kharroubi & Thomas Lim, 2015. "Max–Min Optimization Problem For Variable Annuities Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(08), pages 1-35, December.
    6. Risk, J. & Ludkovski, M., 2016. "Statistical emulators for pricing and hedging longevity risk products," Insurance: Mathematics and Economics, Elsevier, vol. 68(C), pages 45-60.
    7. Hainaut, Donatien & Akbaraly, Adnane, 2023. "Risk management with Local Least Squares Monte-Carlo," LIDAM Discussion Papers ISBA 2023003, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    8. Ballotta, Laura & Eberlein, Ernst & Schmidt, Thorsten & Zeineddine, Raghid, 2021. "Fourier based methods for the management of complex life insurance products," Insurance: Mathematics and Economics, Elsevier, vol. 101(PB), pages 320-341.
    9. Cheng, Chunli & Hilpert, Christian & Miri Lavasani, Aidin & Schaefer, Mick, 2023. "Surrender contagion in life insurance," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1465-1479.
    10. Cheng, Chunli & Li, Jing, 2018. "Early default risk and surrender risk: Impacts on participating life insurance policies," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 30-43.
    11. Boyer, M. Martin & Stentoft, Lars, 2013. "If we can simulate it, we can insure it: An application to longevity risk management," Insurance: Mathematics and Economics, Elsevier, vol. 52(1), pages 35-45.
    12. Li, Jing & Szimayer, Alexander, 2010. "The effect of policyholders' rationality on unit-linked life insurance contracts with surrender guarantees," Bonn Econ Discussion Papers 22/2010, University of Bonn, Bonn Graduate School of Economics (BGSE).
    13. Jeechul Woo & Chenru Liu & Jaehyuk Choi, 2024. "Leave‐one‐out least squares Monte Carlo algorithm for pricing Bermudan options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(8), pages 1404-1428, August.
    14. Yao Tung Huang & Yue Kuen Kwok, 2016. "Regression-based Monte Carlo methods for stochastic control models: variable annuities with lifelong guarantees," Quantitative Finance, Taylor & Francis Journals, vol. 16(6), pages 905-928, June.
    15. Enrico Biffis & David Blake & Lorenzo Pitotti & Ariel Sun, 2016. "The Cost of Counterparty Risk and Collateralization in Longevity Swaps," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(2), pages 387-419, June.
    16. Bernard, Carole & MacKay, Anne & Muehlbeyer, Max, 2014. "Optimal surrender policy for variable annuity guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 116-128.
    17. Hürlimann, Werner, 2010. "Analytical Pricing of the Unit-Linked Endowment with Guarantees and Periodic Premiums," ASTIN Bulletin, Cambridge University Press, vol. 40(2), pages 631-653, November.
    18. Floryszczak, Anthony & Le Courtois, Olivier & Majri, Mohamed, 2016. "Inside the Solvency 2 Black Box: Net Asset Values and Solvency Capital Requirements with a least-squares Monte-Carlo approach," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 15-26.
    19. Bacinello, Anna Rita & Millossovich, Pietro & Olivieri, Annamaria & Pitacco, Ermanno, 2011. "Variable annuities: A unifying valuation approach," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 285-297.
    20. Anna Rita Bacinello & Ivan Zoccolan, 2019. "Variable annuities with a threshold fee: valuation, numerical implementation and comparative static analysis," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 42(1), pages 21-49, June.
    21. Antje Mahayni & Judith C. Schneider, 2016. "Minimum return guarantees, investment caps, and investment flexibility," Review of Derivatives Research, Springer, vol. 19(2), pages 85-111, July.
    22. Lars Stentoft, 2013. "American option pricing using simulation with an application to the GARCH model," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 5, pages 114-147, Edward Elgar Publishing.
    23. James Risk & Michael Ludkovski, 2015. "Statistical Emulators for Pricing and Hedging Longevity Risk Products," Papers 1508.00310, arXiv.org, revised Sep 2015.
    24. Dupret, Jean-Loup & Barbarin, Jérôme & Hainaut, Donatien, 2021. "Impact of rough stochastic volatility models on long-term life insurance pricing," LIDAM Discussion Papers ISBA 2021017, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).

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