Preprint Article Version 1 This version is not peer-reviewed

Valuation of Large Variable Annuity Portfolios Using Linear Models with Interactions

Version 1 : Received: 28 June 2018 / Approved: 28 June 2018 / Online: 28 June 2018 (12:05:27 CEST)

A peer-reviewed article of this Preprint also exists.

Gan, G. Valuation of Large Variable Annuity Portfolios Using Linear Models with Interactions. Risks 2018, 6, 71. Gan, G. Valuation of Large Variable Annuity Portfolios Using Linear Models with Interactions. Risks 2018, 6, 71.

Journal reference: Risks 2018, 6, 71
DOI: 10.3390/risks6030071

Abstract

A variable annuity is a popular life insurance product that comes with financial guarantees. Using Monte Carlo simulation to value a large variable annuity portfolio is extremely time-consuming. Metamodeling approaches have been proposed in the literature to speed up the valuation process. In metamodeling, a metamodel is first fitted to a small number of variable annuity contracts and then used to predict the values of all other contracts. However, metamodels that have been investigated in the literature are sophisticated predictive models. In this paper, we investigate the use of linear regression models with interaction effects for the valuation of large variable annuity portfolios. Our numerical results show that linear regression models with interactions are able to produce accurate predictions and can be useful additions to the toolbox of metamodels that insurance companies can use to speed up the valuation of large VA portfolios.

Subject Areas

variable annuity; portfolio valuation; linear regression; group-lasso; interaction effect

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