New Data from M.J. Cathcart et al Illuminate Findings in Actuarial Science (Calculating Variable Annuity Liability “greeks” Using Monte Carlo…

New Data from M.J. Cathcart et al Illuminate Findings in Actuarial Science (Calculating Variable Annuity Liability "greeks" Using Monte Carlo Simulation)

By a News Reporter-Staff News Editor at Insurance Weekly News -- Data detailed on Actuarial Science have been presented. According to news reporting from Midlothian, United Kingdom, by VerticalNews journalists, research stated, "The implementation of hedging strategies for variable annuity products requires the calculation of market risk sensitivities (or 'Greeks'). The complex, path-dependent nature of these products means that these sensitivities are typically estimated by Monte Carlo methods."

The news correspondents obtained a quote from the research, "Standard market practice is to use a 'bump and revalue' method in which sensitivities are approximated by finite differences. As well as requiring multiple valuations of the product, this approach is often unreliable for higher-order Greeks, such as gamma, and alternative pathwise (PW) and likelihood-ratio estimators should be preferred. This paper considers a stylized guaranteed minimum withdrawal benefit product in which the reference equity index follows a Heston stochastic volatility model in a stochastic interest rate environment. The complete set of first-order sensitivities with respect to index value, volatility and interest rate and the most important second-order sensitivities are calculated using PW, likelihood-ratio and mixed methods."

According to the news reporters, the research concluded: "It is observed that the PW method delivers the best estimates of first-order sensitivities while mixed estimation methods deliver considerably more accurate estimates of second-order sensitivities; moreover there are significant computational gains involved in using PW and mixed estimators rather than simple BnR estimators when many Greeks have to be calculated."

For more information on this research see: Calculating Variable Annuity Liability "greeks" Using Monte Carlo Simulation. Astin Bulletin, 2015;45(2):239-266. Astin Bulletin can be contacted at: Cambridge Univ Press, Edinburgh Bldg, Shaftesbury Rd, CB2 8RU Cambridge, England.

Our news journalists report that additional information may be obtained by contacting M.J. Cathcart, Moodys Analyt, Edinburgh EH3 8RD, Midlothian, United Kingdom. Additional authors for this research include H.Y. Lok, A.J. McNeil and S. Morrison.

Keywords for this news article include: Europe, Midlothian, United Kingdom, Actuarial Science

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