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The Impact Of Clustering Methods For Pricing A Large Portfolio Of Vvs Case Study

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The Impact of Clustering Method for Pricing a Large Portfolio of VA Policies 1 Variable Annuity Variable annuities(VAs) are popular life insurance products in the insurance industry. VAs are long-term contracts designed for offering post-retirement income (Bacinelloa, Millossovich, Olivieri, & Pitacco, 2011). VAs have attractive features such as dynamic investment opportunity and guarantees against the investment and early death risks. A single premium or recurrent premiums from policyholders are invested into the different risk return portfolio decided by the policyholders. There are different reference funds in each different risk return portfolio. Different risk return portfolio can be changed at no cost under some constraint…show more content…
However, these risks interact each other and the iteraction is not fully understood. Appropriate risk management is required. Pricing and hedging of guarantees is the major concern of the contract design. This risk should be considered during the process of pricing. For example, Bacinelloa, Millossovich, Olivieri and Pitacco(2011) introduced a unifying valuation approach for VAs depending on different assumptions of policyholder behavior 1.1Guaranteed Minimum Benefits There are two main classes of guarantees: Guaranteed Minimum Death Benefit (GMDB)and Guaranteed Minimum Living Benefit (GMLB). There are three types of benefits in GMLB: Guaranteed Minimum Accumulation Benefit (GMAB), Guaranteed Minimum Income Benefit (GMIB), Guaranteed Minimum Withdrawal Benefit (GMWB). The simplest form of guaranteed benefit is Guaranteed Minimum Accumulation Benefit, it provides a minimum account value at maturity. Usually, the minimum account value is the initial premium amount. It gives the policyholders the chance of renewing account value at maturity when the investment performance is bad. Guaranteed Minimum Income Benefit also provides a guaranteed account value at maturity, but policyholders only can take out the account value in the form of annuity at specified annuity rate. This guarantee also reduces the risk from the annuity rate at maturity. In the money means that the annuity payment resulting from
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