Statutory financial reporting for variable annuity guaranteed death benefits: Market practice,mathematical modeling and computation |
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| Affiliation: | 1. Department of Mathematics, University of Illinois at Urbana–Champaign, United States;2. Department of Mathematics & Statistics, York University, Canada;1. Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario, N2L 3G1, Canada;2. Institute for Financial and Actuarial Mathematics, University of Liverpool, Peach Street, Liverpool, L69 7ZL, UK;1. ARC Centre of Excellence in Population Ageing Research (CEPAR), School of Risk and Actuarial Studies, UNSW Business School, University of New South Wales, Australia;2. Institut de Statistique, Biostatistique et Sciences Actuarielles (ISBA), Université Catholique de Louvain, Belgium;1. Department of Applied Mathematics, University of Washington, Seattle, WA, USA;2. Centre de Mathématiques Appliquées, Ecole Polytechnique and CNRS, Route de Saclay, 91128 Palaiseau Cedex, France;3. Dipartimento di Matematica, Università di Bologna, Bologna, Italy |
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| Abstract: | As more regulatory reporting requirements for equity-linked insurance move towards dependence on stochastic approaches, insurance companies are experiencing increasing difficulty with detailed forecasting and more accurate risk assessment based on Monte Carlo simulations. While there is vast literature on pricing and valuations of various equity-linked insurance products, very few have focused on the challenges of financial reporting for regulatory requirement and internal risk management. Most insurers use either simulation-based spreadsheet calculations or employ third-party vendor software packages. We intend to use a basic variable annuity death benefit as a model example to decipher the common mathematical structure of US statutory financial reporting. We shall demonstrate that alternative deterministic algorithms such as partial differential equation (PDE) methods can also be used in financial reporting, and that a fully quantified model allows us to compare alternatives of risk metrics for financial reporting. |
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| Keywords: | Guaranteed minimum death benefit Risk measures Statutory financial reporting Individual model Aggregate model Numerical PDE methods Running supremum |
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