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- Title
Tree-based models for variable annuity valuation: parameter tuning and empirical analysis.
- Authors
Quan, Zhiyu; Gan, Guojun; Valdez, Emiliano
- Abstract
Variable annuities have become popular retirement and investment vehicles due to their attractive guarantee features. Nonetheless, managing the financial risks associated with the guarantees poses great challenges for insurers. One challenge is risk quantification, which involves frequent valuation of the guarantees. Insurers rely on the use of Monte Carlo simulation for valuation as the guarantees are too complicated to be valued by closed-form formulas. However, Monte Carlo simulation is computationally intensive. In this paper, we empirically explore the use of tree-based models for constructing metamodels for the valuation of the guarantees. In particular, we consider traditional regression trees, tree ensembles, and trees based on unbiased recursive partitioning. We compare the performance of tree-based models to that of existing models such as ordinary kriging and generalised beta of the second kind (GB2) regression. Our results show that tree-based models are efficient in producing accurate predictions and the gradient boosting method is considered the most superior in terms of prediction accuracy.
- Subjects
VARIABLE annuities; FINANCIAL risk; MONTE Carlo method; VALUATION; RECURSIVE partitioning; RETIREMENT investments; REGRESSION trees; FINANCIAL planning
- Publication
Annals of Actuarial Science, 2022, Vol 16, Issue 1, p95
- ISSN
1748-4995
- Publication type
Article
- DOI
10.1017/S1748499521000075