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Fourier based methods for the management of complex life insurance products

Ballotta, L. ORCID: 0000-0002-2059-6281, Eberlein, E., Schmidt, T. and Zeineddine, R. (2021). Fourier based methods for the management of complex life insurance products. Insurance: Mathematics and Economics, doi: 10.1016/j.insmatheco.2021.08.009

Abstract

This paper proposes a framework for the valuation and the management of complex life insurance contracts, whose design can be described by a portfolio of embedded options, which are activated according to one or more triggering events. These events are in general monitored discretely over the life of the policy, due to the contract terms. Similar designs can also be found in other contexts, such as counterparty credit risk for example. The framework is based on Fourier transform methods as they allow to derive convenient closed analytical formulas for a broad spectrum of underlying dynamics. Multidimensionality issues generated by the discrete monitoring of the triggering events are dealt with efficiently designed Monte Carlo integration strategies. We illustrate the tractability of the proposed approach by means of a detailed study of ratchet variable annuities, which can be considered a prototypical example of these complex structured products.

Publication Type: Article
Additional Information: © 2021, Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license https://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Fourier transforms; Hybrid models; Structured products; Variable Annuities
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Q Science > QA Mathematics
Departments: Bayes Business School > Finance
Date available in CRO: 10 Aug 2021 08:47
Date deposited: 10 August 2021
Date of acceptance: 9 August 2021
Date of first online publication: 19 August 2021
URI: https://openaccess.city.ac.uk/id/eprint/26571
[img] Text - Accepted Version
This document is not freely accessible until 19 February 2023 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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