An economic scenario generator for embedded derivatives in South Africa

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dc.contributor.author Levendis, Alexis Jacques
dc.contributor.author Mare, Eben
dc.date.accessioned 2023-10-16T06:33:37Z
dc.date.available 2023-10-16T06:33:37Z
dc.date.issued 2022
dc.description.abstract It is well known that interest rate risk is a dominating factor when pricing long-dated contingent claims. The Heston stochastic volatility model fails to capture this risk as the model assumes a constant interest rate throughout the life of the claim. To overcome this, the risk-free interest rate can be modelled by a Hull-White short rate process and can be combined with the Heston stochastic volatility model to form the so-called Heston-Hull-White model. The Heston-Hull-White model allows for correlation between the equity and interest rate processes, a component that is important when pricing long-dated contingent claims. In this paper, we apply the Heston-Hull-White model to price Guaranteed Minimum Maturity Benefits (GMMBs) and Guaranteed Minimum Death Benefits (GMDBs) offered in the life insurance industry in South Africa. We propose a further extension by including stochastic mortality rates based on either a continuous-time Cox-Ingersoll-Ross short rate process or a discrete-time AR(1)-ARCH(1) model. Our findings suggest that stochastic interest rates are the dominating factor when reserving for GMMB and GMDB products. Furthermore, a delta-hedging strategy can help reduce the variability of embedded derivative liabilities. en_US
dc.description.department Insurance and Actuarial Science en_US
dc.description.department Mathematics and Applied Mathematics en_US
dc.description.librarian am2023 en_US
dc.description.uri https://www.actuarialsociety.org.za/assa-news/sa-actuarial-journal-and-articles en_US
dc.identifier.citation Levendis, A. & Mare, E. 2022, 'An economic scenario generator for embedded derivatives in South Africa', South African Actuarial Journal, vol. 22, pp. 79-118. DOI; 10.4314/saaj.v22i1.4 en_US
dc.identifier.issn 1680-2179
dc.identifier.other 10.4314/saaj.v22i1.4
dc.identifier.uri http://hdl.handle.net/2263/92866
dc.language.iso en en_US
dc.publisher Actuarial Society of South Africa en_US
dc.rights © Actuarial Society of South Africa. This work is distributed under the Creative Commons Attribution 3.0 License. en_US
dc.subject Heston-Hull-White en_US
dc.subject Stochastic volatility en_US
dc.subject Stochastic interest rates en_US
dc.subject Stochastic mortality en_US
dc.subject Pricing en_US
dc.subject Hedging en_US
dc.subject Guaranteed minimum death benefit (GMDB) en_US
dc.subject Guaranteed minimum maturity benefit (GMMB) en_US
dc.title An economic scenario generator for embedded derivatives in South Africa en_US
dc.type Article en_US


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