Levendis, Alexis JacquesMare, Eben2023-10-162023-10-162022Levendis, 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.v22i1.41680-217910.4314/saaj.v22i1.4http://hdl.handle.net/2263/92866It 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© Actuarial Society of South Africa. This work is distributed under the Creative Commons Attribution 3.0 License.Heston-Hull-WhiteStochastic volatilityStochastic interest ratesStochastic mortalityPricingHedgingGuaranteed minimum death benefit (GMDB)Guaranteed minimum maturity benefit (GMMB)Article