Use this URL to cite or link to this record in EThOS: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.575292
Title: Monte Carlo simulation approaches to the valuation and risk management of unit-linked insurance products with guarantees
Author: Cathcart, Mark J.
Awarding Body: Heriot-Watt University
Current Institution: Heriot-Watt University
Date of Award: 2012
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Abstract:
With the introduction of the Solvency II regulatory framework, insurers face the challenge of managing the risk arising from selling unit-linked products on the market. In this thesis two approaches to this problem are considered: Firstly, an insurer could project the value of their liabilities to some future time using Monte Carlo simulation in order to reserve adequate capital to cover these with a high level of confidence. However, the complex nature of many liabilities means that valuation is a task requiring further simulation. The resulting `nested-simulation' is computationally inefficient and a regression-based approximation technique known as least-squares Monte Carlo (LSMC) simulation is a possible solution. In this thesis, the problem of configuring the LSMC method to efficiently project complex insurance liabilities is considered. The findings are illustrated by applying the technique to a realistic unit-linked life insurance product. Secondly, an insurer could implement a hedging strategy to mitigate their exposure from such products. This requires the calculation of market risk sensitivities (or `Greeks'). For complex, path-dependent liabilities, these sensitivities are typically estimated using simulation. Standard practice is to use a `bump and revalue' method. As well as requiring multiple valuations, this approach can be unreliable for higher order Greeks. In this thesis some alternative estimators are developed. These are implemented for a realistic unit-linked life insurance product within an advanced economic scenario generator model, incorporating stochastic interest rates and stochastic equity volatility.
Supervisor: McNeil, Alexander Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.575292  DOI: Not available
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