On the Bayesian Risk Evaluation of Minimum Guarantees in Variable Annuities

Byoung Hark Yoo, Bangwon Ko and Hyuk-Sung Kwon

Abstract

Long-term equity return models have a substantial impact on calculating reserves and capital requirements for minimum guarantees in variable annuities (VAs). Under a Bayesian statistical framework, we reinvestigate the standard long-term equity return models (independent lognormal, regime-switching lognormal and stochastic log volatility models) with the Korean equity market data. Our empirical analysis shows that the long-term behaviors of the Korean market are best described by the regime-switching lognormal models, and there can be significant difference in the amount of the reserves and the capital requirements depending on the model selection. The long-term nature of the VA contracts requires that more caution be paid for modeling the mean part of the stochastic log volatility model.

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The Asia-Pacific Journal of Risk and Insurance ( APJRI) focuses on risk management and insurance issues of importance to the Asia-Pacific region. An interdisciplinary publication, APJRI facilitates the exchange of research in risk and insurance mathematics, economics, finance, and corporate practice. The journal welcomes theoretical and applied research papers on a variety of specific topics.

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