A Bivariate Lattice Model to Compute Risk Measures in Life Insurance Policies

Abstract

We consider the problem of computing risk measures in a life insurance context by means of a lattice-based approach. The main advantage of the proposed model relies on the fact that the dynamics of the risk factors may be approximated by a unique lattice along the whole time horizon, thus guaranteeing the same computational cost of a standard pricing problem. This allows us to develop an efficient model that computes accurate estimates of the considered risk measures.

TOPICS: Risk management, derivatives, options, equity portfolio management

Key Findings

• ▪ This article shows how lattice-based models can be used to evaluate risk measures of life insurance contract.

• ▪ A bivariate lattice is constructed to approximate the loss function of an equity-linked policy with or without mortality risk.

• ▪ Numerical results show that the model computes accurate Value at Risk and Conditional Value at Risk values in all the considered cases.