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A neural network model for solvency calculations in life insurance

Published online by Cambridge University Press:  01 December 2020

Lucio Fernandez-Arjona Open the ORCID record for Lucio Fernandez-Arjona [Opens in a new window]
Lucio Fernandez-Arjona*
Affiliation:
University of Zurich, 8006Zurich, Switzerland
*
E-mail: lucio.fernandez.arjona@business.uzh.ch
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Abstract

Insurance companies make extensive use of Monte Carlo simulations in their capital and solvency models. To overcome the computational problems associated with Monte Carlo simulations, most large life insurance companies use proxy models such as replicating portfolios (RPs). In this paper, we present an example based on a variable annuity guarantee, showing the main challenges faced by practitioners in the construction of RPs: the feature engineering step and subsequent basis function selection problem. We describe how neural networks can be used as a proxy model and how to apply risk-neutral pricing on a neural network to integrate such a model into a market risk framework. The proposed model naturally solves the feature engineering and feature selection problems of RPs.

Keywords

Economic capitalSwiss solvency testSolvency IINeural networksNested Monte CarloReplicating portfolios
Type
Paper
Information
Annals of Actuarial Science , Volume 15 , Issue 2 , July 2021 , pp. 259 - 275
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of Institute and Faculty of Actuaries

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