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An Efficient Algorithm for the Calculation of Reserves for Non-Unit Linked Life Policies

20 Pages Posted: 11 Dec 2014  

Mark Tucker

University of Edinburgh

J. Mark Bull

University of Edinburgh

Date Written: December 11, 2014

Abstract

The underlying stochastic nature of the requirements for the Solvency II regulations has introduced significant challenges if the required calculations are to be performed correctly, without resorting to excessive approximations, within practical timescales. It is generally acknowledged by practicing actuaries within UK life offices that it is currently impossible to correctly fulfill the requirements imposed by Solvency II using existing computational techniques based on commercially available valuation packages. Our work has already shown that it is possible to perform profitability calculations at a far higher rate than is achievable using commercial packages. One of the key factors in achieving these gains is to calculate reserves using recurrence relations that scale linearly with the number of time steps. Here, we present a general vector recurrence relation which can be used for a wide range of non-unit linked policies that are covered by Solvency II; such contracts include annuities, term assurances, and endowments. Our results suggest that by using an optimized parallel implementation of this algorithm, on an affordable hardware platform, it is possible to perform the ‘brute force’ approach to demonstrating solvency in a realistic timescale (of the order of a few hours).

Keywords: Solvency II, non-unit linked life reserves, brute force, parallel programming, OpenMP

Suggested Citation

Tucker, Mark and Bull, J. Mark, An Efficient Algorithm for the Calculation of Reserves for Non-Unit Linked Life Policies (December 11, 2014). Algorithmic Finance 2014, 3:3-4, pp. 143-161. Available at SSRN: https://ssrn.com/abstract=2536792

Mark Tucker (Contact Author)

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

J. Mark Bull

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

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