Abstract
The method of least squares Monte-Carlo (LSMC) has become a standard in the insurance and financial sectors for computing the exposure of a company to market risk. The sensitive point of this procedure is the non-linear regression of simulated responses to risk factors. This article proposes a novel approach for this step, based on an apriori segmentation of responses. Using a K-means algorithm, we identify clusters of responses that are next locally regressed on corresponding risk factors. A global function of regression is obtained by combining local models and a logistic regression. The efficiency of the Local Least squares Monte-Carlo (LLSMC) is checked in two illustrations. The first one focuses on butterfly and bull trap options in a Heston stochastic volatility model. The second illustration analyzes the exposure to risks of a participating life insurance.
Sector: Insurance
Expertise: Life Insurance
Authors: Adnane Akbaraly,
Donatien Hainaut
Publisher: Detralytics
Date: January 2023
Language: English
Pages: 34
Reference : Detra Note 2023-1
About the authors
Adnane Akbaraly
Adnane is part of the Talent Accelerator Program (TAP) at Detralytics. Prior to joining Detralytics, Adnane worked at CNP Assurances in retirement department and developed skills in Market Consistency Embedded Value (MCEV) assessment.
Having a strong appeal for Data Science applied to actuarial sciences, Adnane has developed technical skills during his experiences in Life and Non-Life. In addition, he had the opportunity to work on an R&D topic that was published in the ASTIN Bulletin.
Donatien Hainaut
Donatien Hainaut is a Scientific Advisor at Detralytics and a professor at UCLouvain (Belgium), where he serves as the Director of the Master’s program in Data Science with a statistical orientation. Prior to this, he held several academic positions, including Associate Professor at Rennes School of Business and ENSAE in Paris. He also has extensive industry experience, having worked as a Risk Officer, Quantitative Analyst, and ALM Officer.
Donatien is a Qualified Actuary and holds a PhD in the field of Asset and Liability Management. His current research focuses on contagion mechanisms in stochastic processes and the applications of neural networks in insurance.
