Efficient Stochastic Modeling for Large and Consolidated Insurance Business: Interest Rate Sampling Algorithms

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One of the challenges of stochastic asset/liability modeling for large insurance businesses is the run time. Using a complete stochastic asset/liability model to analyze a large block of business is often too time consuming to be practical. In practice, the compromises made are reducing the number of runs or grouping assets into asset categories. This paper focuses on the strategies that enable efficient stochastic modeling for large and consolidated insurance business blocks. Efficient stochastic modeling can be achieved by applying effective interest rate sampling algorithms that are presented in this paper. The algorithms were tested on a simplified asset/liability model ASEM (Chueh 1999) as well as a commercial asset/liability model using assets and liabilities of the Aetna Insurance Company of America (AICA), a subsidiary of Aetna Financial Services. Another methodology using the New York 7 scenarios is proposed and could become an enhancement to the Model Regulation on cash flow testing, thus requiring all companies to do stochastic cash flow testing in a uniform, nononerous manner.


This article was originally published in North American Actuarial Journal. The full-text article from the publisher can be found here.

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North American Actuarial Journal