Approximation of insurance liability contracts using radial basis functions

Journal article (2019)

Authors

S.N. Singor Numerical Analysis - EEMCS , Ortec Finance
E. Schols Ortec Finance
C.W. Oosterlee Numerical Analysis - EEMCS , Centrum Wiskunde & Informatica (CWI)
Research Group
Numerical Analysis (EEMCS) (TU Delft)
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Published Date

2019

Language

English

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Faculty

Electrical Engineering, Mathematics and Computer Science

Department

Delft Institute of Applied Mathematics

Research Group

Numerical Analysis

Abstract

We introduce the Option Interpolation Model (OIM) for accurate approximation of embedded option values in insurance liabilities. Accurate approximation is required for ex-ante risk management applications. The OIM is based on interpolation with radial basis functions, which can interpolate scattered data, and does not suffer from the curse of dimensionality. To reduce computation time we present an inversion method to determine the interpolation function weights. The robustness, accuracy and efficiency of the OIM are investigated in several numerical experiments. We show that the OIM results in highly accurate approximations.

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