Application of data clustering and machine learning in variable annuity valuation

The valuation of variable annuity guarantees has been studied extensively in the past four decades. However, almost all the studies focus on the valuation of guarantees embedded in a single variable annuity contract. How to efficiently price the guarantees for a large portfolio of variable annuity contracts has not received enough attention. This paper fills the gap by introducing a novel method based on data clustering and machine learning to price the guarantees for a large portfolio of variable annuity contracts. Our test results show that this method performs very well in terms of accuracy and speed. (C) 2013 Elsevier B.V. All rights reserved.