ABSTRACT
This chapter introduces the ordinary kriging method, which can serve as a predictive model. This method can be used to predict the fair market values of the guarantees embedded in variable annuities. Under the ordinary kriging method, the covariance structure of the responses is modeled and the predictions are based on the weighted average of the observed values. Ordinary kriging is a method developed in geostatistics and derives estimates that are often called best linear unbiased estimators. The estimator is linear because the estimates are weighted linear combinations of the available data. The chapter analyses the ordinary kriging method. The validation measures in the output show that ordinary kriging with conditional Latin hypercube sampling produced much better results than that with Latin hypercube sampling. To test the performance of ordinary kriging with representative policies selected by the hierarchical k-means algorithm.
