Why insurers are turning to the least squares Monte Carlo modelling technique

The Monte Carlo method

Monte Carlo

The challenge of calculating Solvency II risk capital for a liability portfolio with any kind of complexity cries out for a proxy method. Complex liabilities can only be valued accurately using a stochastic approach, especially where there are embedded options, management actions or other events to take account of. In fact, any degree of accuracy requires a ‘nested stochastic’ approach – a set of ‘inner’ stochastic simulations for market-consistent pricing of liabilities within an ‘outer’ set of