A Market Consistent Framework for the Fair Evaluation of Insurance Contracts Under Solvency II

The entry into force of the Solvency II regulatory regime is pushing insurance companies in engaging into market consistence evaluation of their balance sheet, including the financial options and guarantees embedded in life with-profit funds. The robustness of these valuations is crucial for insurance companies in order to produce sound estimates and good risk management strategies, in particular for liability driven products such as with-profit saving and pension funds. This paper introduces a simulation approach for Monte Carlo evaluation of insurance assets and liabilities, which is more suitable for risk management of liability driven products than common approaches generally adopted by insurance companies, in particular with respect to the assessment of valuation risk