The International Financial Reporting Standards (IFRS) offer the possibility to include (parts of) the market value of insurance liabilities on the balance sheet. Within the framework of Market-Consistent Embedded Value or Liability Adequacy Testing the market value of insurance liabilities has to be determined as well. Identifying and then correctly valuing such liabilities, including the contained guarantees and embedded options, is a very complex and highly specialized exercise however. Fortunately, market valuations for a wide range of insurance products are standard features in our ALS Life model.
ALS Life typically uses approximating option formulas for ALM calculations. This is possible because the market value does not have to be determined with an accuracy of 100% in this case. This approach also leads to a huge reduction in calculation time. It is, however, also possible to carry out very precise one-off valuations with ALS Life. For this purpose, a risk-neutral scenario generator has been developed by ORTEC. Using this generator, a risk-neutral scenario set can be produced with a combined Hull-White (interest rate) - Black-Scholes (equity) model. Using these scenarios, even the most complex liability structure can be valued with almost 100% accuracy by Monte Carlo simulation. Risk-neutral scenarios can be generated for different interest rate curves (nominal, real, domestic and foreign curves), inflations, currencies, and total return series.
The user is fully able to calibrate the Hull-White Black-Scholes model on historical or scenario data, or on the market prices of relevant options. The Monte Carlo-module, which is integrated with the liability module of ALS Life, can accordingly be used to valuate even the most complicated liability structures with 100% accuracy.