Research area: mathematical finance
Department: Insurance Advisory
Supervisor: dr. David van Bragt
Description: Due to external developments like the upcoming new accounting standards (IFRS phase II) and new regulatory frameworks (Solvency II) and due to developments in internal risk and return management, ALM models for insurance companies need to determine the market value of the insurance liabilities. A first method to value the embedded options in these liabilities is to apply approximating closed-form option formulas. For very complex options, an alternative approach can also be used. This approach starts by first defining a limited number of states of the world (for example different interest-rate levels) and then using risk-neutral Monte Carlo methods to determine the market value in each of these states. In every point of a set of economic scenarios, the value of the options can subsequently be estimated by means of interpolation between the pre-calculated and tabulated values. This research project builds on earlier research and existing algorithms. The specific objectives of this project are to further refine these algorithms and to find an appropriate method to determine the interest-rate sensitivities of the options for different terms to maturity.
Background information:
Van Bragt, D. and H. Steehouwer (2007), “Recent Trends in Asset and Liability Modeling for Life Insurers”, OCFR Methodological Paper No. 2007-01.