The accurate valuation of insurance liabilities has become a hot item in recent years. New legislation and regulation insists on a market-consistent valuation according to International Financial Reporting Standards (IFRS), Market-Consistent Embedded Value (MCEV) or the Liability Adequacy Test (LAT). But to identify and then correctly value these liabilities including its underlying guarantees and embedded options is a very complex and specialized skill. Fortunately, market valuation of common Dutch insurance products is a standard feature in the Ortec Finance ALM model.

In ALM calculations the Ortec Finance model usually operates with approximating option formulas. This approach is possible because in such cases the calculated market value does not have to be 100% accurate. Such a fast method moreover considerably reduces the calculation time. The model however is definitely equipped to perform nearly exact valuations through an integrated Monte Carlo module. This module can generate scenarios for different interest rate curves (nominal, real, domestic, foreign), inflations, currency and (excess) returns. Together with the liabilities module of the Ortec Finance ALM model, the Monte Carlo module can then be used to value even the most complex liability structures with close to 100% accuracy.

Valuation is crucial for the development of new insurance products when the important parameters for product pricing must be determined. For example when a new unit-linked investment product is developed with a capital- or return guarantee. Besides calculating the (option) value of such a guarantee, this can also be important in determining compensation for the client.  In the next step these compensations can be used to cover the guarantee risks in an efficient manner through existing financial instruments. All components required for these analyses are available in Ortec Finance’s standard ALM model for insurers. This model can therefore be successfully applied for product development and pricing.