Market valuation of embedded options in insurance liabilities is becoming more and more important in the insurance industry. This development is mainly due to new accounting standards (IFRS phase II) and new regulatory frameworks (Solvency II) which require a market-consistent valuation. Risk-neutral Monte Carlo simulation is a commonly-used technique for valuation, mainly because this technique is generally applicable and precise.
Ortec Finance has recently released a new version of its risk-neutral scenario generator. Besides generating scenarios on an annual basis, the scenario generator now also provides risk-neutral scenarios on a monthly basis.
The core of the Ortec Finance risk-neutral scenario generator is a combined (two factor) Hull-White Heston model. The Hull-White model describes the evolution of the interest rate curve over time. The Heston model is an extension of the familiar Black-Scholes model which allows for a time-varying volatility of asset returns. This core model has been further extended by Ortec Finance to allow for the consistent treatment of currencies, inflations, real and foreign interest rate curves, credit bonds and real estate.
In addition, powerful variance reduction techniques are applied to improve the accuracy of the Monte Carlo results for small scenario sets. The risk-neutral scenario generator also contains a powerful and robust optimization tool which enables the user to calibrate the scenario set on historical or market data. The generated scenario sets can easily be exported via the graphical interface or via tailor-made output files. For each generated scenario set a run log file is automatically processed as well to facilitate the auditing process.
Ortec Finance licences the risk-neutral scenario generator as a stand-alone Windows application or in combination with other Ortec Finance products. Ortec Finance can also (periodically) deliver scenario sets, including additional sets with adjusted interest rate curves, volatilities, etc. Bespoke scenario sets can also be delivered within a short time frame