Research & Insights
Solving the “nested stochastic problem”: a Least Squares Monte Carlo approach to liability proxy modelling and capital calculation
Adam Koursaris
This note outlines a method which can be used for solving the nested stochastic problem, creating a function which approximates a multi-dimensional insurance liability through the use of Monte Carlo Simulation and Regression. The process, model choices, automation and validation are discussed in detail.
Although a liability proxy function has many applications within insurance risk management this note will discuss use of proxy modelling in the context of a Solvency II 1 year VaR capital calculation.
