Research & Insights
Nested Simulation for Economic Capital
Steven Morrison
A common definition of an insurer‟s economic capital requirements is based around a 1-year Value at Risk (VaR) metric. This defines capital requirements in terms of some tail percentile (typically the 99.5th percentile) of the market-consistent value of the insurer‟s balance sheet in 1 year‟s time. The problem of estimating such a metric naturally leads to the concept of nested simulation.
