Solvency II and Nested Simulations - a Least-Squares Monte Carlo Approach

Within the European Union, risk-based funding requirements for life in- surance companies are currently being revised as part of the Solvency II project. However, many insurers are struggling with the implementation, which is in part due to the ine±cient methods underlying their numerical computations. We review these methods and propose a signi¯cantly faster approach for the calculation of the required risk capital based on least-squares regression and Monte Carlo simulations akin to the well-known Least-Squares Monte Carlo method for pricing non-European derivatives introduced by Longsta® and Schwartz (2001, [20]).