Machine learning techniques in nested stochastic simulations for life insurance

The insurance regulatory regime introduced in the European Union by the “Solvency II” Directive 2009/138, that has become applicable on 1 January 2016,is aimed to safeguard policyholders and beneficiaries by requiring insuranceundertakings to hold own funds able to cover losses, in excess to the expectedones, at the 99.5% confidence level, over a 1-year period. In order to assess risks and evaluate the regulatory Solvency Capital Requirement, undertakings should compute the probability distribution of the Net Asset Value over a 1-year period, with a financially inspired market consistent approach. In life insurance, given the peculiarities of the contracts, the valuation of the Net AssetValue distribution requires a nested Monte Carlo simulation, which is extremely time-consuming. Machine learning techniques are considered a promising candidate to reduce the computational burden of nested simulations. This work investigates the potential of well-established methods, such as deep learning networks and support vector regressors, when applied to the valuation of the Solvency Capital Requirement of participating life insurance policies, by empirically assessing their effectiveness and by comparing their efficiency and accuracy, also w.r.t. the “traditional” least squares Monte Carlo technique. The work aims also to contribute to the global process of renewal of the European insurance industry, where Solvency II has made the board of directors fully responsible of thechoice of evaluation techniques and algorithmic processes, under the periodic monitoring of national supervisory authorities.