In recent years, market-consistent valuation approaches have gained an increasing importance for insurance companies. This has triggered an increasing interest among practitioners and academics, and a number of specific studies on such valuation approaches have been published. In this paper, we present a generic model for the valuation of life insurance contracts and embedded options. Furthermore, we describe various numerical valuation approaches within our generic setup. We particularly focus on contracts containing early exercise features since these present (numerically) challenging valuation problems. Based on an example of participating life insurance contracts, we illustrate the different approaches and compare their efficiency in a simple and a generalized Black-Scholes setup, respectively. Moreover, we study the impact of the considered early exercise feature on our example contract and analyze the influence of model risk by additionally introducing an exponential Levy model.

Within the European Union, risk-based funding requirements for life insurance 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 signiflcantly 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 Longstafi and Schwartz (2001, [20]).