Jul 17, 2013

The New Trend Emerging Toward Stochastic Analysis: A Primer on Risk Neutral Modeling for Economic Scenario Generation

By now, we all realize that the volatile markets and ever-evolving regulatory climate is driving much new attention to risk management in the insurance industry. In fact, it’s kind of taken on a center stage of its own. With many insurance companies subject to more complex regulations, practitioners are seeking to gain a wider picture of risk exposures—especially as their firms adopt more complex, investment-linked Insurance products.

White Paper - Risk Neutral Modeling for Economic  Scenario Generation: In Theory and PracticeGiven recent regulations like C3 PII and Solvency II requiring the use of stochastic analysis,  we are starting to see a natural movement away from the purely deterministic approaches used in the past. The new trend emerging is the use of sophisticated stochastic simulation frameworks, which  can be used to produce risk neutral and real world economic scenarios. Moreover, scenario sets can now be easily integrated with in-house or other third party liability systems, providing model consistency across the firm.  

 

Read our recently published paper, Risk Neutral Modeling for Economic Scenario Generation: In Theory and Practice,”  to learn more about this trend and the theory behind and practice surrounding Risk Neutral Modeling for Economic Scenario Generation (ESG). The paper also sets forth several practical case study examples that demonstrate the importance of risk neutral modeling and joint calibration in market consistent valuation, regulatory reporting, risk and capital forecasting—and the overall enhancement of a firm’s risk management.

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