Property & Casualty Economic Scenario Generator

Property & Casualty Economic Scenario Generator
The Property & Casualty Economic Scenario Generator (ESG) is an essential tool for capital modelers as well
as risk and investment managers at Property and Casualty (P&C) insurance companies seeking to develop
modern Enterprise Risk Management (ERM) best practice capabilities, or to meet the demands of regulatory
regimes such as Solvency II and the National Association of Insurance Commissioners Own Risk and Solvency
Assessment (ORSA). Powered by the award-winning ESG, users can project large numbers of forward-looking
scenarios for a wide range of economic and financial market risk factors. The Property & Casualty ESG is
used for managing asset portfolio risks, building and running internal capital models, and modeling economic
drivers of P&C underwriting and reserve liabilities.
The Challenge: Market and Economic Risk Modeling for Multi-Asset Investors with Complex Liabilities
Market and economic risk factors have a strong influence on the profitability of the P&C insurance industry where they affect both assets
and liabilities. P&C insurers seeking to model the impact of changing economic conditions on their profitability often lack the economic
modeling framework necessary to produce the core market and economic variables required for their financial modeling needs.
Integrated Modeling of Asset Returns & Economic Scenarios
The Property & Casualty ESG provides a coherent and integrated stochastic modeling framework for various asset classes and economic risk
factors. Asset returns are calculated directly using the yield curves, credit spreads and other economic factors generated by the ESG, allowing
projections of asset returns alongside the economic factors which impact liabilities and ensuring consistency between asset risks and economic
drivers of insurers’ liabilities. This consistent framework helps P&C insurers to capture concentrations of risk and natural hedges between the
asset side and the liability side of the balance sheet and is a prerequisite for any holistic and company-wide Asset and Liability Management
(ALM) system and / or an internal capital model.
Property & Casualty Economic Scenario Generator
Enhanced Asset Modeling Capabilities for Multi-Asset Investors
The Property & Casualty ESG performs asset modeling for a wide range of asset classes representative of most of the investments carried by
P&C insurers. It includes a wide spectrum of fixed income, equity and alternative asset classes, including derivative overlays, to deal with the
specific risk management needs of P&C insurers.
Asset Classes Covered
»» Government bonds
»» Corporate bonds
»» Mortgage back securities
»» Municipal bonds
»» Floating rate notes
»» Inflation-linked bonds
»» Alternative assets, hedge funds and commodities
»» Currency
»» Real estate indices
»» Interest rate swaps and swaptions
»» Equity options
»» Forwards
»» Equity indices and assets
Advanced Portfolio
Portfolio models allow investigating the impact of tailored strategies on portfolio risk and return characteristics, including various rebalancing
strategies, derivative overlays, currency hedging and duration targeting.
Various Outputs
The Property & Casualty ESG is designed to meet the full needs of a P&C internal capital model, including asset portfolio modeling. The core
ESG produces a consistent set of economic scenario outputs which can be imported seamlessly into the major capital modeling platforms.
Economic outputs such as price and wage inflations, claims inflation indices, GDP growth or unemployment allow P&C insurers to refine
their insurance risk models by modeling the impact of these economic drivers on their exposures, loss frequencies, loss severities and reserve
developments.
Forward-looking Quarterly Calibrations
Each quarter, ESG users receive a standard calibration. Our economic and asset model calibrations make use of the skill and judgment of our
economists and financial market experts, together with external forecasts and market data. They provide a forward-looking set of scenarios
designed to reflect the risks of the future, as well as the past. calibrations can be delivered optimized for either short-term projections (for
Solvency II capital models, for example) or longer-term projections (for run-off type models).
Economic Output
»» Nominal government and swap rates
»» Real yield curves
»» Credit spread curves
»» Price inflation
»» Wage inflation
»» Specific inflation indices including:
-- Medical
-- Construction
-- Legal cost
»» GDP growth
»» Unemployment rates
»» Foreign exchange rates
Global Coverage across Major Economies
Models are calibrated across a set of 29 economies – including emerging markets – modeled together consistently.
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Stress Testing and Customized Views
Users can create calibrations reflecting company-specific views and demonstrate ownership of the ESG either with direct ESG model
calibration or using scenario reweighting techniques:
»» All the ESG model parameters can be viewed and edited by the end user. Calibration tools enable developing stress tests on the model tails,
performing sensitivity analysis or aligning the central model forecasts to your own views.
»» With Scenario Views, users can also superimpose their own economic assumptions directly over the standard ESG outputs and produce
custom or stressed scenario sets through scenario reweighting. In addition, Scenario Views helps to visualize, analyze and format scenario
sets.
Detailed Documentation
The Property & Casualty ESG includes detailed documentation to help understand the ESG and meet regulatory demands, including
documentation describing:
»» The full technical details of the models
»» Standard economic assumptions and how they are set
»» How the models are calibrated
In calibration reports, the expert judgment applied by Moody’s Analytics calibration team is clearly identified and justified. Models, data
and expert judgment are subject to extensive validation, such as back-testing, reconciliations and expert reviews. Particularly important to
European insurers that will need to comply with the provisions of Solvency II, Bermudian insurers applying for internal model approval, or US
insurers that will be required to file the National Association of Insurance Commissioners ORSA, Moody’s Analytics models have withstood the
scrutiny of regulators, and audit firms worldwide and we routinely cooperate with various regulatory bodies on market risk issues.
Knowledge Transfer & Support
All models are extensively documented, both internally and in the academic literature, and clients gain access to Knowledge Base — a
comprehensive online library of research documents covering financial modeling, best practice approaches to financial risk management, and
expert analysis of insurance regulations.
In addition to standard ESG training, a support team is dedicated to answering user questions and explaining models and methodologies. All
clients are welcome at Moody’s Analytics events and conferences whether they want to keep abreast of the latest developments in financial
risk modeling or to benefit from advanced ESG training.
Key Business Decisions
The merits of risk modeling tools are uniquely judged by their value in helping insurers make more informed business decisions to better
manage their operations. Moody’s Analytics solutions help with:
»» Evaluating the performance of current and alternative investment portfolios against the efficient frontier.
»» Projecting current asset mix and alternative strategies over a strategic time horizon.
»» Incorporating insurance liabilities consistently with asset returns to evaluate downside risk metrics.
»» Performing risk decompositions to evaluate diversification benefits between assets classes, and between asset and liabilities.
MOODY'S ANALYTICS 3
Related Products
Scenario Views
»» Provides insights into the properties of the economic scenarios used in economic modeling and risk management and enables insurers to
easily generate additional economic scenario sets reflecting their own views or providing customized stresses.
»» Reads in simulations from a standard scenario set which are reweighted so that selected economic series meet the user-defined target views
and provides a side-by-side comparison of the two scenario sets.
Property & Casualty Scenario Service
»» Provides a robust alternative to a full software installation of the Property & Casualty ESG where clients benefit from the same high-quality
modeling framework without the overhead associated with managing, running and calibrating ESG models in-house.
»» Calibration and direct delivery of economic scenario sets to users.
»» Configurable solution to meet P&C insurers’ specific demands.
About Moody’s Analytics
Moody’s Analytics, a unit of Moody’s Corporation, helps capital markets and credit risk
management professionals worldwide respond to an evolving marketplace with confidence.
The company offers unique tools and best practices for measuring and managing risk through
expertise and experience in credit analysis, economic research and financial risk management.
By offering leading-edge software and advisory services, as well as the proprietary credit research
produced by Moody’s Investors Service, Moody’s Analytics integrates and customizes its offerings
to address specific business challenges.
CONTACT US
Visit us at barrhibb.com or contact us at a location below:
AMERICAS
+1.212.553.1653
[email protected]
EMEA
+44.20.7772.5454
[email protected]
ASIA (EXCLUDING JAPAN)
+85.2.3551.3077
[email protected]
JAPAN
+81.3.5408.4100
[email protected]
© 2014 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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