Scenario Service

Scenario Service
Economic scenarios describe plausible future paths of economic variables that are related in an economically
coherent way. They deliver the results of thousands of simulated future rates, yields, returns, and asset prices,
and other economic risk drivers produced by an arbitrage-free modeling framework. The Scenario Service
provides a robust alternative to the Economic Scenario Generator (ESG). Clients benefit from the same highquality modeling framework without the overhead associated with implementing the software, and managing,
running, and calibrating ESG models in-house.
The Challenge: Modeling the Economic Drivers of Insurance Assets and Liabilities
Whether building an economic capital model, designing an asset and liability management system, or implementing an enterprise
risk management program, insurers face the difficult task of modeling the economic drivers of assets and liabilities. They rarely
possess the in-house capabilities to generate the market and economic inputs required for their financial modeling needs.
Key Scenario Service Features
»» Sophisticated models that realistically capture the dynamics of financial markets.
»» Calibration and direct delivery of economic scenario sets to clients.
»» Configurable solution to meet insurers’ specific demands.
»» Annual, bi-annual, or quarterly scenario updates.
Economic Scenarios can be integrated immediately and seamlessly with most capital modeling platforms, ALM, and ERM systems or
proprietary models.
Scenario Service
The merits of risk modeling tools are uniquely judged by their value in helping insurers make more informed business and
operational decisions.
Moody’s Analytics solutions encompass powerful asset analytics capabilities, that help users to:
»» Evaluate the performance of current and alternative investment portfolios against the efficient frontier.
»» Project current asset mix and alternative strategies over a strategic time horizon.
»» Incorporate insurance liabilities consistently with asset returns to evaluate downside risk metrics.
»» Perform risk decompositions to evaluate diversification benefits between assets classes, and between asset and liabilities.
QUARTERLY STANDARD SCENARIOS
Our model calibrations and scenario sets, updated every quarter and released promptly each quarter, reflect changing market conditions.
Standard scenarios include:
»» Market-Consistent Scenarios: risk-neutral scenarios where as much as possible is inferred from market prices to give a market-consistent
calibration. They are ideal for valuing liabilities for technical provisions or an economic balance sheet.
»» 1-Year VaR Scenarios: scenarios optimized for short-term horizons with an increased focus on inferring data from current market process,
and giving a conditional or point-in-time view. They are ideal for market risk models for a 1-year VaR capital calculation.
»» Real-World Best-Views Scenarios: real-world scenarios that reflect our best view of the realistic evolution of risk factor distribution over
horizons of up to around 50 years. They are ideal for a number of applications including: run-off capital, cash-flow projections and illustrating policy outcomes.
»» Real-World Dynamic Equilibrium Scenarios: real-world scenarios that reflect a stable or equilibrium view of asset risk premiums. They
are ideal for use in portfolio construction and strategic asset allocation work.
REALISTIC RISK PROFILES
Models are calibrated across more than 30 economies – including emerging markets – modeled together consistently. Our advanced models
capture features such as fat-tails, tail-dependence, and structural relationships between asset class returns and economic risk factors to ensure
a realistic picture of the economic risks which drive capital requirements and profitability. Integrated modeling of asset returns and economic
scenarios helps insurers to capture concentrations of risk and natural hedges between the asset side and the liability side of the balance sheet.
Market and Economic Risk Factors
Asset Modeling
»» Nominal government and swap rates
»» Bond portfolios (government, corporate, and municipal)
»» Real yield curves
»» Structured finance (MBS, ABS)
»» Credit spreads and credit defaults
»» Floating rate notes
»» Price and wage inflations
»» Interest rate swaps and swaptions
»» Claims inflation indices (medical, construction, legal)
»» Index-linked bonds
»» GDP growth
»» Equity indices and assets
»» Unemployment
»» Equity options
»» Commodities
»» Forwards
»» Foreign exchange rates
»» Real estate indices
»» Alternative assets (private equity, hedge funds, commodities)
»» Vanilla derivatives
MOODY'S ANALYTICS
MARKET LEADING EXPERTISE
Moody’s Analytics is a market leader in economic scenario generation for insurers. The assumptions and parameters used to calibrate our
financial models are rigorously researched, tested and regularly updated by our team of leading economists, actuaries, and financial market
experts. These calibrations are used to create a set of forward-looking scenarios that reflect a range of potential outcomes for asset prices and
economic risks. Models are constantly reviewed and improved as new techniques become available in the continually evolving market risk
modeling field.
However, we know that some users have their own views about models and we can provide custom calibrations based on clients’ own targets,
frequency, or data. We can help with the research and development of new asset classes and economic risk factor models.
CUSTOM CALIBRATIONS
»» Custom calibrations are routinely performed based on clients’ own targets, frequency or data.
»» Clients can also use scenario reweighting techniques to adjust standard calibration to their own views and create stressed
scenario sets.
»» Any additional client requests for the research and development of new asset classes and economic risk factors modeling.
FORWARD-LOOKING
The assumptions and parameters used to calibrate our financial models are rigorously researched, tested and regularly updated by our team of
leading economists, actuaries, and financial market experts. These calibrations are used to create a set of forward-looking scenarios that reflect
a range of potential outcomes for asset prices and economic risks. 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).
COMPREHENSIVE DOCUMENTATION, VALIDATION AND GOVERNANCE
Of particular importance to European companies, which need to comply with the provisions of Solvency II, Bermudian companies applying
for internal model approval, or US companies which are required to file the National Association of Insurance Commissioners Own Risk and
Solvency Assessment (ORSA), Scenario Service is fully documented and supported, including:
»» Detailed technical information regarding models, together with calibration and target-setting methodology.
»» Overview of the modeling framework discussing the model choices made and any limitations on their use.
»» Clear identification and justification of expert judgment calls in calibration reports.
»» Extensive validation, back-testing, reconciliations, and expert reviews of models, data and expert judgment.
KNOWLEDGE, TRANSFER & SUPPORT
All models are extensively documented, both internally and in academic literature. Clients have access to our Knowledge Base—the
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 questions and
explaining models and methods. All clients are welcome at Moody’s Analytics global events and conferences whether they want to keep
abreast of the latest developments in financial risk modeling or to benefit from advanced ESG training.
MOODY'S ANALYTICS
Software Product Family
SCENARIO VIEWS
Scenario Views is an application that gives scenario set users the ability to analyze and customize their scenarios. Scenario Views includes a
reweighting and resampling algorithm that allows users to change the characteristics of the scenarios. Features of Scenario Views include:
»» Providing insight into the statistical properties of the economic scenarios including a range of charting options.
»» Enabling insurers to generate economic scenario sets reflecting their own views or providing customized stresses.
»» Providing a side-by-side comparison of the original and reweighted scenario sets.
»» Allowing users to export scenarios to a range of alternative file structures and formats.
»» Scenario Views provides a direct comparison between your original economic scenarios and scenarios reflecting your own views.
»» Simulations from the original scenario set are reweighted so that the economic series meet the target views.
ECONOMIC SCENARIO GENERATOR
»» State of-the art modeling software: develop in-house expertise using the flexibility and power of the Economic Scenario Generator to
generate economic scenarios.
»» Advanced portfolio construction and strategies: investigate the impact of tailored strategies on portfolio risk and return, including various rebalancing rules, derivative overlays, currency hedging, and duration targeting.
»» Stress tests, sensitivity analyses, and customizable views: all ESG model parameters are identifiable and editable, and calibration tools
enable stress testing the model tails, performing sensitivity analyses or aligning the model central forecasts to in-house views.
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]
© 2015 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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