In a number of actuarial applications a set of economic scenarios is used to perform an analysis. In a continuity analysis or ALM Study the contribution, indexation and investment policies are analysed on the basis of numerous economic scenarios. Triple A - Risk Finance has software at its disposal to generate any number of economic scenarios. Using econometric techniques the Economic Scenario Generator (ESG) generates real-world scenarios for economic variables such as interest rate structures, inflation and share and bond returns. The real-world ESG is a user-friendly and flexible tool.
In addition to this real-world ESG, Triple A - Risk Finance also has a market-consistent or risk-neutral ESG. The market-consistent ESG generates scenarios that can be used for the valuation of embedded options and guarantees in insurance contracts. The valuation of embedded options is also necessary for Risk Based Capital Management, Asset & Liability Management, Market Consistent Embedded Value and Product Pricing.
The interest rate models in the market-consistent ESG are based on the so-called 'no-arbitrage principle'. This implies that the model is one that can exactly reproduce the current interest rate structure. Various models are available for share returns, such as the well-known Black and Scholes model, the Heston model and the Bates model. The latter two models are more complex than the Black and Scholes model but far more in line with the current circumstances in the financial markets.
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