Fairmat and the market consistent scenarios generation (ESG)

Fairmat and the market consistent scenarios generation (ESG)

Premise

The economic scenario generator (ESG) is the cornerstone of the market valuation of the financial statements and it is the most appropriate tool to manage and monitor both market and credit risk in an integrated way.
For Insurance Companies this tool can be used to calculate the Market Consistent Embedded Value, for having an efficient ALM (Asset Liability Management) strategy and to better understand the factors responsible for market risk inherent in certain complex products (eg. life insurance products) .
ESG is also essential to comply with the regulatory requirements of Solvency II both to calculate the Capital Requirements and the evaluation of Best Estimate Liabilities (Pillar I) as well as being used for the ORSA ( Own Risk and Solvency Assessment) purposes, i.e. the validation of theoretical models and for assessing exposure to risks (Pillar II)

Economic Scenario Generators (ESGs) are the cornerstone of the market-consistent valuation of financial statements and they are the most appropriate tool to manage and monitor both market and credit risk in an integrated way.

Insurance Companies can use this tool to calculate the Market-Consistent Embedded Value (MCEV), to have an efficient ALM (Asset Liability Management) strategy and to better understand the factors responsible for market risk inherent in certain complex products (e.g. life insurance products with guaranteed interest rates).

ESGs are also essential to comply with the regulatory requirements of Solvency II, both to calculate the Capital Requirements and to evaluate the Best Estimate Liabilities (Pillar I) as well as being used for the ORSA (Own Risk and Solvency Assessment) purposes, i.e. the validation of theoretical models and for assessing exposure to risks (Pillar II).

Fairmat ESG

Fairmat has published a plug-in you can add to your Fairmat Professional License which enables both risk management and actuarial teams to be independent in calculating market-consistent risk-neutral and real-world economic scenarios for:

  • Zero coupon bonds (ZCB);
  • Inflation Rates;
  • Defaultalble bonds / credit spreads;
  • Baskets of equities and indices (prices and dividends are simulated);

The theoretical models are calibrated automatically, as well as correlations amongst the different economic variables and the risk premia for real-world simulations when Fairmat Professional is connected to a market data provider (e.g. Bloomberg Professional Desk or Fairmat Data Provider).

Alternatively, model calibrations may also be provided by Fairmat as a service.

With the model of Pelsser-Jarrow-Yildirim, Fairmat ESG simulates coherent scenarios for nominal interest rates, inflation and real interest rates which do not allow negative nominal rates and whose correlation is implicit in the model.  

It is possible to define the frequency of simulations (weekly, monthly and yearly) and the simulation time horizon (beyond 40 years)

The generated scenarios can be exported in CSV format for being further processed  by third-party actuarial solutions (e.g. MoSes) or customized to any other format upon customer's request.

Several support information such as consistency, martingale tests, descriptive statistic and scenarios user-defined percentiles are automatically generated within the system.

For more details check out the product's documentation.

The generator of scenarios Fairmat has been used in conjunction with PWC U.S. and the SOA (Society of Actuaries) for the preparation of a paper on the valuation of guarantees in pension plans.

For further information download the presentation of Fairmat ESG and contact us for a trial version of the product.