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 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:
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.