This paper serves as a basic guide to economic scenario generators (ESGs), with an emphasis on applications for the property-casualty insurance industry. An ESG is a computer-based model that provides simulated examples of possible future values of various economic and financial variables. The paper provides general information on the nature of ESGs, discusses essential features of a good one, and provides guidance on stochastic processes and modeling of certain economic and financial variables. The importance of financial market model specification, model calibration, and model validation are discussed. This assures that the ESG will produce simulation results that are relevant and sufficiently robust and that will realistically reflect market dynamics. The paper also provides a concrete illustration which describes issues and decisions made in constructing and using a specific ESG. Considerations relating to the projection time frame are explored in depth. Finally, a discussion of the range of choices for software in developing ESGs is presented, contrasting open-source ESGs with solutions that are available from commercial vendors.
A User’s Guide to Economic Scenario Generation in Property/Casualty Insurance
A User’s Guide to Economic Scenario Generation in Property/Casualty Insurance
Link
Abstract
Year
2022
Keywords
economic scenario generators, ESGs, financial variables, economic variables, open-source ESGs
Description
This paper serves as a basic guide to economic scenario generators (ESGs), with an emphasis on applications for the property-casualty insurance industry. An ESG is a computer-based model that provides simulated examples of possible future values of various economic and financial variables. The paper provides general information on the nature of ESGs, discusses essential features of a good one, and provides guidance on stochastic processes and modeling of certain economic and financial variables. The importance of financial market model specification, model calibration, and model validation are discussed. This assures that the ESG will produce simulation results that are relevant and sufficiently robust and that will realistically reflect market dynamics. The paper also provides a concrete illustration which describes issues and decisions made in constructing and using a specific ESG. Considerations relating to the projection time frame are explored in depth. Finally, a discussion of the range of choices for software in developing ESGs is presented, contrasting open-source ESGs with solutions that are available from commercial vendors.
