Economic Scenario Generators
The projection of economic and financial risk factors is a key element of prospective analyzes made by life insurers, both for the calculation of reserves under Solvency 2 and for the asset allocation and management of financial risks. This projection is achieved in practice through “economic scenario generators” (ESG), which are inputs for the calculus of the economic value of assets and liabilities and the analysis of the distribution of this value. The calculation of economic values is based on the “no free lunch” assumption and therefore leads to model the risk factors in a riskneutral probability, while the analysis of the distribution of these values requires the projection of these factors under the historical probability. Therefore, the insurer must handle different representations of the risk factors, which requires looking at the characteristics of a risk neutral ESG, those of an “historical” one and the possible need for coherence between these two representations. This is what we propose to do in this chapter.