An ESG model aims at modelling the dynamics of the main economic risk factors to which an insurance company is exposed and at generating a set of scenarios of the evolution of these risk factors in the future. An ESG can include purely financial risk factors (e.g. the interest rates, the credit spreads for different credit ratings, the return of different indices, the exchange rates) as well as macro-economic risk factors (e.g. the GDP of a country, the unemployment rate, the price of wage inflation rates, etc). Moreover, the set of scenarios can be generated under different probability measures depending on their use.
The set of scenarios generated by the ESG is a key input for a variety of models of an insurance company, such as the risk and ALM models, the reserving models (Best estimate models in SII, IFRS) or the pricing models. It is thus crucial that those models receive reliable scenarios from the ESG to take relevant decisions based on the outputs of these models.
What Detralytics can do for you
Detralytics actuaries can support you at different levels. We can help you for instance:
- To build internally a new ESG model from scratch or to select a new vendor model;
- To challenge your current ESG model and suggest improvements in terms of its scope or in terms of methodologies underlying the different sub-risk factor models;
- To calibrate the different sub-risk factor models of your ESG and/or suggest new methodologies to calibrate your models;
- To review / validate the ESG of your company, whether your ESG is a vendor-model or has been developed internally.
Detralytics’consultants have acquired a detailed knowledge of the most cutting-edge financial models gained through their academic background as well as through their practical experience. In terms of the latter, we can mention that they have helped a large Belgian Insurance company to improve its ESG and assisted the dealing room of a large Belgian bank to value complex derivatives. They also have validated ESG models for a number of large international insurance companies, and have gained in this way a thorough understanding of the market best practices.