ENTERPRISE RISK SOLUTIONS B&H Economic Scenario Generator Designed for insurers, the B&H Economic Scenario Generator (ESG) is a suite of leading-edge stochastic asset modeling tools within a flexible framework that allows insurers to undertake a wide range of risk management activities. It offers a range of modeling and calibration options for real-world simulation of asset and risk factors as well as risk-neutral simulations for market-consistent liability valuation. The B&H Economic Scenario Generator is fully transparent, with a comprehensive library of documentation. It offers easy integration with the leading ALM software systems and is supported by a range of implementation services. The Challenge: Valuing Complex Liabilities and Understanding Risk in the Face of an Evolving Regulatory Landscape Regulatory developments are placing an ever greater burden on insurers' modeling capabilities, particularly when calculating the best estimate of liabilities, calculating capital or understanding a risk position. Insurers need models that are sophisticated enough to capture the important features of their assets and liabilities, and the dependencies between their assets and risks. Additionally, insurers must be able to adapt their models, for instance by adding new assets or exposures to models in order to reflect a change in investment strategy, or to implement regulatory stress tests. The Solution: Sophisticated and Flexible Modeling for Regulatory and Economic Capital, Reporting and Internal Risk Management The B&H Economic Scenario Generator is a flexible framework that enables the modeling of a comprehensive range of assets including equities, nominal and real interest rates, corporate bonds, real estate, currencies and hedge funds. The solution is fast and easy to set up: a standard Windows interface allows models to be built via simple mouse clicks. A wide choice of modeling options is available allowing users to choose models that best meet their modeling needs and level of sophistication. Our calibration services cover a range of market-consistent and real-world options and cover more than 30 economies, enabling insurers to quickly configure the B&H Economic Scenario Generator to their specific requirements. We also provide a suite of calibration and automation modules that allow clients to calibrate to their own views or quickly generate stress and sensitivity calibrations. THE B&H ECONOMIC SCENARIO GENERATOR FITS SEAMLESSLY WITH OTHER SYSTEMS B&H Economic Scenario Generator Adaptable Solution for Many Requirements The upfront and ongoing investment required to build models in-house is substantial and can increase operational risk in the form of key-man dependencies. Using the B&H Economic Scenario Generator, insurers can be up and running in a fraction of the time that it would take them to build their own models in-house. Implementation of the B&H Economic Scenario Generator enables insurers to significantly reduce development and maintenance costs while having access to our expertise when it's required. "IF AN INSURER TELLS ITS REGULATOR THAT IT’S USING THE B&H ESG, THAT WOULD PROBABLY MEAN ONLY ONE MEETING. IF THE INSURER SAYS THAT IT’S GOING FOR A LESS WIDELY USED ESG, THAT MIGHT MEAN SEVEN MEETINGS.” —InsuranceERM In Print, Spring 2013 The B&H Economic Scenario Generator can be applied to a number of the modeling challenges faced by insurers: MARKET-CONSISTENT LIABILITY VALUATION The B&H Economic Scenario Generator can be used to generate risk-neutral scenarios for liability valuation. The models are calibrated to market data where appropriate which means that liability values will be market-consistent. »» Regulatory Capital: A number of current and emerging regulatory regimes, such as Solvency II, UK Individual Capital Assessment (ICA) and the Swiss Solvency Test require technical provisions to be based on the market-consistent valuation of liabilities. »» Fair Value Accounting: Insurers can use the B&H Economic Scenario Generator for the market-consistent valuation of insurance liabilities in the context of the requirements of new accounting standards such as the ‘market-consistent embedded value’ (MCEV) in use within large European insurance firms. »» Fitting Proxy Models: Many of our clients use the B&H Economic Scenario Generator for fitting proxy models of their insurance business using methods such as Least Squares Monte Carlo, Curve Fitting and Replicating Portfolios. »» Risk Management and Hedging: The B&H Economic Scenario Generator can be used for valuing liabilities as part of risk management and hedging programs. Importantly, for managed volatility funds, it can also be used to project at granular time steps (daily or weekly). REAL-WORLD PROJECTION OF ASSET PRICES AND MARKET RISKS The B&H Economic Scenario Generator can be used to create real-world scenarios that give realistic distributions for asset prices and risk factors. These scenarios can be for short-term horizons such as 1-5 years or for 50 years or longer. There are many applications of this capability including: »» Regulatory and Economic Capital: Where a multi-year cash flow run-off is the required risk measure, the B&H Economic Scenario Generator can be used to create the required multi-year real-world scenarios. »» Asset Allocation and Strategy Analysis: Assessment of different asset allocation strategies against internal risk appetite metrics can be carried out using the asset classes available within the B&H Economic Scenario Generator. »» Product design, development and pricing: The B&H Economic Scenario Generator can be used for pricing the financial guarantees embedded in new products, and for the analysis of their capital requirements. 2 MOODYS ANALYTICS ENTERPRISE RISK SOLUTIONS CALIBRATION SERVICES Any scenario generator is only as good as its calibration—the parameterization of its models. We provide a comprehensive calibration service covering a wide range of economies and asset classes. Our calibrations include: »» Market-Consistent Calibrations: These are risk-neutral calibrations where as much as possible is inferred from market prices to give a market-consistent calibration. They are ideal for valuing liabilities for technical provisions or an economic balance sheet. »» 1-Year VaR Calibrations: These calibrations are optimized for short-term horizons. They infer data from current market prices given a conditional or point-in-time view, and can be used by either the B&H Economic Scenario Generatror or the B&H Risk Scenario Generatror and are ideal for market risk models for a 1year VaR capital calculation. »» Real-World Best-Views Calibrations: These are real-world calibrations that reflect our best view of the realistic evolution of risk factor distribution over horizons to around 50 years. They are ideal for a number of applications including; run-off capital, cash-flow projections and illustrating policy outcomes »» Real-World Dynamic Equilibrium Calibrations: These calibrations are real-world, and reflect a stable or equilibrium view of asset risk premiums. They are ideal for use in portfolio construction and strategic asset allocation work. The B&H Economic Scenario Generator can be equipped with a suite of calibration tools allowing users to customize their calibration, impose their own views or apply stress and sensitivity calibrations. We also offer a bespoke calibration service where we provide alternative calibrations directly to the users. Asset and Modeling Coverage The B&H Economic Scenario Generator can project a wide range of assets and risk factors, including: »» Equity indices »» Nominal and real interest rates »» Nominal and index-linked bonds »» Inflation (RPI, CPI, wages, medical costs and others) »» Exchange rates »» Real estate and alternative assets (hedge funds, private equity, commodities and others) »» Credit spreads and credit risky bonds (financial and non-financial corporate bonds, sovereign bonds) »» Municipal bonds »» Structured products (MBS) »» Derivatives (options, swaps, swaptions, forwards) »» Implied volatilities »» Multi-asset portfolios (with a range of rebalancing options) The B&H Economic Scenario Generator includes a range of modeling options for the major risks and asset types. Users may choose the best model for their requirements considering the nature of their liabilities and the sophistication level of users. For example, for equity assets, options range from a simple Black-Scholes fixed volatility model to a Stochastic Volatility Jump Diffusion model. Interest rates options vary from Vasicek to LMMPlus - a multifactor, displaced diffusion stochastic volatility LIBOR market model, with various other options including Hull-White, Black-Karasinski, multi-factor CIR, LMM and Gaussian LMM. Comprehensive Documentation We provide comprehensive documentation of our models and calibrations. These documents are available to users via our online Knowledge Base (www.barrhibb.com/knowledge_base). The documents typically fall into the following categories: »» Calibration reports: These provide validations of a calibration and summary model and calibration methodology information. »» Model methods: Provide detailed description of the model including model and pricing equations and derivations. »» Calibration methods: Describe of the calibration method including approach to analysis data to develop targets. »» Assumption updates: Contain the latest updates to assumptions and calibration targets. »» Policy and compliance documents: Describe our approach to data selection and calibration validation. ENTERPRISE RISK SOLUTIONS MOODYS ANALYTICS 3 B&H Economic Scenario Generator The Product Family »» The B&H Risk Scenario Generator produces risk scenarios to support capital modeling for insurers, whether as part of a regulatory internal model or for the calculation of an insurer’s own view of their economic capital. It enables insurers to project relevant risk drivers (market and non-market) over a 1-year time horizon and uses a mix of fundamental structural and statistical relationships to produce credible joint behavior across a range of different risk drivers. »» The B&H Economic Scenario Service provides a robust alternative to a full software installation of the B&H Economic Scenario Generator where clients benefit from the same high-quality modeling framework without the overhead associated with managing, running and calibrating ESG models in house. About Moody’s Analytics Moody’s Analytics, a unit of Moody’s Corporation, helps capital markets and credit risk management professionals worldwide respond to an evolving marketplace with confidence. The company offers unique tools and best practices for measuring and managing risk through expertise and experience in credit analysis, economic research and financial risk management. By offering leading-edge software and advisory services, as well as the proprietary credit research produced by Moody’s Investors Service, Moody’s Analytics integrates and customizes its offerings to address specific business challenges. CONTACT US Visit us at barrhibb.com or contact us at: +44.131.625.7027 [email protected] Copyright © 2014 Moody’s Analytics, Inc. All Rights Reserved. SP28936/110517/IND-401