Tid: 17 mars 2011 kl 10.15-11.00.

Plats : Seminarierummet 3721, Institutionen för matematik, KTH, Lindstedts väg 25. (observera dagen och lokalen), Karta!

Föredragshållare: Lina Palmborg och Ebba Baldvinsdottir

Titel: On Constructing a Market Consistent Economic Scenario Generator (Examensarbete – Master thesis)

Abstract

Recently the insurance industry has started to realise the importance of properly managing options and guarantees embedded in insurance contracts. Interest rates have been low in the last few years, which means that minimum interest rate guarantees have moved from being far out-of-the money to expiring in the money. As a result, many insurance companies have experienced solvency problems. Furthermore, insurance firms operating within the European Union will, from the end of 2012, be subject to the Solvency II directive, which places new demands on insurance companies. For example, the valuation of assets and liabilities now needs to be market consistent. One way to accomplish a market consistent valuation is through the use of an economic scenario generator (ESG), which creates stochastic scenarios of future asset returns.

In this thesis, we construct an ESG that can be used for a market consistent valuation of guarantees on insurance contracts. Bonds, stocks and real estate are modelled, since a typical insurance company's portfolio consists of these three assets. The ESG is calibrated to option prices, wherever these are available. Otherwise the calibration is based on an analysis of historical volatility. An assessment of how well the models capture prices of instruments traded on the market is made, and finally the ESG is used to compute the value of a simple insurance contract with a minimum interest rate guarantee.

The full report (pdf)

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