A pragmatic approach to modelling real-world interest rates

Even without the advent of Solvency II and the appeal of internal models to model capital more accurately, it’s likely that the events following the global financial crisis (GFC) would have sharpened up European insurance companies’ risk modelling capabilities.

In Asia, insurance companies are also investing significant resources in developing their own economic capital models. Boards of directors have been charged with the measurement of risk and the need to plan their capital requirements through such things as an Own Risk and Solvency Assessment (ORSA) and an Internal Capital Adequacy Assessment Process (ICAAP) in Singapore and Malaysia, respectively.

Much has already been written about building complex Monte Carlo engines to calculate risk measures. This report by Milliman’s Clement Bonnet and Nigel Knowles addresses a question about the front-end of the risk measurement process: How do we project our yield curve?

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