Developing an Economic Scenario Generator for Insurance Applications

Specialeforsvar: Martin Østergaard Rebild

Titel: Developing an Economic Scenario Generator for Insurance Applications

Abstract: In this dissertation, we study the use of economic scenario generators for applications in insurance with a focus on implementing a cascade structure using analytical results. The use of economic scenario generators have been increasingly studied in recent actuarial literature to assess risks in insurance applications by considering simulations of market behavior. For our approach, we consider the correlation and dependency between inflation and interest rates to determine a driving relationship between the two. Applying theory from mathematical finance, we derive long term expressions for the mean and the variance of a modified diffusion short rate model. Furthermore, we employ Monte Carlo simulation to examine the expectations of possible future outcomes using the developed economic scenario generator model. We compare the model output with the historical levels of both inflation and interest rates to validate the model’s output and to compare the generated results with newer data. Finally, by considering a workers compensation annuity claim and we illustrate how the model can be applied in the
insurance sector.

Vejledere:   Christian Furrer
                     Jonas Lundgren, 
Censor:       Pernille Jul Overby