qESG produces realistic economic scenarios for a collection of asset types and economic variables, making use of leading asset modelling practice and the latest actuarial research.

Quindiem’s vast experience in the insurance market in Africa puts it in the ideal position to help clients use this powerful tool in their business to enhance decision-making in numerous areas.

As its name suggests, an Economic Scenario Generator (ESG) is a tool that simulates future scenarios of economic variables and asset returns statistically.

Historic and current market information as well as expectations of the future are used to calibrate this tool ensuring that the simulated behaviour is realistic. The range of forecasts produced aims to capture the uncertainty around returns on assets and values of economic variables in the future.

Each economic variable and asset is forecast in a way that maintains coherence and its relationship with the other variables and asset classes, ensuring that future uncertainty is captured realistically.

 

 

The figure below displays the asset classes and economic variables that are commonly modelled by qESG . The arrows also represent the typical dependence structures within the model.

 

Additionally, other asset classes and economic variables from most economies can be provided on request.

 

 

qESG incorporates the following technical features into its design:

• Income and capital components for equity and property are separated, allowing for the detailed modelling of tax

• Equity volatility is modelled stochastically, allowing for the realistic, negatively-skewed and fat-tailed equity return distributions

• Interest rates are modelled using 3-factor yield curve models, allowing the major features of the yield curve to be parsimoniously described

• Both real-world and market-consistent calibrations can be produced, ensuring that calibrations are suited to the client’s needs.

By using empirically validated and carefully calibrated information to model the possible outcomes for a set of economic variables and asset returns over a future time period, qESG is able to enhance decision-making in many areas of a business. The major uses for qESG include:

• Capital measurement and management
• Investment portfolio optimisation and market risk management
• Insurance product design
• Valuation of options and guarantees 

 

capital measurement and management

Many insurers and reinsurers use internal models for capital measurement and management. One of the important risks modelled is market risk. Using qESG instead of simplistic assumptions ensures that market risk modelling is more realistic, thereby improving the information upon which capital decisions are based.
The rapid changes in the global economy witnessed recently have highlighted the need for these economic scenarios to be updated regularly within internal models to ensure that they reflect the current environment in which insurers and reinsurers operate.

investment portfolio optimisation and market risk management

The detailed economic scenarios produced by qESG help clients to improve their understanding of market risk and provide valuable, objective information on which investment portfolios can be constructed (or optimised) and on which market risk management can be based. By using qESG, and taking the risk inherent in the institution’s liabilities into account, optimal portfolios of assets can be constructed that achieve management’s desired balance between risk and return holistically (i.e. not just focusing on asset performance).

insurance product design

The increasing complexity of product design and the dependence of the performance of products on asset returns and economic conditions highlight the important role that an ESG can have in developing new products. qESG helps institutions design products that minimise earnings volatility and maximise profitability by ensuring that market risk and market return are appropriately factored into the process.

valuation of options and guarantees

Many products include guarantees or options that can be exercised by the holder. The value of these products is often highly dependent on future asset returns. Therefore, the asset return forecasts by qESG play an important role in the valuation of these embedded derivatives.