Scenario Generation Solutions: Economic & Risk Modelling for Insurers

In this paper we explore the use of scenario re-weighting as a method for post-processing scenario sets to reflect calibration targets without having to recalibrate the model.

While post-processing techniques can be quite flexible in their ability to match targets, they may result in unintended changes to distributional assumptions that are not included in the set of calibration targets. Using simple examples, we demonstrate how a scenario set’s ability to match a set of vanilla asset prices does not uniquely define the resulting prices of more exotic liabilities (or assets).