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    Moody's Analytics Insights

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    The use of carrier approximation methods for projected capital metrics with an application to the IFRS 17 risk adjustment.

    In this paper we explore the use of the carrier approximation for the multi-year projection of risk and capital metrics. Through an annuity book run-off case study we outline the key factors influencing the performance of the carrier method when applied to the projected IFRS 17 risk adjustment and the projected Solvency II solvency capital ratio (SCR).

    August 2019
    Article
    illuminated charts and graphs

    Latin American Currency Highlights: Determining the Risk of a Large Currency Depreciation for 15 Countries

    Latin American countries have a shaky history when it comes to stable foreign exchange. Several countries are facing economic and political upheaval, which may significantly impact the value of their currencies. Using the Moody's Analytics Currency Depreciation Indicator, we evaluate the coming year for 15 Latin American countries.

    February 2019
    Whitepaper
    Image of possible yield curve and equity evolution

    Fast Projection of Reserve and Capital Requirements with Proxy Functions

    An emerging business requirement for North American insurers is the ability to project forward stochastic reserve and capital requirements under various planning scenarios to a specific future date. In this paper we consider applying proxy functions to this task, using function fitting techniques described in our previous research paper Fitting Proxy Functions for Conditional Tail Expectation: Comparison of Methods.

    October 2018
    Presentation
    Two senior business colleagues at meeting in modern interior

    CECL Disclosures – Required and Beyond

    CECL Disclosures – Required and Beyond

    July 2018
    Whitepaper
    Businessmen and woman standing together by railing conversing

    Insight, IFRS 17, and Innovative Technologies - Drivers of Change in the Insurance Industry

    Performance optimization through business insight, dealing with IFRS 17 in a post-Solvency II world, and the challenges associated with stress testing for insurance firms in the US. These were the focus areas for Moody's Analytics at this year's Moody's Insurance Summits in London and New York.

    July 2018
    Presentation
    Financial and business chart and graphs

    Simple But Not Simpler: Day 1 Modeling Approaches

    Simple But Not Simpler: Day 1 Modeling Approaches. This presentation is a review of simple approaches available to community banks on the road to their CECL journey.

    July 2018
    Presentation
    Idea concept with row of light bulbs

    Be Reasonable: Creating Supportable Forecast Scenarios for CECL

    This presentation discusses the CECL requirement of reasonable and supportable forecasts. We discuss what makes an economic scenario reasonable and supportable and discusses structural forecast model methodology. We also compare customized, standard and off-the-shelf scenarios and examine forecasting credit losses.

    June 2018
    Whitepaper
    Proxy and Validation vs. yield curve change risk factor

    Fitting Proxy Functions for Conditional Tail Expectation: Comparison of Methods

    This paper details alternative methods for fitting proxy functions to CTE, employing quantile regression in combination with OLS among other techniques. We compare methods according to quality of fit for an example portfolio of variable annuities.

    March 2018
    Article
     Merton Model Schematic

    A Cost of Capital Approach to Estimating Credit Risk Premia

    This research paper discusses the credit risk premium adjustment required for constructing discount rates specified by the IFRS 17 accounting rules. Calculating the credit risk premium is a key requirement in the ‘top down' yield curve method. It may also be a useful input in computing (or benchmarking) the illiquidity premium for ‘bottom up' discount rate construction.

    March 2018
    Whitepaper
    New Origination Indices for All Loans

    What Do 20 Million C&I Loan Observations Say about New Origination Dynamics? — Insights from Moody's Analytics CRD Data

    We construct and examine new origination of C&I loans to middle-market borrowers using the Loan Accounting System data extracted from Moody's Analytics Credit Research Database (CRD/LAS). We find that C&I loan origination declines during the Great Recession and recovers soon after. The magnitude of the decline and the speed of the recovery varies across segments. For example, new lending to the financial industry decreases more than to the non-financial industry during the recession and recovers faster afterwards. Another example, new originations during the recession consists predominantly of short-term loans, while long-term lending becomes more dominant post crisis. This finding suggests that banks are using loan tenor as a means to mitigate risk during crises, at times even more so than credit quality.

    February 2017
    Whitepaper
    Figure 5: Univariate validation (value vs. issue age)

    Proxy Methods for Hedge Projection: Two Variable Annuity Case Studies

    The challenge of projecting dynamic hedge portfolios for blocks of Variable Annuities (VA) with complex guarantees has proven to be extremely computationally demanding but also essential for obtaining hedging credit in reserves or capital calculations. Our previous research has argued in favor of proxy function methods such as Least Squares Monte Carlo as alternatives to full nested stochastic calculations, and we have demonstrated the successful application of these methods for hedging in simple option examples including path-dependent options. This paper extends previous work by considering actual VA products with guarantees of the kind offered by insurers in North America and Europe.

    May 2016
    Whitepaper
    Figure 6: Joint scenarios for log index values at years 1 and 2 (area of symbol proportional to new weights);
Original scenarios generated using 20% volatility (left hand chart) and 40% volatility (right hand chart)

    Quantitative Insurance Research - The unintended consequences of scenario post-processing in the valuation of insurance liabilities

    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).

    September 2015