General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518

Moody's Analytics Insights

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
Aubrey Clayton,  Dr. Steven Morrison

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
Average projected LGD from LossCalc 4.0, by industry, North America Firms

Measuring and Managing the Impact of IFRS 9 and CECL Requirements on Dynamics in Allowance, Earnings, and Bank Capital

Reserving for loan loss is one of the most important accounting aspects for banks. Its objective is to cover estimated losses on impaired financial instruments due to defaults and non-payment. Reserve measurement affects both the balance sheet and income statement. It impacts earnings, capital, dividends and bonuses, and attracts the attention of bank stakeholders ranging from the board of directors and regulators to equity investors. In response to the so-called “too-little, too-late” problem experienced with loan loss reserve during the Great Financial Crisis, accounting standard setters now require that banks provision against loan loss based on expected credit losses (ECL). Arguably, calculating the Expected Credit Loss Model under IFRS 9 and CECL presents a momentous accounting change for banks, with the new standards coming into effect sometime between 2018 and 2021, depending on the jurisdiction.

March 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
Aubrey Clayton,  Dr. Steven Morrison

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
Dr. Pierre Xu, Tomer Yahalom, May Jeng

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
Dr. Steven Morrison, Aubrey Clayton

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

Whitepaper
illuminated charts and graphs

Proxy Model Validation

In this paper, we discuss the validation of proxy models, commonly used in the insurance industry to replace valuations that would otherwise require Monte Carlo simulation. In practice, proxy model validation inevitably involves a certain amount of subjectivity and is specific to the exact problem at hand. We do not attempt to provide a prescriptive recipe for how validation should be carried out, but rather suggest some general ideas and principles based on our experience implementing proxy models with our clients.

September 2015
Dr. Steven Morrison, Laura Tadrowski

Whitepaper
Figure 1: Example weights using different L-statistics (99.5th quantile; 1,000 scenarios)

Efficient Statistical Estimation of 1-year VaR Economic Capital

The 1-year Value-at-Risk of the market-consistent balance sheet has emerged as the global industry standard in economic capital assessment in insurance. VaR as a financial risk metric pre-dates the insurance industry's adoption of it, and there has been substantial research and application of techniques for the efficient estimation of tail percentiles which has not yet been adopted by insurers as standard practice. This paper surveys some of those methods and considers how effective they may be in the estimation of the 99.5% 1-year VaR.

November 2013
Dr. Steven Morrison, Laura Tadrowski