As the insurance industry changes, companies will need to perform much more sophisticated calculations and the number of compute cycles required will increase by many orders of magnitude. PBR, Solvency II, EC, and MCEV all require stochastic calculations for a single valuation and nested stochastic calculations to project values forward.
Stochastic modeling uses a combination of probability and random variables to forecast financial performance or, in the case of reserve setting, to forecast financial requirements. Nested stochastic models, as the name implies, are stochastic models inside other stochastic models. Because setting reserves and capital using a principles-based approach is based on stochastic valuation, earnings projections will require stochastic projections at each future projection date, across all scenarios. Nested stochastic models are needed to appropriately manage the business, price new products, project earnings, or measure risk.
MG-ALFA® delivers this computational ability today.
Recently, a large, multiline corporation migrated to MG-ALFA and developed economic capital models across the organization. Using our nested stochastic capabilities, it was able to project economic capital requirements by line of business and then use our aggregation functionality to demonstrate to rating agencies that it had inherent hedging between lines within the company. Using MG-ALFA, the corporation was able to reduce its overall capital requirements well below the sum of the capital requirements for the separate business lines. The results, of course, were unique to this client and its situation.