Scenario generation

Blufftop has developed a generator of economic scenarios for use in risk management at financial institutions.  The generator provides scenarios in the same format as the generator currently (2023) mandated for use by the National Association of Insurance Commissioners (NAIC) for regulatory work in the U.S., but has some advantages over that generator.  In particular, the interest rate generator is arbitrage-free, it is consistent with market pricing of fixed-income instruments, and it produces scenarios with the short-rate pinned at zero by the Fed, characteristics which the currently mandated generator lacks.

A short book describing the interest rate generator and the reasons for its development is available for download.

Anyone interested in software that implements the generator should contact Steve Strommen at the email link on the top right of this page.

Comments on the NAIC scenario generator project

The NAIC is in the process of replacing the generator currently mandated for use.  They have tentatively chosen the GEMS generator from Conning.  A nationwide field test of that generator was conducted, and the test failed with unsatisfactory results.

Some experts have suggested that Conning's interest rate generator is inappropriate for the NAIC's purpose.  Steve Strommen drafted a document discussing Conning's interest rate generator and explaining why it may be appropriate for market-based valuations like those in Solvency II but not appropriate for real-world simulations like those mandated by the NAIC.  This opinion was a significant motivator for developing the generator mentioned above.  You can download Mr. Strommen's opinion here.

 

 Downloads and links

• Generating Interest Rate Scenarios - A Real-World Approach

• Understanding the Connection between Real-World and Risk-Neutral Scenario Generators, SOA Research Institute, 2022

• Strommen commentary on Conning's interest rate model