Media An Actuarial Scenario Generator for Equity, Interest Rate and Inflation Risk

An Actuarial Scenario Generator for Equity, Interest Rate and Inflation Risk

uploaded April 3, 2023 Views: 120 Comments: 0 Favorite: 1 CPD

In the Netherlands, the government intends to reform the pension system for the second pillar and the new pension contracts will be more contribution-based than benefit-based. All contributions are allocated to pension capitals for individual participants, to make the system more transparent and flexible and to make communication about possible pension outcomes easier. The system will retain some collective elements in the forms of buffers so (for example) longevity risk and occupational disability risk can still be shared.  

To analyze the consequences of the transition from the old to the new system, a new scenario generator has been designed by a scientific committee appointed by the Dutch government (the Parameters Committee). The generator can be used to simulate stochastic paths for relevant economic variables that are needed for calculations during and after the transition to the new system. One of the economic variables is inflation, which was particularly challenging to incorporate due to recent developments. In addition, the change to a system with individual accounts involves a valuation problem for uncertain future cashflows and it was therefore necessary to create a scenario generator that can produce risk-neutral scenarios as well as scenarios under the original probability measure. 

In this talk one of the designers of the new model will talk about the challenges during the calibration process and in particular discuss the choices made to model inflation risk.

Content groups:  content2023


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