I have a couple of questions on ESGs that I'm hoping to get some help on: When else would the use of an ESG be appropriate, other than for solvency projections? How would one decide whether a real-world or risk-free calibration is more appropriate for a given use?
In my opinion, 1. ESG would be used for all stochastic projection, so also include With Profits bonus investigations. 2. Solvency projections under SII would always be based on Risk Free calibration. I am not sure what would the Real World calibrations be used actually - would it be for bonus investigation?
X3 solutions question 3.3. mentions that the ESG is used in stochastic projections used for recommending the investment mix - yet another application of ESGs. And here the company is using a Real World calibration of ESGs.
The Real World calibrations would be used for the projection of future capital requirements, bonus investigations, investment strategy setting - anything to do with the probable future outlook. I think the Risk Free is the requirements for the Market Consistent valuation under the regulatory solvency requirements. Please correct me if I am missing something here....
Yes, this sounds spot on. A risk-neutral calibration follows the principles in CT8. So it's great for calculating the price of derivatives and other market-consistent valuations. A real world model is useful for making management decisions, or whenever we are interested in the real world probability of something happening, eg the amount of solvency capital we need at the 99.5% probability level. Best wishes Mark
