Evaluating a wide range of solvency paths gives insurers deeper insight into the risks embedded in investment strategies and the long-term implications for financial resilience. This paper develops an analytical framework for conducting multiyear solvency projections and explores the added value of incorporating a stochastic modelling approach.

The extension of a deterministic framework to a stochastic one adds another dimension to solvency analysis, providing a more comprehensive understanding of uncertainty and volatility. Rather than relying on a single prescribed scenario, the stochastic approach produces a full distribution of potential outcomes, arising from different market and economic risks. This provides a richer understanding of uncertainty and interactions among capital markets, liability valuations, and capital requirements.

Highlights

• Deterministic Solvency II capital projections for an insurance company
• Assessment of alternative asset allocation strategies
• Stochastic economic scenarios that provide additional insights for base projections
• Assessment of the volatility which was missing from the deterministic projections of the various options