19.4 Scenario Testing

Some regulators require test of capital against a set of scenarios

  • Static scenarios in Canada (DCAT)

  • Stochastic in UK and Australia

    • AUS: 99.5% of 1 year survival rate

    • UK: also have 3 years 98.5% and 5 years 97.5% survival

Stochastic modeling requires:

  • Forecasting financials for 1-5 years

  • Probability distn (for many risk sources) where they can be developed

  • Dependencies among risks

  • Reflection of Management Responses