PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

208 MODELING FINANCIAL SCENARIOSto history. This section uses history to review results of an illustrativesimulation to subjectively assess the model’s plausibility.A simulation is performed generating 5,000 iterations (samplepaths) using the base parameters described in Section 3, disallowingnegative nominal interest rates. 8 The results are presentedin several different ways (these results are discussed in the followingsection).² Table 1 provides key statistics for key variables in the simulation.Mean values of the output are shown for the first and last(50th) projection years. The 1st and 99th percentiles of the distributionof results are indicated for an intermediate projectionyear (year 10).² Tables 2 and 3 show the correlation matrices, comparing thesimulation correlations (Table 2) and historical correlations(Table 3).² Some of the Figures (1—6, 8—10, 14—15, 18, 20, and 22) show“funnel of doubt” plots, indicating the level of uncertainty surroundingeach output variable over time. 9 The x-axis indicatesthe time period and the y-axis indicates the value(s) assumedby the variable of interest. The “funnel of doubt” graphs showthe mean value for the 5,000 iterations (solid line), the 25thand 75th percentile values (dark shaded section), and the 1stand 99th percentile values (lighter shaded section). Expandingfunnels indicate that the values become more uncertain overthe projection period. Narrowing funnels indicate that the variablesbecome more predictable when making long-term forecasts.² Figures 7, 11—13, 16—17, 19, 21, and 23 are histograms, illustratingthe full probability distribution of the values for a par-8 The output of this illustration has been saved in a file and is posted at http://casact.org/research/econ. The American Academy of Actuaries uses a similar prepackaged scenarioapproach in looking at C-3 risk of life insurers.9 These “funnel of doubt” graphs are referred to as “summary graphs” in @RISK.