Advanced features within the Prophet allow for complex calculations in an efficient manner. Some of these are discussed below:
The Asset Liability Strategy (ALS)
The Asset Liability Strategy (ALS) library supports investment decision making. The library provides a mechanism to model assets and liabilities together including complex interactions such as policyholder behaviour (e.g., dynamic lapses) and management actions (such as discretionary dividends, bonuses, or participation rates). It makes the asset liability models more dynamic while:
- Measuring the impact of different investment strategies that include the re-balancing of asset portfolios
- Measuring the value of new business and the impact of acquired portfolios
- Calculating the risk-based capital, including Solvency II and Internal Model
- Performing stochastic calculations to appropriately estimate the time value of options and guarantees, etc.
The ALS library is considered one of the most complex libraries, as it involves extensive code specifically defined in extended formula.
Extended Formula are variable types, and these are either already defined in a library (e.g., the ALS library) or can be created to enable specific and more complex calculations than those carried out by the standard Prophet formula.
Examples for use cases of extended formula include the rebasing of guaranteed rates, the isolated calculation of each group of paid-up contracts and the increments in contract benefits.
Extended formula can be set up either as time dependent or non-time dependent given the requirements. It allows additional variables to be defined within the formula when they are not defined elsewhere in the Prophet model. Parameterisation within the extended formula can be used to optimise the model performance.
However, the variables defined within the extended formula are not displayed in the diagram view with associated dependencies and the values stored in the extended formula’s internal variables are not visible directly in the model, therefore debugging gets challenging at times.
Stochastic calculations involving multiple simulations can be performed using Prophet. They can be tailored to optimise shareholder and policyholder investment returns by understanding the interaction between bonus rates and future investment performance, to allow for guaranteed annuity rates or to perform insolvency and stress tests to meet the requirements of various capital regimes such as embedded value or Solvency II.
Setting up a stochastic run is different to a deterministic run. For example, it requires stochastic tables where assumptions vary by simulations with appropriate configurations for the run structure and settings.