STOCHASTIC PROCESSES

You have been commissioned to develop a model to project the assets and liabilities

of an insurer after one year. This has been requested following a change in the

regulatory capital requirement. Sufficient capital must now be held such that there is

less than a 0.5% chance of liabilities exceeding assets after one year.

The company does not have any existing stochastic models, but estimates have been

made in the planning process of worst case scenarios.

Set out the steps you would take in the development of the model.