Modeling of the Fundamental Spread using Montecarlo

The Fundamental Spread represents the expected cost of default and downgrade of assets to which insurance companies are exposed. In the framework of the Solvency II regulation, the fundamental spread is used as a mainly piece of the matching adjustment calculation and is, therefore, essential when determining the goodness of the financial immunization of a portfolio of insurance obligations. The purpose of the work we propose is to study the impact of the different models of obtaining the spreads in the cash flow matching strategy, analyzing the stability of the immunizations through simulation, and trying to establish how the chosen calculation method should be. For this, we will use transition tables between credit states of the emissions considered in the immunization.

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