Enterprise Risk Management Technology Guide :: Conning: Software to model any risk

Conning: Software to model any risk

Mark Saunders, a director in Conning's Risk Solutions group, explains how Conning's powerful software can run thousands of potential scenarios and help insurers prepare for extreme tail risks

Mark SaundersHow can Conning help insurers manage Covid-19's impact from an investment perspective?

Conning has a pedigree as an asset manager and our software is very powerful when it comes to modelling a wide range of different asset types.

Our stochastic modelling software can run thousands of potential scenarios, giving a full distribution of what might happen in the future. This includes extreme tail events, such as Covid-19. Conning recently back-tested its 2019 year-end calibration, and for 99% of investment types the model produced some downside scenarios which mirror what actually occurred due to Covid-19.

Not only does our software model the downside risk in a bad year, but we also have an optimisation module that tests hundreds of different investment strategies to produce an efficient frontier that shows the maximum projected portfolio returns for each level of standard deviation.

Alternatively, the user can choose other risk and reward metrics – for example, identifying investment strategies which maximise returns against the downside risk of a 1-in-200-year event. Conning's tools provide clients with deep insight, and I am unaware of any other software offering such a full range of analysis.

How do you expect the insurance sector to change post-Covid-19?

We expect to see increased automation to reduce insurance companies' expense ratios. For example, this could involve automated underwriting and, at the back end, more automated claims handling.

Conning also expects a continued focus on the search for yield. There are negative yields on a lot of government bonds, and insurers really need to earn a yield, especially life insurers. Companies are diversifying their balance sheet and looking to invest in more exotic asset classes, such as private equity and infrastructure.

Hand-in-hand with insurers diversifying their balance sheet into more exotic instruments, they are going to need expertise and software to model these investment risks and measure the diversification benefits.

For Conning, demand has stayed strong throughout Covid-19, and we are on track to have one of our best years. The Covid-19 pandemic, and any big financial crisis, just accelerate underlying trends. This means we are seeing more insurers move towards sophisticated modelling software.

How has Conning enhanced its products recently?

About a year ago we helped our first client get fully running on the cloud. The ability for clients to take advantage of the speed and cost savings of the cloud is something we are continually improving.

We are also going to continue the integration with FIS's Prophet actuarial modelling software, which is very strong on the liabilities side. Last June, Conning announced it had integrated the Conning GEMS® Economic Scenario Generator with FIS's Prophet actuarial software solution.

As we move more and more onto the cloud, integration with third-party software becomes easier.

We have also recently improved the user interface for asset modelling, which makes it simpler for clients to integrate bespoke investments into their asset-liability management (ALM) and strategic asset allocation process.

Lastly, we have enhanced the integrated calibration tools to allow users to calibrate the severity of 1-in-200-year events, allowing them to bring in their management view more easily. It also provides the ability to calibrate correlations between asset classes through a "Global Jump Process", so clients can understand how a tail event can simultaneously affect how credit behaves, how equity behaves, and how FX moves. Customers can then receive a joined-up view.

What emerging risks are high on Conning's radar?

We think downgrades are a potential issue. We see how some institutional investors have a big allowance on their balance sheet for potential downgrades, so being able to model the impact of that is very important.

It is also difficult to know when we will come out of this negative yield environment. There is a risk there could be a sharp correction in some economies, which would have a big impact on investors who hold a lot of fixed income. Again, it is important to have an understanding of a full range of potential outcomes, and that is where stochastic ALM software can really add value.

Mark Saunders
T: +44 (0) 207 337 1931
E: [email protected]