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New Conning Investment Optimization Solution Uses Stochastic, Integrated Approach

The Investment Optimizer risk/reward efficient frontier analysis solution, available as software or services, uses stochastic modeling to enable asset-and-liability modeling and places investment risk in the context of underwriting, liability and operational risks.

Seeking to address insurers' need to cope with a protracted low interest rate environment and other economic and regulatory challenges, Conning (Hartford) has released the Investment Optimizer risk/reward efficient frontier analysis solution, which works within its risk management software suite. Capable of stochastic asset- and liability-based modeling, as compared to traditional deterministic asset-based modeling, Investment Optimizer can be used to gain what the vendor calls critical insights on investment risk and reward as a licensable option within its GEMS Economic Scenario Generator, FIRM Portfolio Analyzer, and ADVISE Enterprise Risk Modeler software platforms.

Sherry Manetta
Sherry Manetta, Conning

Investment Optimizer software and services support insurers' and reinsurers' regulatory, accounting and investment needs to better assess risk/reward tradeoffs and ensure that they make decisions based on risk-adjusted return information, a Conning statement asserts. The vendor adds that Investment Optimizer can provide asset-based efficient frontier analyses, but claims that it is especially powerful when analyzing investment risk on an integrated basis with underwriting, liability and operational risks. Conning claims to have signed to U.S.-based clients but declines to name them.

The solution combines the power of stochastic optimization technology with Conning's comprehensive capital and risk management modeling framework, according to Sherry Manetta, Conning's head of software operations, risk & capital management solutions. "It is specifically designed to meet global market demand for more sophisticated risk analysis tools that can incorporate all aspects of an insurance enterprise to identify an investment strategy that will optimize risk adjusted return on capital," she remarks.

Manetta says that demand was initially conditioned by disruptions to the market caused by the financial crisis, followed by other developments, such as the European sovereign debt crisis. "The challenge insurers face is that all of these forces have an integrated impact," Manetta observes. "It's a matter of getting a combined look at multiple economic and capital market variables."

As an example, Manetta cites the case of municipal bonds, traditionally considered to be stable instruments that insurers invested in to a significant degree. "Now that we've seen that they can default, how do insurers evaluate them now?" she asks. "Insurers need to sort through a variety of asset classes to decide which to invest in, and to assess the appropriate duration of the investments." Manetta asserts that Conning's approach to investment portfolio optimization is unique, offering stochastic rather than deterministic analysis and evaluating investment risk holistically on an integrated basis with other types of enterprise risk. "We have essentially taken the capabilities we've used in proprietary software and put it on the market," she remarks.

"Others might take the approach of scenario generation and comparison of one portfolio against another," she continues. "Our approach allows companies to readily evaluate thousands of portfolio strategies against each other on a highly automated basis. You can look over a series of different portfolios with your preferred risk level and see what the return is — it tells you that optimal point."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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