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Conning/Milliman Partnership Boosts Economic Capital Modeling

Linking Milliman’s MG-ALFA system with Conning’s GEMS Economic Scenario Generator will respond to regulators’ and raters increasing demand for stochastic modeling capabilities and foster a holistic approach to risk management.

Responding to regulators' and rating companies' pressure on life insurers to perform economic capital modeling and related risk management tasks, Conning (Hartford) has partnered with Milliman (Seattle) to create a file exchange interface to run Milliman’s MG-ALFA system with output from Conning’s GEMS Economic Scenario Generator (ESG). The combined capabilities also help to bridge insurers’ investment portfolio management and actuarial risk management functions within an enterprise risk management (ERM) context.

By integrating MG-ALFA and the GEMS ESG, Conning and Milliman say they have created a comprehensive solution for life insurance companies undertaking economic capital, strategic asset allocation, liability valuation, stress testing and other asset-liability modeling. The vendors assert that for MG-ALFA users, GEMS scenarios can be used to enhance financial and regulatory reporting, and improve overall risk management.

Sherry Manetta
Sherry Manetta, Conning

Insurers are under pressure to be able to perform economic capital modeling, and the MG-ALFA/GEMS interface delivers a comprehensive range of economic and capital markets scenarios, according to Sherry Manetta, managing director, Conning. “Regulators, through initiatives like Solvency II and the NAIC’s Own Risk and Solvency Assessment (ORSA), and rating agencies are accelerating their demand for economic modeling, and to answer those demands, insurers need more robust economic scenario generation for their risk modeling,” Manetta comments.

[Related: 10 Pillars Of An Effective Insurance ERM Framework.]

In addition to providing Milliman’s base of about 150 worldwide users of MG-ALFA the opportunity to derive real-world and market-consistent scenarios, Conning’s GEMS also factors in important economic and capital market variables, such as inflation, interest rates and equity market changes, as well as credit spread and migration dynamics, among other available features, according to the vendors. The GEMS economic models and their simulated data are internally consistent within and across all major global economies, according to a joint statement.

Having a very comprehensive ESG is essential to performing the kind of stochastic analysis required to meet emerging regulations, affirms Pat Renzi, MG-ALFA Global Practice Leader, Milliman. “With regulations such as Solvency II, AG43, and PBA, the focus is on evaluating the tail risk -- assessing capital requirements to provide assurance that the company will remain solvent in extreme conditions," she elaborates. “Without a comprehensive ESG, you could miss those tail events, resulting in underestimating the appropriate amount of capital to be holding."

Describing MG-ALFA as fundamentally an asset/liability modeling platform for the life insurance industry, Renzi says that Milliman has integrated with other third-party ESG providers before. “There aren’t many ESG providers with the breadth and depth that Conning has,” she comments. “They provide strong global coverage, which is important to our clients.”

In addition to meeting emerging stochastic modeling and principles-based economic capital modeling, the combination of MG-ALFA and GEMS also exemplifies a trend of interoperability of enterprise risk management (ERM) capabilities, according to Conning’s Manetta. As such, it can also help insurers to think holistically across departments charged with critical risk management responsibilities.

Insurers’ investment portfolio managers and actuarial risk managers have traditionally worked autonomously. While the two sides do share information, their cooperation doesn’t drive a consistent view of assumptions used in modeling. “If the actuarial department is working on one set of assumptions and the investment department on another, you start to have breakage,” cautions Manetta.

Conversely, if the actuarial side is using the same economic and capital markets assumptions as the investment side, there will be consistency in their worldview and the financial analyses they’re performing, Manetta adds. “So if they’re using the same ESG, they will enjoy consistency in the results of their respective modeling efforts.”

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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