Apr 23, 2014

Insurance and Risk Management: Managing Today's Big Data, Compute and Modelling Challenge


In today’s video blog, Jim Jockle, Numerix CMO and Saul Stepner, Managing Director of Americas Sales examine the complex challenges insurance companies are facing, and the innovative solutions they are successfully implementing in today’s market. From rapid product design, to the tools to effectively risk manage and hedge complex life and annuity products Saul discusses how stochastic analysishedge projection strategies and fast computation methods can be leveraged to achieve greater consistency and transparency across Asset Liability Management programs.

Weigh in and continue the conversation on Twitter @nxanalyticsLinkedIn, or in the comments section.

Video Transcript: Insurance Risk Management: Managing Today's Big Data, Compute and Modelling Challenge

Jim Jockle (Host): Hi welcome to Numerix Video Blog. I’m your host Jim Jockle. With me today, Saul Stepner, Managing Director of Americas Sales. Saul how are you?   

Saul Stepner (Guest): Excellent Jim, how are you? 

Jockle: Very good. Saul I want to talk to you. Saul by background is quite an expert in insurance and I want to pick your brain on a couple of topics today. Mainly, post 2008, two things we’re continuing to see. Number one, a return of rise of interest rates. Number two, availability of investment funds. Under the assets of the management are continued to grow for many institutions. How are insurance companies reacting to these two market events?       

Stepner: Sure so you’ve touched on a few very important points here. The rise of interest rates and really the rise in consumer confidence out there. It’s creating a lot more wealth and a lot more consumers who want to put money into retirement solutions. So insurance companies are thinking about this and they’re actually putting a lot of plans into action.

They’re starting to look at their product portfolios, de-risking some of the guarantees that they’ve made that are unsustainable. And actually starting to create new types of product offerings that really offer the types of guarantees and retirement solutions that these consumers are looking for. One example of that type of product would be an FIA. We are seeing an increase in fixed index annuities of all different types of categories. But that’s something that we’ve seen as a trend the industry.         

Jockle: So you’ve mentioned de-risking unsustainable guarantees. So for way of knowledge, 2008, wasn’t just the market environment and the underlyings that were created challenges around the products, but it was also guarantees that the product couldn’t live up to post that environment. What is being taken into consideration now in product design that hasn’t been taken into consideration prior to 2008?

Stepner: Sure great question Jim. So one of the trends that we’ve been seeing in the product design is really in the underlying funds. So we’re starting to see a lot of the hedging taking place in the underlying funds themselves. So managed vol is a perfect example where a lot of the carriers are offering variable annuities, with choices of managed vol funds as underlying investments. Those managed vol funds basically have a natural hedge built into them. And then the risk manager at the insurance company, they’re calling it hedge around the edge - hedging the residual risk out.

Jockle: So what has fundamentally changed though? So I think about different levels of sophistication on the asset side and the liability side of many houses in capital markets. Especially, we think about annuity products as a derivative that just happens to have different elements involved in from an actuarial science. As compared to as a traditional derivative where there’s a much shorter maturity. What is being done or changed in the modelling approach of these products to ensure that things are being hedged appropriately, and the products themselves will perform as expected by investors?

Stepner: Well you know the industry has gotten smarter. Obviously you learn from the lessons of the past. And one of the things that we’re seeing happen now, is a lot of the insurance companies looking at ways to project their hedging strategies forward. So once they come up with the hedging strategy, whether it’s a hedging strategy as I mentioned, that takes place for the most part in the underlying funds themselves. Or traditional three greek hedging strategies.

You’ve heard the term Stochastic on Stochastic. They’re running basically a Stochastic projection to look at how those hedges will perform through time. And as result by the way, a lot of insurance clients are getting relief on capital by putting forth a clearly defined hedging strategy. Which requires you to have this hedge strategy simulation in place.

Jockle: So I want to follow up on that question. Because once we start talking Stochastic on Stochastic or otherwise known as Nested Stochastic creates a considerable amount of compute challenges. And then when we think of the blocks of annuities that we’re talking about, we’re talking millions of policies, against millions of paths, against Nested Stochastic issues. What kind of cost is related to this business and how are companies looking to manage, not just a big data problem, but the big compute problem as well?

Stepner: That’s a great question and it’s actually an area that’s really exciting for us at Numerix. The answer to your question is really the cloud. A lot of the big carriers out there are looking to move applications to the cloud, and really leverage the likes of Microsoft’s Azure platform. One of our large clients actually are in the process of moving over sixty percent of their actuarial models into a cloud environment. And you asked about the cost. So partially there’s a big cost savings involved.

But also if you think about it, you need to compute when you need it. Whether it’s a monthly or quarterly basis. You never know what the exact demands will be. So to the extent that you could have the cloud, you can spin up these environments on demand. That’s creating not only cost savings, but opportunity.

Jockle: So one final question.

Stepner: Sure.

Jockle: So we’ve seen several insurers as well as asset managers of hedge funds moving around large blocks of VAs. Some exiting the business, others entering. In terms of some the experiences you’re seeing, of best practices, what are a couple of things that individuals should be thinking about if they’re going to be entering into that business. Especially as it relates to this big data, big compute and modelling challenge.

Stepner: Right so you got to be smart about it. You have to as you’re getting into this business really take a look at your technology stack and what you have in place. Insurance companies are really known for having a lot of legacy environments and there’s a big trend today, insurance companies who are in the business and those getting into the business have actually taken a look at these legacy systems, getting sun setting some of the legacy systems, getting onto newer platforms.

Really that have the capability to work with the cloud to really model the Stochastic interest rates and others factors in the right way, all leading up to really answering at the end of the day both the numbers they need from an internal hedging and risk perspective but also responding to the regulators. Like NAIC or the ORSA, the changes in IFRS and GAAP accounting standards. So there’s a real need to put the right systems in place and the right technology that’s scalable, that’s flexible and provides really a road map for the future.

Jockle: Well Saul thank you so much for joining our video blog. I hope you’ll join us again, sometime in the future. Please stay on top of everything we’re doing here at Numerix. Please follow us along on LinkedIn on the page we have links to all our upcoming events, webinar and conferences we’re attending. And of course we want to talk about the topics that you want to talk about. So please feel free to follow us @nxanalytics on twitter. We’ll catch you next time. Thank you.

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