Life and pensions ALM system: Conning

 

What a difference a year makes. Last year, the Bank of England was exploring whether retail banks could accommodate negative interest rates, and few investors expected government bond yields north of 1% any time soon. Now, the inflationary environment is driving interest rates and yields well above 1%.

For most asset allocators – including insurers and pension funds – the previous investment regime, characterised by low interest rates, resulted in higher allocations to risk assets including alternatives such as real estate, infrastructure and collateralised loan obligations (CLOs). Insurers and pension funds had to review their asset allocation methodology to see how they could manage market risks while integrating actuarial and investment decision-making into their strategies. The increased exposure to riskier assets requires a dynamic approach to scenario modelling and simulations. Investors that previously relied on in-house tools are now looking to providers of specialist asset-liability management (ALM) software to help quantify investment risks and optimise portfolio allocation.

This explains why Conning’s FIRM Portfolio Analyzer was selected for the second year in a row as the winner in the Life and pensions ALM system category.

In one instance, FIRM was implemented at one of the largest European pension funds, enabling the fund to achieve targets for risk-free yields, credit and equities as well as alternatives that reflected the economic views held within the institution. FIRM’s market index functionality was used to model specific asset classes, which included local real estate, private equity, infrastructure and CLOs, and incorporated both price and income components, allowing for a robust cashflow analysis. Moreover, the fund created a realistic model of the stochastic behaviour of the pension liabilities, rules for the conditional payment of asset management fees based on investment results, as well as rules for successive increases of the Guarantee Reserve.

Mark Saunders

The implementation of FIRM resulted in improvements to the client’s risk management programme, including providing analysis of potential cashflow shortfalls and a holistic view of the future liquidity of the fund. As well as providing management insight, the tool allows the fund to produce crucial regulatory documentation.

The system is comprehensive and flexible: dynamic correlations, new Global Jump modelling and an allocation optimiser are among its distinctive features. FIRM comes with a comprehensive set of parameterised asset classes appropriate to the insurance and pension industry. The dynamic correlations between variables enable simulations with multiple correlation scenarios that can improve visibility into relative risk/return and diversification within economies, across economies and multiple time horizons.   

Another pertinent feature is FIRM’s ability to model extreme events. Global Jump provides more granular control regarding the joint probability of severe events and increased tail correlation across different asset classes and economies.

Finally, FIRM’s Allocation Optimizer module is designed to provide clients with advanced efficient frontier analysis, incorporating not only stochastic optimisation but also liability and risk capital modelling.

The judges said:

• “ALM firms have to be good at what they do otherwise their clients – and themselves – get into trouble. And Conning is good. Good products, good systems, good support.”

Mark Saunders, Director and global software product manager at Conning, said:

“This award is great recognition for our client-focused approach to developing our tools. Winning for a second year in a row would not be possible without our clients’ collaboration and feedback, which ensures we continue to deliver a system that provides cutting-edge ALM.”

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