Stress scenarios software of the year, GEMS Stress Test Scenarios, Conning
Stress testing and scenario analysis serve as a crucial complement to stochastic modelling and are required or strongly encouraged by important regulatory regimes such as the National Association of Insurance Commissioners (NAIC).
Conning has developed a package of stress test scenarios that simulate ten significant economic events of the past hundred years from the 2008 financial crisis to the Great Depression.
The use of historical scenarios can help make a case for a call to action to management, since the scenario will likely be a matter of personal experience. Additionally, the results are able to help ensure the existing stochastic analysis is sufficiently robust. They are particularly valuable in highlighting whether an extreme, but historically demonstrated event lies within or outside of the bounds of the current stochastic results—for example, how far in the tail would a repeat of 2008 fall?
A challenge with recreating historical events is data access and availability. Not every company has access to the historical data required to formulate a stress scenario, and there are often data quality issues that need to be addressed. The Conning GEMS Stress Test Scenarios package is built using all the available historical data, and in cases where data is missing or questionable, the data is extrapolated using a carefully developed and documented methodology.
Conning's GEMS Stress Test Scenario package has already been successfully used by a large, multinational property and casualty insurer for its US Orsa analysis, for example. The company has also started leveraging the GEMS scenario package within its own asset management business.
Conning was praised by the judging panel for developing the stress testing package which "nicely" supplements stochastic models. It was confirmed as a great way to translate stress results into relatable outcomes for management.
The stress test scenario package was developed using Conning's GEMS Economic Scenario Generator software, which will soon be available as a web-based application.
Corporate statement: The value of stress test scenarios