Scenario stress testing more relevant than ever, says CIO Reeves

Channels: USA focus

Companies: AEGIS Insurance

People: Rip Reeves

Scenario stress testing is a useful deterministic modelling tool in asset allocation strategy analysis and has become more relevant in the current market environment where geopolitical issues are swaying market sentiment beyond the control of insurers, said Rip Reeves, chief investment officer and treasurer, AEGIS Insurance.

Speaking ahead of his appearance on a panel session at Insurance Asset Risk Americas 2019, Reeves said the primary purpose of the company’s stress testing is to “crush” trade and strategy recommendations.

“The idea is to test these to see where and when they might fall apart—in other words lose money,” said Reeves. “These are important in testing the magnitude of loss for a trade or strategy and very relevant currently given there are so many geopolitical issues we cannot control, and which can effect market sentiment and performance.”

A secondary purpose of stress testing is to view relative performance in non-stressed scenarios. Given stress testing is primarily intended to highlight downside risk, Reeves suggested using a more conservative and stricter risk measurement such as value-at-risk (VaR) to the 99% confidence level instead of VaR95%.

“Stress testing scenarios should be aligned to your company’s financial and risk policies and concerns,” said Reeves. “An insurance company’s internal capital model may also provide useful investment data generated by its Economic Scenario Generator (ESG). Purely quantitative data from the ESG can complement traditional stress testing.”

Reeves will discuss stress testing and economic generators in an unpredictable investment environment at the Insurance Asset Risk Americas 2019 conference in New York on 16 September.

More information on the conference can be found here.

Sarfraz Thind