Predictive Analytics

Milliman CHESS

Economic scenario generators (ESGs) are being used more and more by insurers and financial institutions. Few practitioners have implemented their own ESGs. Most buy ESG software to produce their own scenarios or buy tables from external providers.

One of Milliman’s tools developed for the European market is CHESS (Cloud Hosted Economic Scenario Simulator). CHESS simulates future economic conditions like interest rates, stock values, inflation, real estate indexes and credit spreads in risk-neutral and real-world universes. This solution helps insurers compute regulatory calculations (like Solvency II economic balance sheets and SCR assessments). CHESS is also useful for asset liability management (ALM) studies, product pricing and strategic allocation.

CHESS’s framework is cloud-based. Calculations are computed by an engine located on the cloud, launched with a user’s website. CHESS can launch intensive calibrations and simulations because of the scalability of the cloud and erases any issues regarding software installation-because all that’s needed is a secured web browser. Installation and maintenance are both less expensive and easier because only a browser is being used. Updates are fully centralized on the cloud.

To build a scenario table, follow three simple steps:

  1. Model calibration. Users can quickly determine the model parameters, allowing for projection of future financial indicators.
  2. Simulation. Once parameters are established, users may build future economic trajectories to obtain an entire scenario table.
  3. Validation. To check the consistency of the table, CHESS performs numerous tests to ensure that the table can retrieve relevant prices (risk-neutral universe) or match with historical dataset features (real-world universe).

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