Structured Products Americas Awards 2016
Numerix has proven itself adept at getting tools in place before customers need them. This has come in handy as the structured products market came to grips with the phenomenon of negative rates, which began in some parts of Europe in 2014.
This was a particular problem for structured products with embedded interest rate options, as the most widely used lognormal model for valuing the derivatives assumes rates cannot go below zero.
Banks have therefore looked to two modelling options. First, they can shift the strike, by taking the negative interest rate and adding a buffer that takes it into positive territory, in a process called shifted lognormal. Second, they can use a normal or Gaussian model, which allows rates to move from the positive to negative side with the same probability.
Numerix helps clients by providing a plug-and-play solution that allows them to switch to a shifted lognormal or normal model. This is made possible by a separation of the model from the scripting. Firms with international operations also find they can be supported by the same platform they use domestically without impacting their modelling capabilities.
Numerix has been at the forefront of accommodating a negative rate environment
One user at a US insurer
"Numerix has been at the forefront of accommodating a negative rate environment," says one user at a US insurer.
The technology vendor also helped clients manage exposures resulting from fixed indexed annuities (FIAs) – which pay the retiree a capped return tied to a proprietary or public index with some downside protections. Sales to retirees have grown consistently since 2012, according to the Limra Secure Retirement Institute, reaching $104 billion in 2015, up from $72 billion in 2012, while the variable annuity sales have fallen to $133 billion from $147 billion over the same period.
This drove up demand for enhanced modelling capabilities, as the way interest is treated in FIAs tends to be more sensitive to model choice than for variable annuities, which can be run on relatively simple models such as Black-Scholes.
"Numerix fits into this area very naturally because we have sophisticated models which capture the dynamics and the pricing much more accurately," says Pawel Konieczny, vice-president of product management for insurance at Numerix in New York. "If you use a simple model like Black-Scholes, your pricing of those instruments may be 50% or more off."
The firm is continuing to invest in research and development to provide efficient solutions to ever more intensive processes. A good example of this is the firm's work around nested stochastic simulations, which are required by many regulatory regimes - particularly in the US under Actuarial Guideline 43 and C3 Phase 2. This process requires heavy modelling resources, presenting problems from a technology standpoint.
"We are actively conducting more research into and developing new advanced quantitative techniques, while staying on top of new developments in the industry," says Dan Schobel, an actuary at Numerix in Princeton, New Jersey.
Nested stochastic modelling involve brute force Monte Carlo simulations, which requires enormous computing power to support. To speed up the calculation process and save computing resources, Numerix is turning to an emerging mathematical approach called adjoint algorithmic differentiation (AAD).
"Our quantitative research and our quants have been investigating AAD as a method of speedily computing Greeks, for example with vanilla instruments, and seeing if we can extend it to more complicated types of instruments to cut down on computation time and complexity of the nested stochastic problem," says Schobel.
Applying its technology across industries and instruments is not a case of reinvention; the firm has a reputation for being able to work with the specific needs of clients and to offer access to expertise where that gets its clients where they need to go, then use the lessons it has learned to support the rest of its client base.
"They have gone beyond the expectation you would have of a vendor," said one client.
US firms tackling international markets report that the firm's comprehensive offering allows them to work in a range of environments with the minimum of disruption. In some cases, the value is in the relationship.
"We are able to access quants directly," said one user. "In some overseas markets where there are a lot of bespoke swaps, we are able to put one of our traders directly in touch with Numerix's quant team and talk about local practices."