Partner Article

IRM publishes new guidance to help insurers drive value with capital models as Solvency II goes live

As Solvency II regulation goes live, the Institute of Risk Management (IRM) today publishes two new guidance documents produced by its Internal Model Industry Forum (IMIF). The release of these documents comes at the same time as regulators across Europe, including the UK Prudential Regulatory Authority, start to notify insurers of their internal model approval status.

After years of hard work and costly investment for the industry, the new economic capital models required by Solvency II will be embedded at the heart of risk and capital evaluation and also used as a key input to a wide range of business and strategic decisions. However, moving from a project phase to a “business as usual” environment brings significant challenges.

With this context, today the IMIF has published two new guidance documents to support the insurance industry in this transition. The first of these booklets looks at the communications challenges of bringing internal models to life for Boards and senior management of insurance companies. The second considers the systems, processes and controls that need to be in place to ensure that the model validation process works properly and can be trusted.

These documents have been prepared by cross-industry working groups bringing together company risk and modelling practitioners with leading consultants and advisers, supported by the professional organisations in the field and also by the regulator. The work on board engagement was led by Roger Jackson and David Finnis from KPMG with Niraj Shah from Aegas. Leading the workstream on validation governance were Karun Deep and David Innes from RSA and Matthew Pearlman from LCP.

This work forms part of a wider programme of research and guidance being undertaken by the IMIF exploring how risk models can create sustainable value for insurance businesses. The Solvency II regime has required the creation of sophisticated models which assess the inherent ‘riskiness’ of each insurance business and the resulting capital levels required to support solvency. However, there is still further to go to create real business value from these internal models and ensure they are embedded into mainstream business.

IRM Chairman and IMIF founder, José Morago, said:

“Capital models are a valuable and sophisticated tool but, like all complex tools, they need to be trusted and they need to be understood. The Board needs to be clear on what the models can and cannot do and validation activities need to be based on a cost effective and sustainable operating model. As the industry gets itself ready for the full implementation of Solvency II we are pleased to have been able to encourage this collaborative approach to develop and share good practice.”

Leader of the workstream that looked at Board engagement with the models, Roger Jackson from KPMG, said: “All the work and investment in building sophisticated models will be irrelevant if their capabilities and limitations are not properly understood by Boards and by senior management so that they become a vital tool in supporting decision making. As modelling and risk professionals we must ensure that the communication, understanding and challenge of internal models is of the highest quality and our guidance document aims to share some good practice on how this can be done.’

Matthew Pearlman, Partner at financial, actuarial and business consultants LCP, who led the work on the governance of the model validation process added, “Validation provides Boards with assurance that their model provides the information they need to run the business and that it is fit for purpose. In our work we set out a sustainable operating model to guide insurance businesses on getting best value from this process.’

The guidance documents are available from the IRM’s website here. https://www.theirm.org/knowledge-and-resources/thought-leadership/creating-value-through-internal-models/documents-and-resources/

This was posted in Bdaily's Members' News section by Victoria Robinson .