Member Article

Uses for Internal Models - Supporting Reinsurance Business Decisions

IRM publishes framework: Advanced Uses for Internal Models - Supporting Reinsurance Business Decisions

Going beyond solvency calculations in preparation for Solvency II

The Institute of Risk Management (IRM) today publishes a guidance document produced by its Internal Model Industry Forum (IMIF) exploring advanced uses for insurer internal models in the context of reinsurance decisions.

This guidance has been produced by a workstream of industry practitioners led by IRM member and risk consultant Raphael Borrel, together with report authors Laurence Dunkling and Yoon-Kwong Loh (YK Loh) at AIG.

The workstream is part of a wider programme of research and guidance being developed by the IMIF exploring how risk models can create sustainable value for insurance businesses. The Solvency II regime has required the creation of sophisticated risk 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.

The report outlines a case study of how AIG uses its internal model to support decision-making in respect of its reinsurance programme, including reinsurance purchases and pricing, treaty renewals, pricing models for aggregate contracts such as Stop Loss reinsurance and Adverse Development Covers (ADC), treaty cancellation analysis and commutations. The work emphasises the need for the model to be fully integrated with, and supportive of, existing business processes and effectively communicated and understood at all levels.

IRM Chairman and IMIF founder, José Morago, said,

“Insurers increasingly rely on sophisticated risk models to navigate a challenging and changing financial environment. Making sure these models create value in decision making, are well understood, and gain the confidence of Boards and regulators, has never been more demanding or challenging.

Solvency II does bring to life the potential risk-based value and return trade-off of a reinsurance programme. However, insurers need to properly plan and decide the modelling capabilities of their internal capital models in order to effectively drive value-adding decisions. Building on the experience of one of our leading insurers, this case study provide a practical view of the key modelling

considerations and choices in the reinsurance context.“

During a panel discussion organised by the IRM in December, lead author of the document YK Loh commented:

“We need to ensure that the Internal Model is accepted as a useful tool throughout the business. Our case study provides a practical, hands-on guide on evaluating reinsurance decisions based a range of metrics such as its breakeven return period, its impact on risk appetite and on our common currency – risk-adjusted profits (RAP). We welcome the opportunity provided by the IMIF to share our experience at AIG with the wider insurance market.”

The guidance document is available from the IRM’s website here: 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 .