internal model industry forum - the irm · • top down versus bottom up approach •...

Internal Model Industry Forum

7 December 2015

IMIF – Past, Present and Future

José Morago, IMIF Founder and IRM Chairman

The IMIF in numbers

Kick off meeting June 2014

Over 300 Forum members

16 Steerco meetings

7 workstreams

7 Forum meetings

1 webinar

Speaking opportunities for members

Articles in the press

A strong industry forum

Thank you to our partners and sponsors

Over 40 life and non-life insurance players

represented

Value-adding and high quality publications

On average, 83% of the IMIF members responding rated the first 3 booklets as useful [35% rated them as

very useful and 11% have not read them]

Value-adding and high quality publications

• 4 advanced use case studies

Driving value in the industry

100% of respondents found the IMIF publications and meetings useful in some way

– 60% had applied IMIF ideas, approaches or tools in their organisations

– a further 21% agreed that they had improved their understanding although they had not yet applied it

– 40% welcomed the opportunity it gave to participate in developing industry good practice

2016 – Potential topics

• Role of CRO – under way

• Catastrophe Model Validation – under way

• Maturity of the validation cycle in the BAU

• Model reporting

• Model change processes

• Stress and scenario testing

Please let us know if you want to get involved!

Bringing Internal Models to Life for Boards

Roger Jackson and Dave Finnis, KPMG

Fostering a challenging environment

What it is

•Grouping of points

on best practice

•Useful reference

What it isn’t

•A process map

•Relevant just for

Internal Models

The Communication Framework

Bringing internal

models to life for Boards

Board assessment and development

SpecialistsBoard

challenge

• Ongoing programme

• Appropriateness

• Key concepts

• Common language

• Market comparison

Board Training

• Understand different roles

• Actively seek

discussion/challenge

• Generic questions

• Encourage further debate

• Feedback

• Monitoring

Planning and timing of board engagement

Training• Communication plan

• Be realistic and top-down

• Time to digest

• Plan for changes

Board engagement

Training• Be relevant and engaging

• Sign-posting

• Actively seek challenge

• Accurate, timely and

comparable

Resourcing

Training• Link to communication plan

• Board training

• Planning

• Technical & presentation

skills

Bringing the framework to life

Key principles

What is the scope of the model?

What is the overlap with the ORSA?

Where does the model work well / badly?

What are the model’s key assumptions?

How sensitive is it?

What are its main uses?

Appendix A – NED questions

The PRA’s questions for NEDs is a good starting point for specialists and Board alike

Explanation of the

segmentation basis helps

understand the risk profile.

Understanding how

individual segments

aggregate, can help

simplify the model.

Appendix B – Bottom up discussion

A good, but not technical, understanding of how the model works is key to be able to interpret model output

Appendix B – Outcome based discussion

People generally think in

terms of likelihood rather

than statistical

distributions.

Explaining individual

simulations, broken into

broad categories, helps

understand the impact of

aggregation.

Feedback from Boards highlighted the importance of top down discussions and a focus on the outcomes of the model.

Appendix B – Impact of large events

Showing the impact of a combination of events can assist the Board in getting comfortable with the level of capital at different percentiles

Such charts can be

presented in terms of

the firm’s risk appetite

and a useful addition

to an Executive

Summary.

A View from the Board –Keeping it real and relevantPaul Taylor, NED, Ascot Underwriting

RMOL

A view from the Board-

Keeping it Real and Relevant

Paul Taylor

© Copyright Risk Management Options Limited

RMOL

Keeping it Real


The challenge for Directors:

• Doing the best for the company and shareholders

• Doing the best for other stakeholders

• Operating within and complying with regulatory and legal frameworks

RMOL

Keeping it Real


Director’s Role: The Companies Act 2006 sets out seven generalduties of directors:-

• to act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred

• to promote the success of the company for the benefit of its members

• to exercise independent judgement

• to exercise reasonable care, skill and diligence

• to avoid conflicts of interest

• not to accept benefits from third parties

• to declare an interest in a proposed transaction or arrangement

RMOL

Keeping it Real


Specific Directors’ responsibilities

• Strategy and business planning

• Performance against plan

• Executive Remuneration

• Regulatory/Legal compliance (PRA, FCA + ........)

• Business ethics and conduct

• Risk Management and Control environment

• Assurance of effectiveness of controls

RMOL

Keeping it Real


NEDs’ responsibilites• All of the above +

• Independent challenge, review and assurance

All through a few meetings per year, briefings, etc.

NED riskFailure in any of the duties, exposes the NED to loss of his/her assets

and possibly prison – this keeps it real!

RMOL



Limited time and access = Relevance to the NED

• NEDs are mostly reliant on what they are told together with the additional information that they gather from challenging and questioning.

• Management Information varies in quality (Data or Information?)

• Level of understanding of the Internal Model? (Recognising importance and value to the business)

RMOL



The Internal ModelExec Directors are involved with the IM and its performance on a daily

basis. NEDs are not.

The IM Black box – how much does the NED need to know?• What is it used for? SCR, Strategy and bus plan input, risk

appetites, modelling reinsurance, modelling new ideas

• How is it used? Limitations, Inputs, Outputs

• How do I interpret the output? Training, clear information

• Is it right? IMC - Risk Committee – Board (Exec Directors involved at all levels)

• How do we know? Independent review – Audit Comm

• Keeping up to date? Board briefings

RMOL



The Internal ModelWho keeps the NEDs informed?

What do they need to know?

• Understanding the inputs

• Interpreting the output

• Updating on changes

• What works, what could be better?

• Who gives independent assurance?

RMOL



The Internal ModelThe key elements of communication with the Board:

• Concise

• Clear

• Common language

• Conclusions and recommendations

RMOL



The IM is real and relevant

The Board needs help to understand and use it

A sustainable operating model for validation

INTERNAL

Karun Deep and Matthew Pearlman7 December 2015

Introduction

• The role of Internal Model Validation across insurers today:

• independent series of reviews to provide the Board with information on the

key strengths / weaknesses, limitations and appropriateness of the model

• to play a broader role in ensuring the model is appropriate for use in a number

of areas as process matures

• The role of validation in providing assurance on model changes is also developing

• Model Validation is now:

• a recognised industry practice,

• being seen as a BAU function primarily within risk teams,

• emerging as a formal discipline for risk and actuarial professionals,

• finding its feet as a function providing Boards and management with key

information and insight

Pre IMAP IMAP and beyond

The Validation JourneyValidation is evolving from detailed bottom up analysis towards a more balanced approach

• Developing an independent function with good understanding of the risk profile and its capital modelling

• Appropriateness of the modelling approach and comparison to market best practice

• Analysis by risk class and by line of business

• Ensuring documentation / justification is appropriate and governance processes are robust

• Top Down versus Bottom up approach

• Appropriateness of overall capital number (across metrics)

• Focus on key strengths, weaknesses and limitations

• Key assumptions / sensitivities

• Validation of model changes

• Stress and Scenario Testing

• Is the Model appropriate for all its uses?

Potential areas of focus for the Board

• What are the model’s key strengths and limitations?

• Where does the model work well / work badly?

• What are the key assumptions that underlie the model?

• Does the output of the model give a credible answer?

• What is the scope of the firm’s internal model – risks / businesses?

Regulatory focus

• Pre-IMAP models have incurred significant changes, partly in response to regulatory feedback

• With an approved model, top down validation will be more meaningful

• Regulators continue to expect bottom up analysis, with adequate justification

Model Approval: Beginning of the end?What does ongoing model change / re-approval process look like?

What does ongoing independent assurance look like?

An operating model?

• People

• Right mix of skills and experience

• Appropriate independence

• Operations

• Focus areas

• Tools

• Validation and model changes

• Activity through year

• Governance

• Structures that work

• An engaged Board

• Good communication

People“Strong challenge greatly benefits from experience – as it lends credibility, allows a sense of perspective and the ability to prioritise and can aid validation teams deal with tricky situations to find solutions.”

Right mix of skills and experience

• Capital modelling experience

vital but not everything

• Good understanding of the

firm’s risk profiles

• Ability to challenge

• Actuaries suited but

Accountants / Auditors / Risk

professionals may have a role

to play

• Appropriate independence (without

being overly distant from business!)

• Clarity of reporting lines / Ability to

escalate and drive action

• Mix of internal and external

expertise

• Different sized organisations have

different needs

• Specific deep dives / expertise from

external validation can be powerful

Validation framework

• Establish validation framework

• How frequently do we look at each area?

• Who does the validation

• Expect it to develop over time

The tools of validation

Scenario and

stress testing

Risk ranking

Benchmarking

Backtesting

Reasonableness

checks

Profit and loss

attributionConvergence

testingQualitative

testing

Reverse stress

testingSensitivity

testing

Model change

A possible timetable

Board engagement and communication

38

Clearly stated

validation

objective,

scope,

framework

Easy to

understand

tests / key

graphics and

metric

Single

internal model

validation

report

Regular

reporting and/or

agenda item

Use test

questions

Advanced Uses for Risk Models - Panel session

Raphael Borrel, NHBC

Gemma Dawson, UMACS

YK Loh, AIG

Laurence Dunkling, AIG

Parth Patel, Ascot

Institute of Risk Management

Email: [email protected]

Tel: +44(0)20 7709 9808www.theirm.org

INTERNAL

internal model industry forum - the irm · • top down versus bottom up approach •...

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