Internal Model Industry Forum 7 December 2015

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
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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
The Communication Framework
What it is
• Grouping of points
on best practice
• Useful reference
What it isn’t
• A process map
• Relevant just for
Internal Models
Bringing the framework to life
Key principles
Specialists
• Understand different roles
• Actively seek
discussion/challenge
• Generic questions
• Encourage further debate
• Feedback
• Monitoring
Board
challenge
Board assessment and
development
Board engagement
Board Training
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Planning and timing of
board engagement
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Ongoing programme
Appropriateness
Key concepts
Common language
Market comparison
Communication
Trainingplan
Be realistic and top-down
Time to digest
Plan for changes
Bringing
internal
models to life
for Boards
Be relevant
and engaging
Training
Sign-posting
Actively seek challenge
Accurate, timely and
comparable
Resourcing
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Link to communication
plan
Training
Board training
Planning
Technical & presentation
skills
Appendix A – NED questions
The PRA’s questions for NEDs is a good starting point for specialists
and Board alike
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 B – Bottom up discussion
A good, but not technical, understanding of how the model works is
key to be able to interpret model output
Explanation of the
segmentation basis helps
understand the risk profile.
Understanding how
individual segments
aggregate, can help
simplify the model.
Appendix B – Outcome based discussion
Feedback from Boards highlighted the importance of top down
discussions and a focus on the outcomes of the model.
People generally think in
terms of likelihood rather
than statistical
distributions.
Explaining individual
simulations, broken into
broad categories, helps
understand the impact of
aggregation.
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
relevant
Paul Taylor, NED, Ascot Underwriting
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
© Copyright Risk Management Options Limited
RMOL
Keeping it Real
Director’s Role: The Companies Act 2006 sets out seven general
duties 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
© Copyright Risk Management Options Limited
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
© Copyright Risk Management Options Limited
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 risk
Failure in any of the duties, exposes the NED to loss of his/her assets
and possibly prison – this keeps it real!
© Copyright Risk Management Options Limited
RMOL
Keeping it Real and Relevant
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)
© Copyright Risk Management Options Limited
RMOL
Keeping it Real and Relevant
The Internal Model
Exec 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?
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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
© Copyright Risk Management Options Limited
RMOL
Keeping it Real and Relevant
The Internal Model
Who 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?
© Copyright Risk Management Options Limited
RMOL
Keeping it Real and Relevant
The Internal Model
The key elements of communication with the Board:
• Concise
• Clear
• Common language
• Conclusions and recommendations
© Copyright Risk Management Options Limited
RMOL
Keeping it Real and Relevant
The IM is real and relevant
The Board needs help to understand and use it
© Copyright Risk Management Options Limited
RMOL
A sustainable operating
model for validation
Karun Deep and Matthew Pearlman
7 December 2015
INTERNAL
Introduction
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The role of Internal Model Validation across insurers today:
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independent series of reviews to provide the Board with information on the
key strengths / weaknesses, limitations and appropriateness of the model
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to play a broader role in ensuring the model is appropriate for use in a number
of areas as process matures
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The role of validation in providing assurance on model changes is also developing
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Model Validation is now:
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a recognised industry practice,
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being seen as a BAU function primarily within risk teams,
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emerging as a formal discipline for risk and actuarial professionals,
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finding its feet as a function providing Boards and management with key
information and insight
The Validation Journey
Validation is evolving from detailed bottom up analysis towards a more balanced approach
Pre IMAP
• 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
IMAP and beyond
• 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?
Regulatory focus
Potential areas of focus for the Board
• Pre-IMAP models have incurred significant changes,
partly in response to regulatory feedback
• What are the model’s key strengths and limitations?
• With an approved model, top down validation will be
more meaningful
• What are the key assumptions that underlie the model?
• Regulators continue to expect bottom up analysis, with
adequate justification
• Where does the model work well / work badly?
• Does the output of the model give a credible answer?
• What is the scope of the firm’s internal model – risks /
businesses?
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
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Capital modelling experience
vital but not everything
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Good understanding of the
firm’s risk profiles
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Ability to challenge
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Actuaries suited but
Accountants / Auditors / Risk
professionals may have a role
to play
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Appropriate independence (without
being overly distant from business!)
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Clarity of reporting lines / Ability to
escalate and drive action
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Mix of internal and external
expertise
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Different sized organisations have
different needs
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Specific deep dives / expertise from
external validation can be powerful
Validation framework
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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
Risk ranking
Scenario and
stress testing
Reasonableness
checks
Backtesting
Reverse stress
testing
Benchmarking
Sensitivity
testing
Convergence
testing
Profit and loss
attribution
Qualitative
testing
Model change
A possible timetable
Board engagement and
communication
Clearly stated
validation
objective,
scope,
framework
Single
internal model
validation
report
Easy to
understand
tests / key
graphics and
metric
Use test
questions
Regular
reporting and/or
agenda item
38
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 9808
www.theirm.org
INTERNAL