Internal Model Best Practices
for Insurer Risk Assessment & Capital Requirement
March 13, 2007
Alkis Tsimaratos
Solvency Sub Committee (SSC)
Background (1/3)
The IAA and the Solvency Sub Committee
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Founded in 1985 the IAA has amongst other objective to
– Represent profession with international bodies
– Promote high standards of professionalism
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The SSC is part of the Insurance Regulation Committee
– Coordinates the work on Solvency and risk assessment of Insurers
– Point of contact with the IAIS (International Association of Insurance Supervisors)
– Coordinate related projects with Actuarial associations
– 30 active members, 2 committee meetings a year, monthly/bimonthly conference calls
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Background (2/3)
An increasing use of “Internal Models”
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Greater use of Enterprise Risk Management (ERM)
– Embed risk management within the whole organization is a high priority (71%)
– Improve risk measurement and quantification process is a high priority (77%)
(source : The 2006 Tillimghast ERM survey )
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Jurisdictions considering or using Internal Models
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Europe (Solvency II, UK - ICA, Germany - BaFin)
Australia (APRA risk management standards)
Swiss (Swiss Solvency Test)
Canada (Segregated Funds)
USA (C3 phase II)
 SSC has recognized a wider use of Internal Models in the Industry
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Background (3/3)
The “Internal Models” best practice project
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Timeline : project started in 2005 in conjunction with the IAIS
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2005 : Launch of the project
May 2006 : target content framework approved by the IAA Board during the Paris Congress
May 2007 : discussion of the first draft in the board and committee meetings in Mexico
End 2007 : release of the final version
Current deadline
– 31 march : feedback from Associations on the first draft
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Target scope for the use of Internal Models
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Be used and understood across the Insurance companies – the use test
Be transparent to third parties
Reflect company risks and risk management
Be validated to insurer experience & calibrated to financial markets
Use reliable experience studies for developing assumptions
Be subject to suitable approvals, controls, internal audit and periodic independent review
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Internal Models draft review (1/6)
Section 1 - Introduction
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The Introduction sets the rationale and scope of an Internal Models best
practices
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Role of Internal models
Insurance Industry ERM trend
Regulators trend in use of Internal models#
List of guidance areas
Is there anything missing ?
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Internal Models draft review (2/6)
Section 2 – Purpose
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This section sets
– The purpose of the paper (guidance)
– A definition of what is referred to as an Internal Model
– A target audience :
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Regulators
Actuaries
Auditors
Senior management
Board of directors
Investors, market analysts
 Do you consider the purpose, scope and audience appropriate ?
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Internal Models draft review (3/6)
Section 3– Model Fundamentals
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This section articulates the fundamentals components of an Internal
Model
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The structure of a model : separate components
Level of complexity of the components
Reference to appropriate theory or practice
Appropriateness of use
Selection assumptions
Test, audit, controls and storage
Use of experts
 Does this general framework correspond to your current practices ?
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Internal Models draft review (4/6)
Section 4 – Model specifics
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This section details the best modeling practices
– On data
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corporate assumptions, industry data, experience
– On structure
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complexity, completeness, stochastic/deterministic, period, time horizon
– On frequently used modeling techniques
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ESG, ALM, Life modelling, Collective risk model (non life)
– On identified specific issues
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real world vs risk neutral, key results, tax treatment
Is the level of detail on this section adequate ?
Are there missing items ?
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Internal Models draft review (5/6)
Section 5– Results and communication
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This section sets the practices for communicating results
– Identifying the stakeholders and their requirements
– Internal management communication needs
– Examiner communication needs
– Public communication needs
 Should communication be part of best practices – should it be further
developed?
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Internal Models draft review (6/6)
Section 6– Governance best practices
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This section sets the practices for governance over
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Roles, responsibilities and resources
Framework, targets and process
Documentation and controls
Data and reports
Results and analysis
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Independence, information management, use test, senior management involvement
Does this correspond to your current practices / is there anything
missing?
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Internal Models draft
Current developments
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The draft is under review by all Actuarial associations – 31 march
The SSC drafting team is already revising this first document with the
comments already received
– Add missing components and avoid overlapping
– Adjust level of details
– Simplify tone and improve articulation of key ideas
– Ensure consistency with similar references (Canadian, UK)
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Conclusion : Reviewing the best practices
Role of the actuaries
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Actuaries are actively involved in setting up and running Internal
models
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They are working within all industry stakeholder on this topic:
– Insurance groups
– Consultancies partners
– Insurance associations
– Supervisors
 We have to bring our best knowledge, experience and vision to
the service of the Industry – your feedback on the draft is welcome
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Internal Model Best Practices
for Insurer Risk Assessment & Capital Requirement
March 13, 2007
Alkis Tsimaratos
Solvency Sub Committee (SSC)