The Institute of Risk Management’s (IRM) Internal Model Industry Forum (IMIF) today publishes its eighth guidance document for the insurance market - The Journey from Model Validation to Model Risk Management.
The guidance was developed to help insurers pursue continuous improvement of their modelling capability in response to a fast changing world where good data does not always exist but good judgement is imperative. The document offers a framework for developing a model risk management framework, encouraging a risk-based approach which looks at all models used by the firm, not only those for regulatory purposes. Any such framework needs to be tailored specifically to the individual firm’s risks and culture with the intention of improving decision-making, allowing the most efficient allocation of resources and adding significant value.
The guidance was produced by a workstream of industry practitioners led by Philip Whittingham FIRM, Head of Model Validation and Risk Governance at XL Catlin, who is also the chair of the IMIF, and Marc Taymans, Managing Partner at Risk Dynamics (part of McKinsey & Company).
Phil Whittingham explained, "Models are an essential tool to help insurers manage uncertainty but users need to be aware of whether they are appropriate for the decisions they are supporting. Model risk management extends significantly beyond model validation, which is just one control activity within a robust model risk management process, and brings a range of benefits. Best practice is still developing but our project team has come up with some useful industry resources including an example risk classification and an example model risk management policy as a starting point.”
Roel Van den Heuvel, Associate Partner at Risk Dynamics, who supported the work added, “We see tremendous opportunity for model risk management in the insurance industry, a practice which has been well established in banking. In particular, from the discussions with the IMIF working party, we believe extending the scope beyond regulatory models to a focus on business value will improve the overall efficiency and effectiveness in the models insurers operate.”
The guidance document is available from the IRM’s website at /knowledge-and-resources/thought-leadership/creating-value-through-internal-models/documents-and-resources/
IMIF 2018 publications are generously sponsored by EY, LCP, Milliman, PWC, Risk Dynamics and Marsh.