MRM IN INSURANCE: THE BEST, BEST PRACTICES
Model risk management (MRM) in insurance is not new. In fact, actuaries and other insurance professionals have been dealing with MRM-related topics for years. But what are MRM practitioners and certified risk professionals actually doing to manage model risk inherent in the enterprises they represent? If your answer is “we maintain a model inventory in Excel”, it is time to start asking yourself one simple question: is this really the best way?
Actuaries are a body of self-governed financial risk professionals with a specialisation in the insurance industry. Within a typical insurance company, actuaries participate in the pricing and valuation of liabilities, financial reporting, asset liability management (ALM) and other finance, treasury and risk management operations.
Some, if not all, of these areas require financial modelling of some kind, and by extension, the management of model risk. That is not to say that actuarial models are the only type of models that insurance companies are tasked with managing – but these models represent a large percentage of the overall model inventory, and thus the risk.
So how does the term ‘self-governed’ with respect to actuaries translate into the MRM policies and procedures followed by an insurance company? To start, note that there exist several professional organisations around the world that provide actuarial standards of practice (ASOPs) to members within their jurisdiction. Normally included within these standards are provisions for the management of model risk. ASOPs are designed to be flexible rather than prescriptive and they are not step by step instructions representing any specific topic, including MRM. Where appropriate, the ASOPs leave room for the individual actuary’s professional judgment.
Jul-Sep 2022 Issue
SAS