Brian Robinson of Moody's Analytics spells out the opportunity for the next wave of internal model applicants
Despite a few false starts, the Solvency II regime is finally in effect for the European insurance industry, and the first batch of regulatory reporting has been delivered.
As part of this process a few insurers have been given approval for their internal models. For these firms, the journey to approval has been challenging as the methodologies and systems associated with internal models evolved in parallel with the requirements and stakeholder expectations.
Although the number of insurers with internal models has been smaller than originally anticipated, we expect further models to be approved over the next few years. Those firms who have deferred their application benefit from the foundations laid by early adopters.
Capital management and the use test
There are many benefits of using an internal model especially if the standard formula does not adequately reflect the risk profile of the firm. Inevitably the "one size fits all" nature of the standard formula makes it inappropriate for many insurers.
A well-designed internal model must calculate the solvency capital requirement (SCR) and also allocate the SCR across products/risks. It must support a range of what-if capabilities to inform capital management activities and risk-based decision making – the "use test" – on a basis that is appropriate to the insurer.
Our RiskIntegrity™ Capital Aggregator has been designed to perform these tasks and incorporates a range of what-if capabilities including asset allocation, business mix and stress testing.
Reduced implementation overhead
As the techniques and software that underpin internal models have matured, the next wave of applicants can benefit from faster implementations and reduced costs with offthe- shelf solutions that have been designed to meet the demands of a simulation-based internal model.
Our RiskIntegrity™ product suite – which includes RiskIntegrity™ Capital Aggregator, RiskIntegrity™ Proxy Generator and Risk Scenario Generator – support the calculation of the internal model SCR.
Each module can be deployed independently or as part of an integrated solution. They have been designed to address the operational challenges of the working day timetable and offer a controlled environment with a range of functionality to support the governance requirements of an internal model, including data management and quality controls, workflow/scheduling, audit capabilities and access management.
Proxy modelling for assets and liabilities
Internal model SCR calculations can be challenging for insurers due to the time taken to run their granular cash flow models ("heavy models"), especially when there are path-dependent liabilities for life insurers.
Our RiskIntegrity™ Proxy Generator addresses this problem by calibrating proxy models to replicate the outputs from the heavy models. The proxy models are then used by our RiskIntegrity™ Capital Aggregator to calculate the internal model SCR.
A unique feature is the integration of Moody's Analytics Economic Scenario Generator enabling automated generation of fitting scenarios for techniques such as Curve Fitting and Least Squares Monte Carlo. In addition, the scenario generation process is integrated with the function fitting process ensuring robust governance and automation of the end-to-end process.
Our proxy generation software enables large-scale multi-user deployment across different business units and the ability to manage the calibration of large volumes (>1,000) of proxy models. It has been designed to address the working day timetable requirements associated with Solvency II, with a focus on performance, automation and operational efficiency. In addition, it provides a range of validation outputs to support the governance and sign-off processes associated with the proxy models.
Risk factor calibration and modelling
Moody's Analytics supports hundreds of insurers globally with stochastic risk factor modelling and calibration across a range of business needs. Our Risk Scenario Generator has been designed to generate market and non-market risk factors stochastically over a one-year time horizon. It delivers a suite of statistical/structural models and range of copulas to meet the demands of our internal model clients. In addition, our advisory and research teams have a wealth of experience helping our clients with the calibration process, whether on a standard or bespoke basis.
For further information on our Internal Model Solutions, or capital and solvency management please contact Brian Robinson, Senior Director Product Management at Moody's Analytics.
Companies:Moody's
