This paper presents latest thinking from the Institute and Faculty of Actuaries' (IFoA) Model Risk Working Party and follows on from their Phase I work, Model Risk - Daring to Open the Black Box. This is a more practical paper and presents the contributors' experiences of model risk gained from a wide range of financial and non-financial organisations with suggestions for good practice and proven methods to reduce model risk.

A central problem for regulators and risk managers concerns the risk assessment of an aggregate portfolio defined as the sum of d individual dependent risks (Xi). This problem is mainly a numerical issue once the joint distribution of (X1,X2,...,Xd) is fully specified. Unfortunately, while the marginal distributions of the risks (Xi) are often known, their interaction (dependence) is usually either unknown or only partially known, implying that any risk assessment of the portfolio is subject to model uncertainty.

This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with market uncertainty. During calm periods, the underlying risk forecast models produce similar risk readings; hence, model risk is typically negligible. However, the disagreement between the various candidate models increases significantly during market distress, further frustrating the reliability of risk readings.

Contagion across banks is widely perceived to be an important element in banking crises and thus a major systemic stability concern. This special feature analyses the risk of crossborder contagion for large European banks. The main objective of the article is to draw attention to a potentially highly relevant financial stability issue, which so far may have been under-explored.

The Financial Reporting Section and Committee on Life Insurance Research announce the release of a new report examining current practice around the development of policyholder behavior assumptions for life insurance and annuity products.

Some have argued that recent increases in credit risk transfer are desirable because they improve the diversification of risk. Others have suggested that they may be undesirable if they increase the risk of financial crises. Using a model with banking and insurance sectors, we show that credit risk transfer can be beneficial when banks face uniform demand for liquidity. However, when they face idiosyncratic liquidity risk and hedge this risk in an interbank market, credit risk transfer can be detrimental to welfare.

The present paper proposes a new methodology to model the lapse risk in life insurance by integrating the dynamic aspects of policyholders' behaviors and the dependency of the lapse intensity on macroeconomic conditions. Our approach, suitable to stable economic regimes as well as stress scenarios, introduces a mathematical framework where the lapse intensity follows a dynamic contagion process, see Dassios and Zhao (2011). This allows to capture both contagion and correlation potentially arising among insureds' behaviors.

These slides examine the interest rate sensitivity of a life insurer's liquidity and solvency - with particular focus on an interest rate rise. We model the economic (market-consistent value) balance sheet of an average German life insurer subject to European Solvency II regulation. To capture portfolio and long-term effects, we explicitly incorporate an existing back book of historically sold policies and an existing asset allocation calibrated by empirical data.

An effective Risk Appetite Framework has been identified as a critical component of an effective risk management and governance framework and a key enabler for organisations wanting to drive performance and empower staff at every level to make timely, risk aware decisions. However, there remains a surprising variety of opinion about what it actually means to establish and embed an effective risk appetites framework.

This paper provides a brief recap of the evolution of the risk appetite concept in the banking industry. The main focus, however, is the practical application of the risk appetite framework to help board members and senior business and risk executives drive the implementation of such a framework at their institutions.