In February 2018, the Internal Model Industry Forum of the Institute of Risk Management published a paper on “The Journey from Model Validation to Model Risk Management”. The paper provides some useful insights for all companies, not just those using Internal Models, on how model risk can be appropriately managed. The paper notes that model validation is considered business as usual for companies who participated in the SII Internal Model Approval Process but that less consideration has been given to what constitutes an appropriate approach to the broader topic of Model Risk Management.
The paper argues that model risk should be managed like any other risk through the implementation of a thorough framework to help identify, assess, mitigate and monitor the risk. The authors note that “Good Model Risk Management will allow firms to make the most efficient allocation of resources and maximise the benefit they achieve from their investment. A thorough approach to Model Risk Management will also allow insurance entities to refocus their effort across their business in a proportional manner, targeting key areas of risk which may have seen less focus in recent years due to the overemphasis that has been placed on the internal model by regulatory changes.”
Opinions contained within the paper leverage experience from the banking industry where there has been an increased focus from regulators recently which might soon extend to insurance companies given the importance of models in both industries. The paper is easy to follow and provides some detailed thoughts and opinions on the following areas of Model Risk Management:
- Differences between model validation and Model Risk Management
- Benefits of Model Risk Management
- The current state of Model Risk Management
- How to develop a Model Risk Management Framework
- Possible steps that could be taken to implement Model Risk Management over the lifetime of a model
Should you wish to find out more on this increasingly important topic, the paper has been uploaded to the Society of Actuaries in Ireland’s ERM Resource Database and can be accessed here. The ERM Resource Database is a collection of articles, papers and books related to Enterprise Risk Management which can be easily filtered and searched with the majority of postings accessible to members and non-members alike.
Eamonn Mernagh is CRO with Canada Life International Re and a member of the SAI’s Enterprise Risk Management Committee
The views of this article do not necessarily reflect the views of the Society of Actuaries in Ireland, the Enterprise Risk Management Committee, or the author’s employer. The article was edited by the Communications Subgroup of the Enterprise Risk Management Committee.