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 BAU for companies who participated in the SII IMAP 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 paper leverages experience in 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