Firms made significant progress with internal model validation work in 2013, with most firms stating they are more than halfway towards their ideal validation process, according to The LCP Internal Model Validation Survey 2013/14. Insurers are also starting to get tangible value from their internal model validation, with the work done so far building trust in the models.
The LCP survey polled Lloyd’s insurers on their validation approach, the key validation challenges, engagement with the business and plans for the future. Alongside industry trends and LCP recommendations for action in 2014, the survey also highlights four key challenges which remain:
- Modelling of dependencies (cited by 54% of respondents)
- The tight Lloyd’s reporting timetable (43% of respondents)
- Setting and managing pass/fail criteria (32% of respondents)
- Validating expert judgement (29% of respondents)
Charlotte Edwards, consultant in LCP’s insurance consulting practice said: “Our survey shows that significant progress was made in internal model validation during 2013.
“However, significant challenges still remain for 2014 and insurers need to consider how they can use the lessons learned so far to get genuine value from their validation work in 2014.” Other key findings of the survey include:
- There has been a market-wide refocus on adding business value in addition to meeting regulatory requirements
- Firms are looking to reduce the long-term cost of validation. Key initiatives include streamlining processes, concentrating on the most important areas and having a rolling programme for testing
- Timetabling is critical. By spreading work more evenly across the year, firms are looking to give management more time to engage with the model and validation, and to ensure hassle-free regulatory reporting
- Firms are planning to build stronger links between the stress and scenario tests used for model validation and those used elsewhere in the business for risk management. This will avoid doubling up of effort and help firms to share useful ideas across the business
Tom Durkin, LCP partner concluded: “Our survey shows that internal model validation has developed from an unwelcome regulatory ‘box ticking’ exercise to a valuable - if still burdensome - business process. This is good to see, as internal models are most effective when they are driven by business needs, rather than by regulators.
“The capital model should have to fight to justify its existence, and should become a capable servant of the business, rather than a regulatory millstone. And the business, not the regulator, should be providing the key challenge to modelling assumptions and results in the year ahead”.