The knowledge and experience of actuaries starting out in capital modelling in 2020 are very different to the those who built the early capital models.

This leads to a critical question for all capital modelling teams – how do you build the right skills to be really good capital modeller?

Is it all about technical ability? Or knowledge of the wider insurance market and the key insurance business functions? Or previous modelling experience? 

At our recent round table event, Heads of Capital identified three gaps in experience that are often observed in capital teams today:

• Building a model from first principles
• Redeveloping key parts of a model
• Adjusting a model for a new use

Having worked in capital modelling for nearly twenty years now, I’m lucky to have deep experience in all three of these areas, which I have found so valuable to developing my overall capital modelling knowledge.

The Solvency II requirements around internal models now means that the decision to rebuild or redevelop is a much bigger and more onerous decision than it was in the past. As a result, there are fewer opportunities for capital teams to get this kind of experience. In addition, standard approaches within modelling platforms have become more commonplace. If new capital modellers only see one approach to an area then it is easy to become anchored to that approach, making it is harder to come up with new approaches, or even spot when one might be required. 

So how else can you build equivalent skills? Unpicking the underlying experiences from those gaps lead me to a couple of ways to achieve them …

Developing new ideas

Standard approaches to capital modelling often mean that modellers miss out on the process of generating ideas, having them challenged and refining them. This means that when a new approach is required, modellers often underestimate the effort that this involved in the process, as well as the importance of spending time on the fundamental structure. This can lead to under-delivering on model change, increasing reluctance to make further changes and stifling future development.

To avoid this pitfall, develop the ability to be flexible and to take on feedback. To be able to do that you need to ensure you have a deep understanding of both the issue you are trying to model and the strengths and weaknesses of the approach you are proposing. It is this understanding that has helped me grow as a capital modeller.

Working with others

Getting good feedback requires collaborating with people from a variety of backgrounds and being open to the insights from their specialisms. This taught me to be inquisitive, to clarify the objectives of what I was trying to do, and to focus on what really achieves those aims. This provides opportunities to challenge long standing assumptions, refine existing approaches and develop new ones. 

For example, one of the people I learned the most about capital modelling from was a software developer. They taught me concepts that reinforced lessons I was starting to learn, such as the importance of symmetry and the cost of building flexibility into models. It was also useful to know that programs also need periodic rewriting to simplify and streamline them. In programming this is known as “refactoring”, a term I have borrowed for capital modelling. The discovery that a different field has spent a long time on an issue you are now addressing is a great opportunity to see which of their approaches might be relevant for your current project.

My tips for today’s capital modellers. There are a few tips I would offer:

• Know what you don’t know – seek out opportunities to plug any knowledge gaps you may be aware of.
• Stay curious – find out about other modelling approaches, whether used in capital or not. Stochastic reserving, pricing, operational risk and finance models are all good starting points.
• Diversity in disciplines – when you get the opportunity to chat with experts in other fields - use it. Engineers, scientists and software professionals are a good starting point. Try to find an area of common ground and discuss different ways to approach an issue.
• Know the main challenges – know the key issues that would make a significant impact in your field and understand why they have proved difficult. Then when you get an opportunity to discuss an issue you can make the most of it.

I’d be really keen to hear others’ views on what makes a good capital modeller, others’ experiences of where they have learned the most, and tips on how we can continue to improve our skills in the current modelling environment.