Lloyd’s insurers spend about £20 million annually on capital-model governance and validation, but many approach the process as an exercise to satisfy regulators, rather than a value-adding proposition. This could represent a missed opportunity, research by the Lloyd’s Market Association (LMA) has revealed.
A survey of managing agencies’ chief risk officers and senior directors found that many are concerned that the processes of validation testing and results reporting are too complex. Testing priorities are driven by regulatory feedback and previous findings, rather than risk-based planning, the impact on model use, and cyclical validation planning, which could add genuine value.
Less than half of CROs consider validation to have increased confidence in their internal model. When findings are reported internally, board directors may be overcome by enormously detailed reports principally aimed at regulators.
A paper prepared by LMA’s Chief Risk Officers’ Committee, entitled ‘V’ is for value: how do insurers take back validation?concludes that internal model validation should:
- be focused on outcomes rather than the process
- be risk-based and proportionate to the exposure to ‘Model Risk’
- consider the cost-effectiveness of the process
- differentiate effective board governance from regulatory reporting.
Alex Hindson, chair of the LMA CRO Committee and Chief Risk Officer at Argo Group, said: “As a market, we are missing an opportunity. We are spending tens of millions on model validation, but mainly approaching this as a regulatory exercise. We need to communicate better through tailored reporting, decrease repetitive testing in favour of value-added aspects, and encourage regulators to be more consistent in their oversight of internal model validation.”
‘V’ is for value: how do insurers take back validation? Is available to download at: www.lmalloyds.com/vr.
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About the Lloyd’s Market Association (LMA)
Formed in 2001 and located in the heart of the Lloyd’s Building in the City of London, the Lloyd’s Market Association represents the interests of the Lloyd’s underwriting community. All underwriting businesses at Lloyd’s are members, together managing gross premium income of around £30billion per annum.
For more information visit: www.lmalloyds.com.