Modelling for insurers and reinsurers  - Page2

How do we get started? 

Companies must ask themselves to what extent they already have the necessary resources and skills and whether they need to buy external help. They have to allocate a budget, assess training needs and ensure that their plans do not conflict with existing in-house projects or systems.
One solution that many players find helpful is to start with a relatively straightforward pilot project. This allows an organisation time to digest all the elements of the process and the issues that arise before rolling it out to the rest of the business. 

What mistakes do we have to watch out for? 

A common mistake is to begin the risk quantification process by constructing or acquiring models that are insufficiently flexible and do not allow for future development. Another is to aim for such a high level of detail that the models are never completed. It is best in the early stages to concentrate on ensuring that the model includes all the risks required to meet the objectives; that it is complete, verifiable and flexible; and that it facilitates an audit trail. 

One particular issue is the relationship between the different risks in the business as this may have a material impact on the outcome and hence decisions made. For example, the larger a catastrophe loss the greater the probability of reinsurer insolvency – a factor that should be reflected in the modelling process in some way. The World Trade Centre catastrophe exposed the tendency of many practitioners to under-estimate how the interdependency between risks can cause aggregate losses to spiral. 

How do we communicate the change? 

Staff, customers and other stakeholders – and maybe your home regulator – must be informed for these changes to work. For example, the process often has implications for the way claims and underwriting data are stored. The whole organisation needs to be made aware of the changes and their consequences. This is not something that can be neatly hived off to one single department. In short, if the process is to work successfully it should influence the culture of the whole organisation.

Taking a positive view
Fortunately, these processes amount to much more than just a series of hurdles designed to keep the regulators at bay. They can profoundly benefit the financial management and strength of an insurance or reinsurance operation, help achieve best use of capital and promote better risk management practices. Rather than thinking of these processes as a problem, insurers and reinsurers that take a positive view will find they bring all kinds of other benefit. 

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