28 June 2012
Time is of the essence for those firms in the insurance industry needing to obtain independent verification of their internal models ahead of Solvency II implementation.
David Edison, Head of Moore Stephens’ actuarial team, says: “Building and implementing a robust internal model is just one part of the challenge facing the insurance industry under the FSA’s Internal Model Approval Process (IMAP). Obtaining independent validation of the model is quite another. With Solvency II due to enter into force on 1 January 2014 time is of the essence.
“Independent validation sits at the heart of the model approval process. Validation applies to all aspects of the model, including the modelling process, statistical and data issues and the governance process around it. It is a broad concept not just focusing on the calculation kernel but encompassing both the quantitative and qualitative aspects. Moreover, it is not a one-off requirement. The FSA, together with other regulators, requires that internal models be reviewed on an ongoing basis, to take account of changes after initial validation.
“Validation is a bespoke undertaking. Requirements will vary from firm to firm, depending on volume and complexity of business, among other things. Validation cannot be carried out overnight. Nor can it be undertaken by those who have been involved in building and developing a firm’s model. Many firms lack personnel with the technical expertise to carry out validation and who fall within acceptable independence parameters, especially the scarce actuarial resource facing today’s insurance industry.
“Internal model verification must be seen as an asset, not an imposition. It is not simply a question of meeting regulatory requirements. It is also about maximising commercial efficiency and maintaining a competitive edge.”
For further information contact David Edison.