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Risk quantification

5:16 PM | Posted by |
Internal risk and capital models are at the heart of an ERM
framework. The latest draft of the NAIC ORSA Guidance
Manual requires models to meet the highest quality
standards, be appropriately calibrated (“real time”),
and fully tested and documented, as well as subject to
independent scrutiny and validation.
Nearly two thirds of respondents report using an economic
capital measure in addition to the more traditional capital
metrics of statutory capital, GAAP and rating agency
capital. US domestic companies have the lowest take-up
rate of economic capital (51 percent), compared with US
international groups and subsidiaries of overseas groups.
This is likely to be driven by the need for international
groups to comply with other regulatory regimes. Where
economic capital is used, 71 percent have the capability to
project it – a requirement if this is to be used as a RMORSA
metric. Of this group, 41 percent report the ability to do so
over one year, while 55 percent can make projections beyond
three years.
In quantifying risks, market and underwriting risks are
most likely to be stochastically modeled, and 40 percent of
companies reported that they had infrastructure or data
issues that prevented them from following their desired
approach to risk quantification.
39 percent of companies believe their risk aggregation
approach needs improving or is at a low level of
sophistication. However, for US domestic companies,
this increases to 60 percent. This may be a feature of
groups having to address aggregation across entities and
geographies, as well as across risk types. This may result in a
greater focus by groups on this topic and therefore a higher
level of comfort in their approach.
44 percent of companies reported not having a model risk
management framework that includes model validation
requirements. These respondents either have no model
risk management framework, or their requirements do not
include validation.