Model behaviour: supervisors grapple with internal model approval

With regulators struggling to get comfortable with insurers’ internal models, and with the memory of the subprime crisis still lingering, the question of how to ensure that the models are robust is worrying supervisors. Blake Evans-Pritchard reports

The subprime crisis in 2007 came as a rude awakening to the actuarial profession. Internal models, which hitherto had performed satisfactorily, failed to shield the banks from the very worst of the financial fallout. This was a stark warning to regulators: they had to make sure that this catastrophic meltdown did not happen again. The insurance sector sat up and took notice.

Now, as insurers undergo the process of building and obtaining approval of their internal capital models for Solvency II