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Many insurers are in the midst of their internal model development with risk professionals and actuaries engaged in risk calibration and risk modelling, two highly technical areas. The Solvency II framework, in particular article 120, places ultimate responsibility for the appropriateness of internal model design on senior management and the supervisory board of insurers.
It is therefore imperative that risk professionals are able to engage and clearly communicate the rationale behind their calibrations to company management and the supervisory board, whose background may be predominantly non-technical.
In this edition, Deloitte aims to de-mystify the art of risk modelling. They present a risk-modelling framework that, in addition to being quantitatively robust, is a tool capable of consistently delivering and communicating risk calibration concepts to senior management, minimising the risk of misinterpretation.
They also demonstrate how this framework will capture the decisions taken during the calibration process, including its limitations and weaknesses. As a result, insurers will be able to engage senior management better in this process, allowing them to make better-informed decisions in risk modelling, an area with significant capital implications.