Skip to main content
The Actuary: The magazine of the Institute and Faculty of Actuaries - return to the homepage Logo of The Actuary website
  • Search
  • Visit The Actuary Magazine on Facebook
  • Visit The Actuary Magazine on LinkedIn
  • Visit @TheActuaryMag on Twitter
Visit the website of the Institute and Faculty of Actuaries Logo of the Institute and Faculty of Actuaries

Main navigation

  • News
  • Features
    • General Features
    • Interviews
    • Students
    • Opinion
  • Topics
  • Knowledge
    • Business Skills
    • Careers
    • Events
    • Predictions by The Actuary
    • Whitepapers
    • Moody's - Climate Risk Insurers series
    • Webinars
    • Podcasts
  • Jobs
  • IFoA
    • CEO Comment
    • IFoA News
    • People & Social News
    • President Comment
  • Archive
Quick links:
  • Home
  • The Actuary Issues
  • December 2011
12

Insurers seek outside help on internal model market risk

Open-access content Thursday 15th December 2011 — updated 5.13pm, Wednesday 29th April 2020

Two-thirds of insurers intend to use independent experts to validate market risk assumptions in internal models, according to a survey from Towers Watson...

2

The firm says the rapid economic meltdown in 2008 and the current European debt crisis highlight the risk of unquestioningly relying on historic data when forecasting future economic conditions.

The research found that almost half of insurance companies surveyed (44%) expect the number of developed market sovereign defaults to significantly increase in the next 50 years, although just over one-quarter (28%) prioritise current market conditions over historic data in their risk assumptions.

Neil Chapman, director at Towers Watson's Risk Consulting and Software business, said: "Solvency II will raise the supervisory bar far beyond current ICA requirements with much greater emphasis being placed on data analysis and expert judgement. What makes this particularly important is that for many insurers market risk is the dominant driver and most manageable lever for capital requirements and real economic outcomes."

Alasdair MacDonald, head of investment strategy at Towers Watson, said: "Historic data is only one pillar for market risk model calibration and assumption setting with good judgment also being essential. The current Eurozone crisis is a good example of the dangers of "naive" data analysis without expert judgment.

"Prior to the current crisis some dismissed data prior to the creation of the Euro as not being relevant. This resulted in calibrations predicting very tight ranges for Eurozone sovereign debt yields. The fallacy of such an assumption is now clear to all."

According to other Towers Watson research, the ratings of developed world sovereign debt are expected to decrease over the next 30 years as the full gravity of the imbalances between developed (debtor) and developing (surplus) countries are recognised and reflected in investors' assessment of their relative creditworthiness.

The firm believes that a key element in raising calibration standards is the wider use of internal models in decision making. This is reflected in supervisory approval criteria that focus on statistical quality, documentation and validation. In meeting these criteria, Towers Watson found that companies face a number of challenges, including: resources with the right skills and experience; achieving operationally independent validation; and meeting uncertain Financial Services Authority timeframes and requirements.

Mr MacDonald continued: "Company actuaries are experts in insurance risk, but not necessarily market risk, and have to date made limited use of the expertise of investment professionals.

"The competitive and regulatory impetus of Solvency II signals a fundamental change in the role of investment diversity and complexity in insurers' portfolios; and with it an irrepressible shift for market risk calibration: from cottage industry to game changing paradigm."

This article appeared in our December 2011 issue of The Actuary.
Click here to view this issue
Filed in
12
Topics
Regulation Standards

You might also like...

Share
  • Twitter
  • Facebook
  • Linked in
  • Mail
  • Print

Latest Jobs

Pensions Actuarial Analyst

London, Midlands, Scotland
£Market Competitive
Reference
143788

Senior Manager/Director level roles - Life insurance

Stirling
Generous salary with excellent bonus and benefits
Reference
143787

Reinsurance Pricing Actuary

London (Central)
£60-90K depending on experience
Reference
143786
See all jobs »
 
 

Today's top reads

 
 

Sign up to our newsletter

News, jobs and updates

Sign up

Subscribe to The Actuary

Receive the print edition straight to your door

Subscribe
Spread-iPad-slantB-june.png

Topics

  • Data Science
  • Investment
  • Risk & ERM
  • Pensions
  • Environment
  • Soft skills
  • General Insurance
  • Regulation Standards
  • Health care
  • Technology
  • Reinsurance
  • Global
  • Life insurance
​
FOLLOW US
The Actuary on LinkedIn
@TheActuaryMag on Twitter
Facebook: The Actuary Magazine
CONTACT US
The Actuary
Tel: (+44) 020 7880 6200
​

IFoA

About IFoA
Become an actuary
IFoA Events
About membership

Information

Privacy Policy
Terms & Conditions
Cookie Policy
Think Green

Get in touch

Contact us
Advertise with us
Subscribe to The Actuary Magazine
Contribute

The Actuary Jobs

Actuarial job search
Pensions jobs
General insurance jobs
Solvency II jobs

© 2023 The Actuary. The Actuary is published on behalf of the Institute and Faculty of Actuaries by Redactive Publishing Limited. All rights reserved. Reproduction of any part is not allowed without written permission.

Redactive Media Group Ltd, 71-75 Shelton Street, London WC2H 9JQ