Risk and models under Solvency II

(Aug 21, 2011)

Insurers need to have internal models for their major risks. Indeed, both the Individual Capital Assessment (ICA) regime in the UK and the pending Solvency II rules in the EU demand that insurers have good models for their risks.

However, when building a model for mortality or any other kind of risk, you have a number of known issues in the modelling process:

  1. Model risk. You do not actually know what model structure is most appropriate for your portfolio or risk.  This is particularly keenly felt for mortality projections.
  2. Basis risk. Even if you have the correct model, you should be calibrating it using the same population you want to model. However, if you fit a model to the experience from one portfolio, yet use…

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Tags: ICA, Solvency II, model risk, basis risk, concentration risk, model points

A model point

(Nov 28, 2010)

The current issue of The Actuary magazine carries an article on the selection of model points.  Model points were widely used by actuaries in the 1980s and 1990s, when computing power was insufficient to perform complex policy calculations on every policy in a reasonable time-frame.  The idea is to select a much smaller number of sample policies, whose behaviour in aggregate mimics that of the portfolio overall.

There are several ways of selecting policies as model points, or even creating them from scratch: sometimes actuaries would create model points which had no counterpart in the portfolio.  However, computing power has come a long way since the times when model points were necessary.  By way of illustration,…

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Tags: model points, simulation

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