EAA Summer Seminar Model Development July 7 th 9 th, 2010 Utrecht / The Netherlands

Transcription

1 EAA Summer Seminar Model Development July 7 th 9 th, 2010 Utrecht / The Netherlands organised by the European Actuarial Academy EAA in co-operation with the Dutch Actuarial Association 1. Introduction As an actuary you daily apply methods and models. Data is being analysed, interpreted and a conclusion on the risks will follow. But the financial crisis has revealed the wide gap between mathematical models of risk and the reality of uncertainty. Too many people were good at math but ignorant of history wrote David Brooks in the New York Times. As actuaries try to quantify the risk in their reserves, we must not make the same mistake. In this seminar we will take a look at model development in broad perspective. The broad perspective means that also topics as guidance, risks in development, ERM and negotiation and presentation skills will be part of this Summer School. Essentially, all models are wrong, but some are useful 1. Just how useful to the solvency and sound management of the business is the crux of whether supervisors are likely to approve an internal capital model under Solvency II. In particular, rather than coming up with reams of extraneous technical detail about the operation of the model, applicants first need to be able to 1 Attributed to statistical model pioneer, Professor George E.P. Box

2 prove that the model analysis is actually understood, trusted and used in the running of the business. The IMAP timetable of the UK Financial Services Authority (FSA) and also the internal model approval timetable of other European Supervisory boards, like the Dutch DNB and the German BaFin, set out the key preparatory steps leading up to application. For those seeking approval ready for Solvency II implementation in 2012, this breaks down into work across three business cycles: the first cycle up to October 2010 will be characterised by generic feedback from the FSA such as thematic reviews; The second cycle, up to October 2011, covers specific dry runs; and the third cycle encompasses submission and review, and, in most cases, this will extend beyond There is growing acceptance that most model approval is initially likely to be partial as many firms seek more time to overcome difficulties that may preclude a full model IMAP. A key first step is therefore to judge what risks or product lines may need to be excluded and which to concentrate on in the first round. It is equally important to ensure that these priority areas are not pursued in isolation from the rest of the business as applicants will be expected to show supervisors how a partial model will fit into the overall governance, solvency assessment and decision-making of the business, as well as develop a longer term plan to either remain on a partial basis or extend the model and its governance. In looking at the timings, it is also important to bear in mind that the IMAP process is likely to stretch the resources of the FSA and other EU supervisors, so those that allow their preparations to slip could find themselves at the back of a lengthening queue for initial acceptance, review and approval. Smaller firms could be at particular risk of losing out as supervisors may begin to prioritise larger and more complex entities as their in-trays fill up. For internal model approval for supervisory purposes the model should fulfil with the following tests for model approval: 1. Use Test: Senior management needs to understand,and consider the risk and capital evaluations from the internal model as a core driver in its business planning and strategic decision-making processes; 2. Statistical Quality (Data): Evaluations need to be based on timely, reliable, consistent and comprehensive risk data and be underpinned by current, credible and verifiable risk assumptions; 3. Calibration: Outputs need to be calibrated to a 99.5% value at risk (VAR) over a oneyear period; 4. Profit and Loss Attribution: Companies need to regularly check whether the categorisation of risk and attribution of profit/loss in their models accurately reflects the causes and sources of profit/loss within business units; 5. Validation: Evaluations and underlying assumptions need to be regularly sensechecked against actual experience. Companies also need to gauge the sensitivity of outputs to changes in key assumptions; 6. Documentation: Companies need to keep written and regularly updated records covering the design, operation, mathematical basis and underlying assumptions of their model; 7. Model Governance: Not an official test, however supervisors have emphasised its importance; the internal model may only be approved if the insurer has adequate governance and internal controls in place; 8. External Models and Data: The tests specified apply also to data or models supplied by a third party.

3 Next to acceptance of the model by the supervisory authority it is even more important to get the model accepted within the company. For internal acceptance of the model within other functions than the actuarial function it is important to have: 1. Management buy-in 2. A well defined risk appetite 3. An aligned finance and risk function 4. Integrated risk and capital management a. Active capital management b. Embedded risk management c. Forward looking evaluation and shaping of risk profile d. Coherent risk appetite framework cascaded through the organisation e. Skilled and capable staff f. Ongoing awareness programme 5. Predictive model a. Calibrated to real life b. Documented and validated periodically c. Augmented by periodic stress and scenario analysis d. Reliable data 6. Robust control environment a. Evidencing operation of internal control system b. Outsourcing arrangements c. Business continuity planning, including reverse stress tests d. Functioning IT systems Besides this also good communication and an environment that is open for changes is very important. In this course all of the aspects as mentioned above will be discussed. Next to that it will be possible to practice with presenting results to management. 2. Participants Actuaries working in West and Eastern Europe are invited to attend the seminar. 3. Purpose and Nature To learn about model development in conjunction with getting your models accepted within the company. 4. Lecturers Dr. Estelle Jonkergouw Estelle recently joined Eureko / Achmea to establish a new Financial Risk unit within the Group Risk Management department. This unit will be responsible for managing, at group level, all financial risks including amongst other market, credit, liquidity and strategic risk. Before joining Eureko, Estelle was senior vice president at Rabobank Nederland. She is known for her expertise in risk modelling, risk management and the BISII capital adequacy framework for financial institutions. In this regard she also delivers presentations and workshops at national and international conferences. Within Rabobank she established a new risk modelling unit on group level which is responsible for the validation and review of risk models developed within the bank as

4 to comply with BISII regulation and the internal ICAAP. In this capacity she also implemented a firm-wide governance framework for risk models across the full model cycle. Previously she was an assistant professor in Statistics and Econometrics at the University of Pretoria in South Africa, from which she also holds a PhD in Econometrics. drs. Jan-Huug Lobregt AAG Jan-Huug is an actuary based in PwC Amsterdam. He has more than 14 years experience working in the insurance field, specifically in the areas of Economic Capital Management, Risk management, IFRS and Solvency II. Jan-Huug s experience includes specifically working with Economic Capital, risk management and actuarial compliance projects. He has worked on risk appetite implementation for a large insurance company, Solvency II Gap analysis and IFRS implementation. He has also been involved in several Sox Compliance projects. Next to that he has been involved with the implementation of Economic capital models. Rob van Meurs Rob van Meurs studied Psychology and Change Management. From 1987 he worked at the Ministry of Justice and at several Consultancies as a coach, management consultant and manager. He is one of the owners of A&O groep and a member of the Dutch Council of Management Consulting. He works with Actuary students from 1995 until now at themes as consulting, negotiating, speaking in public and leadership. 5. Language The language of the Summer Seminar will be English. 6. Preliminary Programme Wednesday, 7 th July Departure bus to AG&AI Registration Introduction & welcome and opening of day Model development: (Lobregt) - PWC-case - Guidance - Risks - Communications in actuarial business Lunch Model development in the light of ERM (Jonkergouw) Workshop: model development and risk management (Jonkergouw) Bus transfer, approx (Formal) Dinner Thursday, 8 th July Departure bus to AG&AI Negotiation with the board (van Meurs) Coffee Break Workshop (van Meurs) Lunch

5 Workshop: presentation (van Meurs) Coffee Break Working on model-development case (van Meurs) Bus transfer, approx Social Event Friday, 9 th July Departure bus to AG&AI Preparation presentation (Lobregt/van Meurs) Coffee Break Presentations Wrap-up and evaluation (Lobregt/van Meurs) :00 concluding remarks, closing of seminar (Lobregt/van Meurs) Lunch Bus transfer to station 7. Fees & Registration Please register for the seminar as soon as possible because of the expected demand. We recommend registration until 7 th May If there are more persons interested in this seminar than places available we will give priority to the registrations having been first to arrive. Please send your registration as soon as possible by using our online registration form at Your registration is binding. Cancellation is only possibly up to 4 weeks before the first day of seminar. If you cancel at a later date, the full seminar fee is due. You may appoint someone who takes your place, but must notify us in advance. EAA has the right to cancel the event if the minimum number of participants is not reached. Please always give your invoice number when you effect payment. Bank charges are to be borne by the participant. We will send you an invoice, please allow a few days for handling. Your early-bird registration fee is until 24 th May 2010 the latest. After this date the fee will be Accommodation / Place of Seminar The seminar will take place at the office of AG&AI in Utrecht, Groenewoudsedijk 80, 3528 BK Utrecht, the Netherlands. We have arranged special prices for accommodation in the NH Hotel in Utrecht (NH Utrecht). There will be a bus transfer between the hotel and the AG&Ai office. The costs for hotel accommodation are not included. You can book a hotel room directly at: NH Hotel Utrecht, Jaarbeursplein 24, 3521AR Utrecht (Netherlands) Tel Fax: nhutrecht@nh-hotels.com

6 A single room costs 105 per night, a double room costs 115 per night, including breakfast. This price is valid for bookings out of our allotment EAA Seminar up to 4 weeks before the seminar. Please book your accommodation directly with the hotel and note the hotel s cancellation policy. The number of rooms is limited. When you reserve the room please mention the reservation number: Accreditation for CPD Points For this seminar, the following CPD points or hours are granted by the individual actuarial associations: Austria: 15 points Bulgaria: 12 points Croatia: 15 hours Germany: 15 hours Hungary: 15 hours Netherlands: approx. 14 PE-points (individual accreditation) Russia: 40 points Switzerland: 20 points No responsibility is taken for the correctness of this information.