The processes of Lloyd’s insurers’ capital-model governance validation testing and results reporting are overly congested and driven by regulatory feedback rather than standards of measurement that could add genuine value to firms, according to recent research by the Lloyd’s Market Association (LMA).
A survey of managing agencies’ chief risk officers and senior directors found that many are concerned that the processes of validation testing and results reporting are too complex.
Alex Hindson, chair of the LMA CRO Committee and Chief Risk Officer at Argo Group, said; “As a market, we are missing an opportunity. We are spending tens of millions on model validation, but mainly approaching this as a regulatory exercise.
“We need to communicate better through tailored reporting, decrease repetitive testing in favour of value-added aspects, and encourage regulators to be more consistent in their oversight of internal model validation.”
The $26 million a year Lloyd’s insurers spend on ensuring capital governance is up to par goes largely amiss when treated as an exercise in satisfying regulators – rather than a value-adding business process, said the CRO survey.
Measurements that would add genuine value, LMA argued, include “risk-based planning, the impact on model use, and cyclical validation planning.”
Less than half of CROs surveyed consider validation to have increased confidence in their internal model.
When findings are reported internally, board directors may be overcome by enormously detailed reports principally aimed at regulators, the survey found.
The paper concluded that internal model validation should be “focused on outcomes rather than the process be risk-based and proportionate to the exposure to ‘Model Risk’ consider the cost-effectiveness of the process differentiate effective board governance from regulatory reporting.”
