Simpler, but more dynamic capital models are what the insurance industry needs in order to avoid suffering some of the same problems it did during the financial crisis that began in 2008, according to the Willis Economic Capital Forum (WECF), a Georgia-State-University-based initiative from the academic and analysis arm of Willis Group.
Markus Stricker, director of the WECF, said in a statement that “everyone in the industry would be interested in reducing the complexity of models, making things more transparent and thus easier to understand. We ought to have learnt in the years since the financial crisis that our economic capital models need to be more dynamic and more insightful.”
He went on, explaining that looking at economic capital models in a static manner is not very helpful. Instead, he suggests insurers develop models that are simpler, yet still useful and easier to use. Stricker suggests learning from other industries that have such models in place. For example, airplane manufacturers run stress tests to find out how much pressure they can put on a wing before it breaks off, while pharmaceutical companies have a rigorous, structured process they must go through to get a medication validated.
“I think we need a similar set of standard procedures to validate the methods that financial companies use to calculate solvency related key figures,” said Stricker. Currently, standardized processes do not exist for validating economic capital models. It seems insurance companies, regulators and brokers could all benefit from a validation process that is transparent and efficient.
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