TY - JOUR
T1 - Why insurance regulators need to require sensitivity settings of internal models for their approval
AU - Borgonovo, Emanuele
AU - Clemente, Gian Paolo
AU - Rabitti, Giovanni
PY - 2024
Y1 - 2024
N2 - According to the Solvency II directive, insurers can use internal models for solvency assessment, but regulators must approve these models. Sensitivity analysis is a crucial part of the approval process. However, the directive lacks clarity on the required sensitivity analysis. Various techniques exist in literature to assess the impact of model assumptions on output, each revealing different aspects of model behaviour. In this letter, we suggest a minimum standard for regulators to ensure model quality. We propose complementary sensitivity settings for internal model development, governance, and approval. Implementing these settings enhances the explainability of approved models and their reliability.
AB - According to the Solvency II directive, insurers can use internal models for solvency assessment, but regulators must approve these models. Sensitivity analysis is a crucial part of the approval process. However, the directive lacks clarity on the required sensitivity analysis. Various techniques exist in literature to assess the impact of model assumptions on output, each revealing different aspects of model behaviour. In this letter, we suggest a minimum standard for regulators to ensure model quality. We propose complementary sensitivity settings for internal model development, governance, and approval. Implementing these settings enhances the explainability of approved models and their reliability.
KW - Explainability
KW - Model governance
KW - Uncertainty and Sensitivity settings
KW - Explainability
KW - Model governance
KW - Uncertainty and Sensitivity settings
UR - http://hdl.handle.net/10807/261635
U2 - 10.1016/j.frl.2023.104859
DO - 10.1016/j.frl.2023.104859
M3 - Article
SN - 1544-6123
VL - 60
SP - 1
EP - 11
JO - Finance Research Letters
JF - Finance Research Letters
ER -