Our Prime Re Solutions colleague Michel Dacorogna presented this topic in the ASTIN Three-Part Series.
With the implementation of risk-based solvency regulations like Solvency 2 or the Swiss Solvency Test, internal models play a crucial role in determining the solvency capital requirement of an insurance company. Already before this, reinsurances and big insurance groups have been using internal models to effectively manage their economic capital. Internal models must capture the main risks of the company and for this need to follow certain principles.
In this presentation, we define what is an internal model and recall the historical developments of risk models in actuarial science. Then we describe their main components, the calibration and the use of its results. We show the key principles of a good internal model and discuss the way to validate its results. We will insist on the importance of embedding the model in the business processes of the company and show with the concrete example of a large reinsurer a possible way to do it.
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