A better approach to LDTI model validation
PwC describes how insurers can effectively manage their LDTI model validations.
Overview
The insurance industry is under significant pressure to meet US GAAP Long Duration Target Improvement (LDTI) requirements within the current adoption timeline. In PwC’s 2019 LDTI readiness survey, 60% of participating companies expected more work than they anticipated when the standard was issued in August 2018. Virtually all companies favored a delay of the implementation deadline; 91% of respondents expressed a desire for more time to thoroughly validate model developments and perform adequate dry runs.
There are four trends that we see shaping the future development of model risk management (MRM) programs:
- Revisiting the definition of “model,”
- Shift to validating new models,
- Coordinating the three lines of defense, and
- Focusing on cost efficiencies.
The pressures companies are under to meet LDTI implementation add to the need to revisit their approach to MRM and accelerate the transition into a future state MRM environment. In this paper, we describe how insurers can manage their LDTI model validations to enhance efficiency, reduce pressure on implementation timescales, and provide management confidence in the accuracy of model results and adequacy of surrounding controls.
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