Making model risk management more cost effective

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Overview

In our previous report, Model risk management comes of age, we explored on the rapid growth of model risk management in the insurance sector, especially at large and medium sized insurers. We proposed that the industry had gained sufficient experience to move from start-up mode to implementing ideas that better operationalize MRM programs.

In this paper, we explore in more detail some of those ideas, particularly those that can improve cost effectiveness.

Cost efficiency opportunities

Insurers looking to improve the cost efficiency of their model risk management program should consider the following opportunities:

  1. Develop and clearly document the allocation of model risk management responsibilities, especially between model owners/developers and the model risk management department. Prioritize the importance of independence and the need to eliminate avoidable duplication.
  2. Review the model risk scoring process. Place proper emphasis on damage to the enterprise when assessing failure severity, and not just for models that generate big numbers. In addition, utilize other learnings and available industry advances to improve failure likelihood scoring too.
  3. Make better use of the information contained in the model inventory to develop a clearer picture of model connectivity, including upstream and downstream connections and error patterns across similar models. Alternatively, develop a better inventory process if this information is not currently available.

How PwC can help

Our insurance risk and capital management practice advises insurers on assessing, monitoring and managing risks from all sources. Multi-disciplinary teams provide comprehensive services in all key risk areas:

PwC’s professionals also address risk management framework components, including strategy, governance and organization, measurement and analytics, reporting, and systems and data infrastructure.

Contact us

Henry Essert

Insurance Risk & Regulatory Services Leader, PwC US

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