Searching Guidelines for the Use of Internal Models in Insurance Company’s Risk and Capital Management

Abstract

In this paper, we explore critical aspects related to the use and development of internal models in insurance companies’ risk and capital management. Our aim is to find out how crucial the various risk factors of internal models are for successful performance of essential management sub-tasks. The problem is approached hierarchically starting from relevant management sub-tasks, then analyzing the possible causes for the failure of the firm, and finally ending up with an analysis of the most important risk components which have to be taken into account when internal models are used and developed. As source information for causal and risk factors, we use a cause effect model of the European insurance supervisors and an international insurance survey. The problem is formulated as a multiple criteria decision making task with a hierarchical structure. We use the Analytical Hierarchy Process as a planning tool to analyze management criteria, causal and risk factors. The evaluation is carried out by a panel consisting of senior managers of Finnish insurance companies. As a result, we obtain a list and rank order of the key risk components for the use and development of internal models. The results also illustrate the potential usefulness of decision science tools when making subjective decisions in the context of internal models.

Vakuutusyhtiöille tullaan tarjoamaan Solvenssi II:ssa mahdollisuus käyttää yhtiön omaa ns. sisäistä mallia pääomavaatimusten määräämisessä. Tässä tutkimuksessa tarkastellaan sisäisten mallien käytön ja kehittämisen asettamia vaatimuksia yhtiön johtamiselle operaatiotutkimuksen menetelmiä soveltaen. Erityisesti tuodaan esille pienen maan näkökulma. Tavoitteena on tarjota tietoa päätöksenteon pohjaksi sekä Euroopan vakuutusvalvojien yhteisölle että yksittäisille yhtiöille.