Insurers must work with regulators to develop risk models

The key to developing risk models for risk-based regulation of insurance companies is for insurers to work closely with financial supervisors to ensure their approval, professional services firm KPMG partner Jane Leach told an insurance solvency conference in London today.

Leach claimed this is one of the main lessons insurers could learn from the risk-based Basel II bank capital adequacy proposals developed for major banks by the Basel Committee on Banking Supervision, the body that in effect regulates international banking.

The European Commission’s Solvency II rules for insurance companies are developing along similar lines to Basel II, she told the conference, organised by KPMG. The Solvency II project is targeted to reform existing insurance solvency rules in the 15-nation European Union.

Leach said it would be fruitless for a company to develop a model of the business risks it faced, only to find regulators were not satisfied with it.

She said the Basel experience showed models required four main features to gain regulator recognition: a quantified measure of risk, objective parameters, independent back-testing and should be integral to a company's risk management process.

Insurance firms generally face significant diversity and complexity of risks. But Leach said experience with the banking sector showed there is benefit in setting protective standards that encourage improved risk management within a firm.