Why insurance regulators need to require sensitivity settings of internal models for their approval

Emanuele Borgonovo, Gian Paolo Clemente and Giovanni Rabitti

Finance Research Letters, 2024, vol. 60, issue C

Abstract: According to the Solvency II directive, insurers can use internal models for solvency assessment, but regulators must approve these models. Sensitivity analysis is a crucial part of the approval process. However, the directive lacks clarity on the required sensitivity analysis. Various techniques exist in literature to assess the impact of model assumptions on output, each revealing different aspects of model behaviour. In this letter, we suggest a minimum standard for regulators to ensure model quality. We propose complementary sensitivity settings for internal model development, governance, and approval. Implementing these settings enhances the explainability of approved models and their reliability.

Keywords: Model governance; Explainability; Uncertainty and Sensitivity settings (search for similar items in EconPapers)
JEL-codes: C15 C63 C67 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:60:y:2024:i:c:s154461232301231x

DOI: 10.1016/j.frl.2023.104859

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