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CEO FORUM: Gen Re's Tad Montross on model dependency
03 May 2010
Have risk carriers developed a dangerous dependency on models? General Re CEO Tad Montross advises moderation.
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tad montross
Over the past two decades the insurance industry has seen the use of models increase dramatically which creates a new management challenge – understanding and managing all the models. The list is getting long; Catastrophe Models, Risk Based Capital, Dynamic Financial Analysis, Solvency I, Solvency II, ICA’s, Enterprise Risk Models, various Rating Agency Capital Models and Predictive Models. While the intent (to better underwrite and manage risk) is admirable, the complexity of the models introduces a significant challenge.
Understanding the models, particularly their limitations and sensitivity to assumptions, is the new task we face. Many of the banking and financial institution problems and failures over the past decade can be directly tied to model failure or optimistic judgments in the setting of assumptions or the parameterisation of a model.
Insurance is a unique business. It is a business where we sell a product whose true cost is not...
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