普华永道-A-better-approach-to-LDTI-model-validation-PwC_8页_720kb

A Better Approach to LDTI Model Validation Summary

Core Content

The insurance industry is facing significant challenges in meeting the US GAAP Long Duration Targeted Improvement (LDTI) requirements within the current adoption timeline. According to PwC's March 2019 LDTI readiness survey, 60% of companies anticipated more work than expected when the standard was issued in August 2018. Additionally, 91% of respondents expressed a desire for more time to validate model developments and perform dry runs adequately.

To address these challenges, the paper outlines a shift from traditional model validation approaches to a more Agile-based and parallel validation process. This approach aligns with the evolving trends in Model Risk Management (MRM) and is essential for managing LDTI model validations more efficiently.

Main Trends in MRM

In Model Risk Management 2.0, four key trends are identified that are shaping the future of MRM programs:

1. Revisiting the definition of "model" – A broader understanding of what constitutes a model is necessary.
2. Shift to validating new models – Validation should occur concurrently with model development.
3. Coordinating the three lines of defense – Ensuring alignment between different risk management entities.
4. Focusing on cost efficiencies – Reducing the overall cost of validation through improved processes.

LDTI Model Validation Approach

The paper suggests that insurers should move away from a sequential model development and validation process. Instead, a parallel validation process should be adopted, where validation is integrated early in the model development lifecycle. This approach can lead to several benefits:

• Speed: Early and continuous testing helps identify issues before major rework is needed.
• Cost: Planning validation in advance reduces redundant testing efforts.
• Culture: Encourages a cooperative MRM culture by fostering communication and collaboration between developers and validators, while maintaining independence.

An effective LDTI test plan should cover all areas of change, such as:

• Liability of Future Policy Holder Benefits (LFPB)
• Market Risk Benefits (MRB)
• Deferred Acquisition Costs (DAC)
• Presentations and disclosures

The test plan should include testing objectives, procedures, criteria, and pass/fail criteria. It should also be adaptable and iteratively refined as the LDTI solution is developed.

Agile Execution

Given that most insurers are still in the planning or design phase of LDTI implementation, a traditional validation approach that waits for final solutions is not feasible. Instead, an Agile methodology is recommended for both the LDTI build and the validation process.

• Only 13% of respondents have started LDTI build-related activities.
• 52% are in the design phase, and the rest are still in planning.
• Agile allows for early validation planning and iterative refinement of the test plan.

Roles and Responsibilities

Clear roles and responsibilities are essential for the success of an LDTI validation framework. Key groups and their responsibilities include:

It is crucial to define the role of MRM upfront and ensure that the engagement model between teams supports independence and facilitates feedback and development loops.

What Insurers Should Do Now

To develop an effective LDTI validation approach, insurers should:

• Adopt an Agile mindset for LDTI to enable parallel validation.
• Start planning validation early by developing an initial test plan.
• Iterate the test plan as components of the LDTI solution are designed and implemented.
• Establish an effective governance framework that includes all relevant stakeholders.
• Ensure effective feedback loops between implementation and testing teams throughout the process.

By focusing on these areas, insurers can reduce risks, maintain a positive risk management culture, avoid last-minute surprises, and better meet the current adoption timelines.

Conclusion

The paper emphasizes the need for a more integrated and efficient approach to LDTI model validation. By shifting to an Agile and parallel validation model, insurers can enhance their model validation processes, reduce implementation pressures, and ensure the accuracy and reliability of their models. Clear governance, defined roles, and ongoing communication are critical to the success of this transition.