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How is your capital model validation responding to insurance industry megatrends?

Insurance AI Climate change Population 2050

Megatrends are themes like AI, climate and geopolitical risk, that underpin changes in the insurance landscape as well as society as a whole. They are broader than normal risks and can touch on every aspect of our work, presenting both new challenges and opportunities.

We already know that climate change is a deep dive area for capital modelling this year, and a focus for many firms and regulators. We expect many of the other megatrends to receive similar focus in due course!

We recommend that insurers have a clear validation plan for the year, including agreed deep dive areas. To prepare for this, the following questions provide a helpful framework to assess how well these trends are reflected in your modelling.

This then also provides a platform to help prioritise further investigation, analysis and review.

Step 1: Start with a qualitative view

  • For each existing risk (eg, insurance, operational, investment, credit etc.), what are key potential drivers for change?
  • Where do these risks have common drivers, and what could this mean for dependencies between risks?
  • Where is there greatest uncertainty?

Step 2: Understand the existing assumptions

  • What explicit and implicit adjustments are already being made?
  • What assumptions are made elsewhere across the firm?
  • Are the approaches aligned or contradictory?
  • What potential drivers from step 1 are not yet captured?

Step 3. Targeted stress and scenario testing

  • What relevant scenario testing already exists within the ORSA, exposure management and validation programmes?
  • Do these consider all material drivers from step 1?
  • If not, how should you prioritise further testing?
  • Do they reflect views from across the firm?
  • How frequently are/should they be updated?

If you would like more ideas for how to manage key insurance megatrends, our latest "Risk function of the future" report drills into these in more detail, based on input from over 50 CROs, senior risk managers and board members from insurers of all shapes and sizes.