NEW YORK–Capital models will serve little purpose if they are not embedded in the risk management culture of a company, leading insurance financial experts advised at an industry conference here.
Steven Bensinger, American International Group chief financial officer, said that "any model is only as capable as the risk management program of any company in which it functions."
"If you have an out-of-control company, but with a terrific capital modeling program, I am not sure how good that can be," he said, speaking Friday at the 18th Annual Property Casualty Conference in New York
Today, sophisticated capital models that can simulate thousands of risk scenarios provide a more realistic picture of risk and thus, in theory, help carriers develop a framework to make better decisions regarding capital allocation.
Fitch Ratings managing director Keith Buckley said his company has developed its own capital model that will be used in rating companies. But eventually he would like to see carriers develop their own models within the Fitch parameters that reflect their own unique characteristics.
In judging a carrier's risk and capital management operation, Mr. Buckley likes to interview a variety of underwriting and investment officials–not just the chief risk officer–to see how embedded the carrier's risk management policies are in the culture and how the various officers interact with each other in these matters.
Munich Re chief risk officer Charles Shamieh said he was not sure how much risk management and capital modeling programs would affect the cycles.
"There is evidence that if you have the discipline of a capital modeling program, then in a soft market there could be a technical floor price that will not be breached," he said.
But the downfall could be terms and conditions, which are not easy to calibrate in a capital model.
Mr. Bensinger said effective capital modeling could lead to shorter cycles.
"But all it takes is a few outliers," Mr. Bensinger said.
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