Capital models will serve little purpose if they are not embedded in the risk management culture of a company, leading insurance financial experts warned here.
"Any model is only as capable as the risk management program of any company in which it functions," according to American International Group Chief Financial Officer Steven Bensinger.
"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 at the 18th Annual Executive Conference for the Property-Casualty Industry.
However, today's sophisticated capital models can simulate thousands of risk scenarios and provide a more realistic picture of risk, and thus, in theory, help carriers develop a framework to make better decisions on capital allocation, he noted.
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 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 on 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.
However, he added, the downfall could be in 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."
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