Justify your results

At the recent GIRO conference, Rob Curtis from the FSA drew our attention to the recent consultation paper: CP06/16: Prudential changes for insurers. The part that made me prick up my ears was the following:

The written record of a firm’s individual capital assessment, as carried out in accordance with Sub-Principle 1 submitted by the firm to the FSA must:

  1. in relation to the assessment comparable to a 99.5% probability over a one year timeframe that the value of assets exceeds the value of liabilities, document the reasoning and judgements underlying that assessment and, in particular, justify:
  2. (a) the assumptions used;
    (b) the appropriateness of the methodology used; and
    (c) the results of the assessment.

  3. identify the major differences between that assessment and any other assessments carried out by the firm using a different probability measure.

It’s 1 (c) that caught my attention, of course. I’ve written elsewhere about what you have to do to believe the results of your models: you have to be able to trace the results back to model specification, data and parameters. This means having good audit trails, thorough testing (and records of those tests) and effective version control.

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