How to use challenger models to decipher your IFRS 17 black box

How the estimated value of shareholders’ interests in long-term insurance business, should be calculated under the new reporting regime.

Christelle Oosthuizen

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Have you implemented your IFRS 17 solution, but question whether all the components are calculated correctly?
Would you like to feel comfortable that your models work as expected and align with IFRS 17 standards?
Do you need to reassure auditors that you have used tried-and-tested methods to validate your models and explain the results?
Do you need help explaining movements from IFRS 4 to IFRS 17 with confidence?

If you have answered yes to any of the above questions, actuarial challenger models may add value to your reporting processes. They offer a proactive approach to model validation by challenging and refining primary model outputs. In this article, we explore how challenger models can enhance accuracy, efficiency, and confidence in decision-making within the life insurance industry.

 

What is a challenger model?

A challenger model can be described as an alternative or independent model used alongside the existing model. It is usually built in a different application and is intended to benchmark performance, or validate and potentially improve upon the existing model’s results.

This practice helps to mitigate the limitations of using a single modelling approach, ultimately leading to more informed decision-making.

 

What is a challenger model?

Using the existing Prophet model structures:

While model validation is essential for ensuring the accuracy and reliability of actuarial models, building challenger models offers additional benefits. Challenger models help to:

  • Identify potential flaws or limitations in a model that might have been overlooked during initial development or validation processes. This helps to mitigate risks associated with relying solely on one model.

  • Provide comfort that the systems are working correctly and can also help to explain the results of an existing model. This is especially relevant since off-the-shelf systems are often black boxes, with the internal workings not being transparent or easily understood from the outside.

  • Better understand the results that a model produces, implying that a challenger model can also be used as a training tool.

  • Encourage innovation by fostering a culture of continuous improvement and experimentation, which leads to the development of more robust and accurate models over time.

  • Provide additional assurance to stakeholders regarding the accuracy and reliability of model outputs. By independently verifying the results produced by the primary model, stakeholders can make more informed decisions regarding pricing, reserving, and risk management strategies.

Challenger models focus specifically on challenging or verifying the results of the model by targeting specific aspects of the model, such as assumptions, parameter estimates, or modelling techniques.

Ultimately, the combination of model validation and challenger modelling contributes to stronger risk management practices and better decision-making within the life insurance industry.

How can ILS help?

Insight Life Solutions has produced several challenger models to assist clients in:

  • Projecting their IFRS 17 Contractual Service Margin, Loss Component and Loss-Recovery Component.

  • Building their IFRS 17 Premium Allocation Approach balance sheet.

  • Checking the pricing and cash flow valuation of various life insurance products.

These challenger models can be used to ensure that the components mentioned above are calculated correctly in your productionised models. We can also develop bespoke challenger models to meet your needs and instil confidence that your results are accurate, auditable, and understood. Our challenger models can be used not only to challenge the results from an existing model but also as primary models for smaller books of business or interim models until a long-term solution is implemented.

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