General Insurance Article - S & P reviews European insurers' economic capital models

 Standard & Poor's Ratings Services has published an article evaluating the economic capital models (ECMs) used by European insurers ("A Review Of Europe's Economic Capital Models For Insurance: What' Differentiating The Good >From The Basic?"). The rating agency comments "Certain European insurers with "strong" or "excellent" enterprise risk management (ERM), as defined under our criteria, have chosen to provide Standard & Poor's Ratings Services with additional information to enable us to review their ECMs in some depth. We also obtain information on ECMs during our regular rating and ERM discussions with rated insurers.

 Of the models that we have reviewed so far, all are either "basic" or "good"-none are "superior" according to our criteria. Most models have, in our view, "good" modelling frameworks and platforms, "good" model governance, and "good" modelling for the insurer's largest risks. In our view, the differences between good and basic models lie in the modelling of diversification, fungibility of capital, and long-term options and guarantees.We have also observed that insurers are facing challenges in the use of replicating portfolios; the calibration of extreme risks; obtaining extensive, independent validation; and the justification of the expert judgment used in all model calibrations."