Market consistent valuation will continue to drive the calculation of liabilities under Solvency II. As Solvency II continues to develop, it will be important for firms to recognise previously neglected risks like volatility risk and the residual risks (e.g. counterparty risk, gamma risk) that arise from hedging exercises. My expertise in this area will become more valuable over time.
At the FSA/PRA (2010-13), as co-leader of the market risk specialism, I led the team through the development of an approach to reviewing market risk modules within Solvency II internal models. This included leading discussions with the managers on the appropriateness of our recommended approaches.
At the FCA I put forward a straw man proposal on what the FCA expected to see within an ORSA. I also saw the first attempts at ORSAs by a number of firms, so have seen lots of examples of good and bad practice.
During my contract at Pension Insurance Corporation (late 2015):
• I made changes to the counterparty risk module within the firm’s internal model.
• I documented the data feeds into the counterparty risk module.
• I investigated the potential impact of reinsurer defaults on the firm (which included the impact of changes to the risk profile from recapturing longevity risks). I documented my work and conclusions and the resulting report was included in the firm’s ORSA.
• I explored the potential sampling errors that could result from calculating the SCR stochastically and how this would change if the number of runs was increased.
From April to November 2016 I helped Admin Re to design and build an internal model for Solvency II. I designed and documented models for equity, gilt yield, swap spread, credit spread, default/migration and lapse risks. In all cases I tested the resulting probability distributions and benchmarked them against those of other firms.
From January to July 2017 I helped Legal & General Retirement to understand the impact on their capital requirements of changes to the migration and default methodology within their internal model. This involved a deep dive into the mechanics of the model.
While contracting with Canada Life (July 2017 to May 2018) I documented the data, assumptions & internal model methodology for credit risks associated with the firm’s mortgage portfolio.