Note on the Use of Internal Models for Risk and Capital Management Purposes by Insurers

This note provides educational material for those responsible for constructing, using and approving the use of models to assess and manage risk and capital within insurance enterprises (insurers). This material is also useful to those who rely upon the information derived from models, as an aid to understanding the derivation, uses and limitations of this information. Internal models are primarily relied upon by boards of directors and senior management for strategic planning, regular monitoring of risk and managing an insurer’s corporate capital. Internal models are also coming into use for determining regulatory required capital, usually subject to supervisory approval based upon satisfaction of specific conditions required by the supervisor.