So is there really a case for the in-house ESG model?
Posted on 15-04-2009 | 0 comments
One of our perennial conversations with prospective clients is the buy-vs-build discussion. Solvency II will bring an increased focus on internal models and some will make the mistake that this means they need to build models in-house. Internal in this context refers to the use of models and not where they are built.
Using models internally means understanding them, their limitations and questioning their results, it doesn’t necessarily mean building them from scratch. I am often surprised when managers believe that they should build their own Economic Scenario Generator (ESG) models and software. The expertise to build and maintain ESG modelling solutions are difficult to find and often expensive. I am acutely aware of the operational risks involved in building, maintaining and regularly calibrating an ESG modelling solution - it is the core of my business, has given me a few grey hairs and occasionally kept me awake at night.
Insurance companies have lots of other risks to worry about – and many pay us to manage the operational risk of maintaining a world-class ESG modelling solution – because it’s what we are good at.
I have heard many arguments over the years and in this note consider the pros and cons of building an in-house ESG.
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