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Publications Nov 2015

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Systemic Risk of Modelling in Insurance: Did your model tell you all models are wrong?


The purpose of this white paper is to help the readers understand the systemic risk associated with modelling practices within the insurance industry. The term 'systemic risk' is often used when describing the Global Financial Crisis of 2007-2008. The catalyst for this financial meltdown was the bursting of the US housing bubble which peaked in 2004, causing the value of securities tied to the US housing market to plummet and damage financial institutions on a global scale. Core to the magnitude of the losses experienced by these events was the modelling assumptions upon which these securities were valued, the extent to which these assumptions were applied across markets and the sensitivity of these assets’ values to those assumptions – assumptions that turned out to be unreliable. These modelling shortcomings took a systemic nature because the whole mortgage-backed industry was using more or less the same models, as they had been “institutionalised” by credit rating agencies. When the model assumptions began to fail the economic effects further amplified the model failure and losses.

This paper is specifically focused on the practical understanding of Systemic Risk of Modelling and development of practical solutions for managing such risk within the insurance industry

Oxford Martin School

Oxford Martin School