ERM-130-18: AAA Model Governance Practice Note


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Key Takeaways:

This study note serves to help practitioners better understand models, their risks, and the best practices of establishing an effective model governance structure. It is divided into 9 sections:

  1. Model: What is a model, and what purposes do they serve for organizations?
  2. Model Development: 3 different roles: model developer, model user, and model reviewers, and goes through some high-level steps on developing a model.
  3. Model Governance Policy and Standards: Enterprises (AKA companies) and Professional Bodies both have policies and standards and actuaries may need to abide to both parties.
  4. Model Risk: What is model risk and how is it measured? How to prioritize/rank model risk using different key risk measures (financial, regulatory, data complexity, etc.), and frequency of review?
  5. Model Governance: Roles and responsibilities of an effective governance framework, defines a model steward, pros and cons of a centralized vs. decentralized governance framework, three lines of defense model to help promote a successful governance framework.
  6. Model Processes and Controls: This section goes over some controls actuaries can employ to ensure model inputs, the modeled assumptions themselves, and model outputs and complete, accurate and consistent.
  7. Model Validation: A risk management process serving as an independent assessment of the adequacy of the model. This sections goes into more details on the scope and frequency of performing a model validation, the types of testing procedures employed by actuaries, and the key components of a model validation plan.
  8. Model Documentation: What is included in an effective documentation process, why it is important to have documentation, and what level of detail is appropriate that is audience-specific.