The Model Ajar: Building Rationality Infrastructures Within Insurance Organizations

Abstract

Internal capital models are increasingly used across the insurance business, including reinsurance optimization, risk appetite and business planning. While this expansion is well documented, less is known about what modelers do in practice, in order to embed capital models within their organisations. To address this question, we interviewed 31 insurance practitioners; primarily modelers, but also underwriters and board members – working in London Market insurance firms, as well as regulators. We found that modelers facilitate the embedding of the internal model in two ways: they keep the model ajar, by selectively ‘opening’ it to stakeholders; and they create a model that is flexible enough to be consistent with multiple conceptions of uncertainty.