CEIOPS Reference: 10.29
The use of External models and data increases an undertaking's dependence on third parties (service providers), which may increase or at least could change the risk profile of the undertaking. Some of the risks related to the outsourcing activity include:
Strategic risk (For example, failure to implement appropriate oversight of the service provider, inadequate expertise to oversee the service provider, intellectual black box),
Reputational risk (For example, poor service from the service provider, service provider practices not in line
with practice of the undertaking),
Compliance risk (For example, service provider not adequately complied with standards and practices,
inadequate compliance systems and controls by the service provider),
Operational risk (For example, technology failure, fraud or error, risk that undertakings find it difficult or
costly to undertake reviews of the service provider, the service provider might fail to perform),
Exit-strategy risk (For example, the risk that appropriate exit strategies are not in place, over-reliance on the
service provider, the loss of relevant skills in the undertaking itself preventing it from bringing the activity back in-house, contracts which make a speedy exit prohibitively expensive, limited ability to return to an in- house approach due to lack of staff or loss of intellectual history),
Contractual risk (For example, the ability to enforce contract, settlement of disputes),
Access risk (For example, the outsourcing arrangement hinders ability of regulated entity to provide timely
data and other information to regulators, additional layer of difficulty in regulator understanding activities of the service provider) and
Concentration and Systematic risk (For example, the overall insurance industry has significant exposure to a
small set of service providers and systematic risk to the insurance industry as a whole.)
The comment on concentration and systematic risk could be applied to an ESG supplier such as Barrie & Hibbert. We would like to respond to the comment. We presume the text means "systemic" when it refers to "systematic".
We believe external model suppliers bring considerable benefits to insurance groups in terms of cost, efficiency and operational risk (particularly in reducing key-man risk in highly technical areas). Economies of scale allow many clients to benefit from investment by external model providers in people, intellectual property and technology. Typically external suppliers offer modelling solutions at a fraction of the cost of firms building and maintaining models and software in-house. Any systemic exposure must be compared to this benefit.
The delivery of models and related tools and assumptions for economic scenario generation is the core activity of our (Barrie & Hibbert) business. We take this responsibility very seriously. We believe that our strong market position in the delivery of ESG model software is simply the result of the quality and cost effectiveness of our products and services. There are no inherent barriers to entry of competitors to this business.
In response to the question: “Is there a systematic risk if all companies are using the same model?” we have a number of comments (see footnote1):
Our clients do not use models blindly. Firms validate key assumptions and outputs and use their own judgment to make critical choices of individual model components and model parameters. Users are able to concentrate their limited technical resources on how they use the model rather than the major challenges of designing, building, documenting and maintaining complex software and related hardware solutions.
We do not provide a single unique model. Users have access to a library of different models in an integrated, economically coherent framework so it is not the case that all firms are using the same model. Many clients calibrate to their own data, liability profiles, methodology and assumptions. Our
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