Mastering Model Risk: Assessment, Regulation and Best Practices

In this paper, Numerix Chief Strategy Officer & SVP, Satyam Kancharla, outlines industry best practices for mastering model risk. The article explores the evolution of model risk, including regulatory drivers and industry challenges—in addition to model risk analysis, model assessment, validation and review processes. The paper concludes with a case study example involving model validation for a large insurer, and a detailed description of the four best practices for model risk management in today’s financial marketplace.

Highlights include:

• What is model risk, and why is it so important today?
• What are the key challenges related to the use of financial models?
• Model classification and risk factor taxonomy
• Model risk framework and processes
• What to do about bad data, bad assumptions and bad usage
• Model risk control: model validation and documentation review
• Case study: model validation for a large insurance company
• What are the four best practices for mastering model risk?