SR 11-7 (model risk management guidance)
A 2011 US banking supervisors' guidance defining model risk and requiring an inventory, independent validation and governance, which became the global reference for model management, including in insurance.
Supervisory letter SR 11-7, published in April 2011 by the US Federal Reserve and the Office of the Comptroller of the Currency, is guidance on model risk management. It defines a model broadly, as any quantitative method that turns data into estimates, and model risk as the risk of adverse consequences from decisions based on incorrect or misused models. It organizes their control around three pillars. Rigorous, documented development and use, with testing and awareness of limitations. Independent validation, carried out by people who did not build the model, covering conceptual soundness, ongoing performance monitoring and outcome analysis. And governance, with a comprehensive model inventory, defined roles and responsibilities, board-approved policies and oversight by internal audit. Although aimed at banks, the text became the global reference for model management, and insurers have widely adopted it for their pricing, reserving, capital and now artificial intelligence models, which insurance regulators examine with the same questions.
Textbook case: during the inventory required by its policy based on this April 2011 Federal Reserve guidance, an insurer identifies 340 models, 60 of which had never been validated by an independent team, including an industrial risk pricing spreadsheet used for eight years, one of whose formulas contained a cell reference error.
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