Internal Models and Solvency II
By Paolo Cadoni
Internal Models and Solvency II clarifies the requirements for practitioners and senior executives by providing regulatory and practical insight into internal models. Perspectives from both the supervisory and industry side gives unique insight into the spirit and rationale of the requirements, and are complemented by practical solutions to the daily challenges faced when reviewing and implementing internal models.
Edited by Paolo Cadoni, currently Technical Head of the Insurance Policy Department at the Prudential Regulation Authority, this book provides support and solutions for the managers charged with implementing and validating their companies’ internal models, helping readers to ensure the compliance of their models. Insurance supervisors will also be able to use this book to clarify the requirements when reviewing internal model applications.
Internal Models and Solvency II gives readers a wider understanding of the history, challenges, philosophy, and future prospects of Solvency II internal models.
Under the Solvency II directive, insurance companies are required to calculate their Solvency Capital Requirement (SCR) in order to prove to supervisors, policyholders and beneficiaries that they have a high enough level of funds to absorb significant losses and to make payments as they fall due. They have a choice between a standard formula and an internal model in calculating their SCR.
Many companies favour internal models as they are more risk-sensitive, capture individual risk profiles and therefore reduce the capital requirements placed on insurance companies by Solvency II. However, internal models are subject to approval by supervisory bodies. Insurance companies need to demonstrate that their internal model meets the use test, statistical quality standards, calibration standards, validation standards and documentation standards.
Internal Models and Solvency II is the first authoritative reference book on Solvency II internal models for practitioners and regulators, providing practical insight into these models and their frameworks.
“Each chapter has been written by experts in the topic, individuals with hands-on experience of designing, validating, reviewing and using models. They share their experience here, and bring alive the requirements of Solvency II through practical insight.”
From the foreword by Gabriel Bernardino, Chairman, European Insurance and Occupational Pensions Authority (EIOPA)
|Publication date||14 May 2014|
Gabriel Bernardino (Chairman of the European Insurance and Occupational Pensions Authority)
1. Balance Sheet, Capital Requirements and Internal Models
2. Partial Internal Models
Juan Antonio Lumbreras
3. The Internal Model Approval Process
4. Policy for Model Changes
5. Internal Models to Calculate the Group Solvency Requirement: the Perspective of the Home and Host Supervisor
Régis Weisslinger, Agnieszka Groniowska and Perrine Kaltwasser
6. Use Test: Challenges and Opportunities
Christopher Chappell, Elliot Varnell and Coomaren Vencatasawmy
7. Statistical Quality Standards: Challenges in Internal Model Implementation
Markus Bellion, Christopher Lotz and Peter Müller
8. Representation, Reality, and the Solvency II Data Challenge
9. Calibration standards
10. Profit and Loss Attribution
Andrew Candland and Christopher Lotz
11. Internal Model Validation – the Regulatory Perspective
Ravi Bharos, Christian Kerfriden and Vesa Ronkainen
12. Model Validation: An Industry Perspective
13. Solvency II Internal Model Documentation Requirements
14. How to Review External Models and Data Embedded in the Modelling Framework
15. The Limitations of Internal Models and the Supervisory Review Process
Paolo Cadoni and Christian Kerfriden