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Paolo Cadoni-Modelos Internos
Paolo Cadoni-Modelos Internos
to determine
the Solvency Capital Requirement
Paolo Cadoni
CEIOPS Internal Models Expert Group Chair,
FSA
XXI International
I t ti l Seminar
S i on Insurance
I and
d Surety
S t
Mexico City 18-19 November 2010
Outline
Approval
pp process
p and requirements
q
Questions
Internal Models under Solvency II:
setting the scene…..
A
Assets
t Li biliti
Liabilities
Capital
Requirements
q
Excess of
Assets Over
Liabilities SCR
risk
margin
ffor hedgeablle risk
components
Total
Technical Liabilities
best
estimate
Provisions
Marke
Solvency Capital Requirement (SCR)
Full Internal
Model
Partial Internal
sitivity
Models
Riisk Sens
Standard Formula
with USPs
Standard
Formula
Standard Formula
with simplifications
Complexity
The starting point:
what is an internal model?
Wh
Whatt is
i an internal
i t l model
d l according
di to
t the
th CEA/GC?
“A risk management system developed by an insurer to analyse the
overall risk position, to quantify risks and to determine the
economic capital required to meet those risks”
– Should
Sh ld be
b an integral
i t l partt off the
th risk
i k managementt system
t
– Meet the tests and standards for internal model approval
Source – CEIOPS-DOC-07/05
What are the expected benefits?
Pre-application
Pre application Application * Assessment Decision
9
The Approval Process
Pre-application
Pre application Application * Assessment Decision
10
Pre--application
Pre pp
NB: Pre-application does not mean pre-approval
• Recommended by CEIOPS
• The p
pre-application
pp p
process is g
going
g to be iterative:
Undertakings will not have all elements of their IM ready at the outset As undertakings get
feedback from supervisors the IM may change
The depth of review will vary within the IM
Information to be reviewed is linked to the application (approval process)
Regular feedback to undertakings on the IM
• Supervisors give their view on how prepared the undertaking is to submit the application
11
The Approval Process
Pre-application
Pre application Application * Assessment Decision
12
Application
pp
Formal application
pp
Documentary evidence that requirements are met (art. 112.3)
The administrative or management bodies have overall responsibility for
application – role of internal committees (art.116.1)
Systems must be in place to ensure internal model operates properly on
a continuous basis (art. 116.2)
Internal model g governance p policies ((e.g.
g ppolicy
y for changing
g g the full and
partial internal model (art. 115))
Principle
p 6 Principle 4
Principle 5
widely integrated with cover sufficient risks:
the risk-management design to useful for risk
system facilitate analysis management and
of business d i i
decision-making
ki
decisions
Statistical quality standards (art. 121)
Assumptions &
Methodology
Risks
Managementt
M
Actions
Expert
Judgment Data
Output:
Probability
y Distribution
Forecast Expected
Options & Payments
Guarantees
Diversification &
Risk Mitigation
Techniques
Calibration standards (art. 122)
TailVaR
99%
VaR VaR
99% 99,5%
Supervisory tools
• benchmark portfolios
• test alternative assumptions based on external data
21
Validation standards (art. 124)
¾ Testing
g its results against
g experience
p
Scope Limitations
Tools used
Frequency Validation Policy Documentation
Governance Independence
¾ Need to consider how these will be used (link with Use test) and
reflect in granularity of assessment
¾ Need to understand/reconcile differences to profits and losses on
accountingi bbasis
i
¾ Should be an important validation tool
Documentation (art. 125)
It must be thorough,
thorough detailed and complete enough to allow
third parties to understand and replicate the model
It shall provide a detailed outline of:
– The theory
– Assumptions
– Mathematical and empirical basis underlying the model
The use of a model or data obtained from a third party shall not be
considered to be a justification for exemption from any of the
requirements for the internal model
Firms must have clearly articulated strategies for regularly reviewing the
performance of vendor model results and the integrity of external data
used in their risk quantification process
‘Partial internal models’ (PIMs)
In addition to:
– the whole business of insurance and reinsurance undertakings, or
– only one or major business unites
Options Available to
(2) Use one method listed
integrate the PIM & SF
In CEIOPS level 3 guidance
Pre-application
Pre application Application * Assessment Decision
35
Assessment
• Supervisors may require additional information
• The assessment may be iterative with feedback to undertakings resulting in
modifications to the IM
• The supervisors are expected to assess:
9 Scope and model coverage
9 Methodology and documentation
9 Data quality
9 Quantitative and qualitative procedures
9 T h l i l environment
Technological i t
• The assessment may include desk-based review, on-site inspections, requests for
further information and other contacts
Pre-application
Pre application Application * Assessment Decision
37
Decision
• Firm’s
Firm s responsibility to implement a regular cycle of validation
and monitor on-going compliance.
• Validation analysis
• And more….
Summary
y
– G d deep
Good, d and
d rich
i hddata sets
Thank you!