Internal Models and Solvency II
Internal Models and Solvency II
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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)
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Table of contents
Foreword
Gabriel Bernardino (Chairman of the European Insurance and Occupational Pensions Authority)
Introduction
Paolo Cadoni
1. Balance Sheet, Capital Requirements and Internal Models
Paolo Cadoni
2. Partial Internal Models
Juan Antonio Lumbreras
3. The Internal Model Approval Process
Stefano Pasqualini
4. Policy for Model Changes
Christian Kerfriden
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
Dean Buckner
9. Calibration standards
Ishtiaq Faiz
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
Ben Carr
13. Solvency II Internal Model Documentation Requirements
Dermot Marron
14. How to Review External Models and Data Embedded in the Modelling Framework
Asa Larson
15. The Limitations of Internal Models and the Supervisory Review Process
Paolo Cadoni and Christian Kerfriden