Solvency II: Insurers and supervisors must work together to ensure consistency on model approvals

Insurance groups should ensure consistent approach to model applications across organisation, says chairman of Eiopa's internal model committee

Building an internal model is challenging

Further work needs to be done to ensure consistency between national supervisors in their approval of internal models. But insurance groups must also take steps to ensure they are following a consistent approach to submissions for model approval across the organisation, according to the chairman of the European Insurance and Occupational Pensions Authority's (Eiopa) internal models committee.

Speaking at Insurance Risk's Solvency II and Insurance Risk conference, Paolo Cadoni said Eiopa's peer review of the internal model pre-application process had found inconsistencies between the approaches of national supervisors. But there was evidence that some insurance groups were not consistent in their own approaches.

"Consistency [between supervisors] is very important. But are groups following consistent approaches across Europe? There is a difference in culture across groups. We have heard of subsidiaries of groups complaining they don't have enough information from groups," Cadoni said.

The peer review found a divergence between supervisors in the speed of the application process and the emphasis of the reviews. "Are we there yet in achieving consistency? The view is that we are not," Cadoni said.

But he added that insurers must ensure they meet their responsibilities during the application process: "We need to work together. Firms need to deliver on time and without delay."

Cadoni said Eiopa was taking steps to improve the level of consistency between supervisors, such as providing guidance on internal models to the colleges of supervisors. "Building a [harmonised] supervisory culture takes time, but we are moving there. The scenario is not perfect, and that is why we are willing to solve the problem."

Earlier in the conference, Tobias Buecheler, the head of Allianz Group's Solvency II project, had complained of the different approaches taken by European supervisors on internal model approval.

The Eiopa peer review also highlighted areas where insurers could improve their internal models. Some models were unnecessarily complex, while some were too narrow in their scope, it found.

"You do not need to add complexity where it is not needed. We have seen evidence of models that are too complex," Cadoni said. "There was also evidence that some models were too narrow in scope and were not covering all quantifiable and material risks."

Risk aggregation was also not adequately dealt with in some models. "It is up to firms to convince supervisors that dependency structures are appropriate," Cadoni said.

Despite the continued uncertainty in the final calibrations of Solvency II, it is vital that firms continue to work on their Solvency II implementation programme. Cadoni said. "The risk of doing nothing is greater than the risk of doing something."

He added that a "credible" timetable" for the implementation of the Solvency II regime was needed. "We hope that in the next weeks and months that will be cleared up," said Cadoni.