Internal Models and Solvency II
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Policy for Model Changes
Christian Kerfriden
Policy for Model Changes
Foreword
Introduction
Balance Sheet, Capital Requirements and Internal Models
Partial Internal Models
The Internal Model Approval Process
Policy for Model Changes
Internal Models to Calculate the Group Solvency Requirement: The Perspective of the Home and Host Supervisor
Use Test: Challenges and Opportunities
Statistical Quality Standards: Challenges in Internal Model Implementation
Representation, Reality and the Solvency II Data Challenge
The Calibration Standards
Profit and Loss Attribution
Internal Model Validation: The Regulatory Perspective
Model Validation: An Industry Perspective
Solvency II Internal Model Documentation Requirements
How to Review External Models and Data Embedded in the Modelling Framework
The Limitations of Internal Models and the Supervisory Review Process
Christian Kerfriden
Prudential Regulation Authority, Bank of England
The work of a firm or supervisor does not finish once the internal model application has been approved. After approval by the supervisor and the firm has started to use the internal model to calculate the solvency capital requirement (SCR), it is good practice for firms to update their model to reflect changes to the business and economic environment, and to keep the model and its parameters accurate and up to date.
The firm is responsible for ensuring that the model continues to operate properly on a continuous basis to adequately reflect its risk profile and comply with the requirements. The model change policy introduced by the Solvency II directive provides a framework for the governance of changes to the approved internal model, both internally and in relation to the supervisor.
The policy has to be approved by the supervisor as part of the internal model approval process. The model change policy is an essential component of the governance of the internal model. This chapter will therefore examine some important elements covered by the policy. A section on the changes, and the sources of changes
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