Internal Models and Solvency II
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The Calibration Standards
Ishtiaq Faiz and Paolo Cadoni
The Calibration Standards
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
Under Solvency II, firms using an internal model to calculate the solvency capital requirement (SCR) may derive the SCR using a different time period or risk measure from that set out in Article 101 of the directive,11 For further details, see European Parliament and the Council of the European Union (2009). as long as they demonstrate to the supervisory authorities that policyholders and beneficiaries are provided with an equivalent level of protection.22 Namely, it shall correspond to the value-at-risk of the basic own funds of an insurance or reinsurance firm subject to a confidence level of 99.5 % over a one-year period. These requirements are known as the calibration standards.
The Solvency II definition of calibration is different from the general definition of calibration used in statistics and actuarial science. For example, model calibration is often defined in statistics as the process of adjustment of the model parameters to obtain a model representation of the processes of interest that satisfies pre-agreed criteria (eg, goodness of fit).
The Solvency II definition of calibration, on the other hand, specifically refers to:
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conditions under which other
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