Consultation Paper on the draft proposal for ... - Eiopa - Europa

Guideline 25 Differences between the standard formula and any internal
model used
Undertakings should consider, when disclosing the differences between
Standard Formula and Internal Models:
a) Structure of the model,
b) Risk categories concerned by internal models and those not,
c) Aggregation methodologies and diversification effects,
d) Risk not covered in the Standard Formula but in the internal
model,
e) High level differences in the methodologies.
4.63. Undertakings accompany quantitative information by a description of the
main feature of the internal model in order not to mislead readers of the
quantitative reporting templates and to ensure a better understanding.
4.64. It is impossible a priori to assess whether the methodologies used in an
internal model will be close or similar to the one used in the standard
formula. Nevertheless, undertakings may have chosen in their internal
model to use terminologies that are close to the one used in the
standard formula.
4.65. In particular, it is avoided to base comparisons between the quantitative
outputs of two different undertakings that would have used the same
name for some modules although:
• They may cover different risks;
• They may use totally different approaches.
4.66. This is why undertakings provide a high-level description of the model.
4.67. Besides, modelling of diversification effects was one of the main flaws
detected in internal models in the global financial crisis and is a key
driver in the internal models results. The disclosure of these will
simultaneously boost the public confidence in internal models and also
have a disciplinary effect on the market.
4.68. Because some risks that are material to an undertaking may not be
explicitly included in the standard formula. Nevertheless, in order to
meet article 121(4) of the Directive 2009/138/EC, they would have
included these risks in their internal model. This information seems to be
of the upmost importance in order to analyse properly the reported
quantitative information.
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© EIOPA 2011