Answers to the European Commission on the ... - Eiopa - Europa

• <strong>the</strong> costliness of approval and supervision of <strong>the</strong> internal models
and how <strong>the</strong> costs are shared between individual undertakings
and <strong>the</strong> supervisor; and
• <strong>the</strong> strictness with which qualitative criteria (use test) are applied
by <strong>the</strong> supervisor.
The first two are necessarily harmonized at <strong>the</strong> <strong>European</strong> level, while
<strong>the</strong> latter two may offer some scope for influencing <strong>the</strong> number of
applicants in each Member State.
11.10 CEIOPS expects that supervisory benefits will be highest where internal
models are recognised for
• large insurance undertakings and reinsurance undertakings; and
• innovative or niche players, independent of <strong>the</strong>ir size and legal
form.
The framework should be designed in a way that it invites such
undertakings <strong>to</strong> apply, but it should not present explicit barriers <strong>to</strong>
entry for o<strong>the</strong>rs.
11.11 For larger undertakings, <strong>the</strong> complexity of <strong>the</strong> business may increase
<strong>the</strong> degree <strong>to</strong> which <strong>the</strong> standard formula is an unacceptable
approximation of <strong>the</strong> true risk profile - for example, because <strong>the</strong>
standard formula treats diversification effects in a relatively simple
manner. Conversely, <strong>the</strong> standard formula may not address risks that
are particular <strong>to</strong> innovative or niche business and <strong>the</strong> internal model
may actually be simpler than <strong>the</strong> standard formula for such cases.
11.12 In each individual case, <strong>the</strong> cost of validating internal models depends
on
• how well gaming <strong>the</strong> system is limited by <strong>the</strong> overall framework;
• <strong>the</strong> extent <strong>to</strong> which <strong>the</strong> supervisor can benefit from guidance at
<strong>the</strong> <strong>European</strong> level;
• <strong>the</strong> degree <strong>to</strong> which undertakings use input data and modelling
approaches that are standardised at <strong>the</strong> national or <strong>European</strong>
level; and
• <strong>the</strong> intensity with which <strong>the</strong> internal capital adequacy assessment
process is examined as part of <strong>the</strong> Supervisory Review Process,
regardless of whe<strong>the</strong>r <strong>the</strong> internal methodology is also used as a
basis for Pillar I.
The latter two points may provide some flexibility <strong>to</strong> influence resource
requirements at <strong>the</strong> national level.
11.13 Aspects of <strong>the</strong> framework that potentially limit gaming by undertakings
are:
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