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

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• <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: 116
• Qualitative requirements for <strong>the</strong> use of an internal model within <strong>the</strong> risk management of an undertaking, especially such requirements for <strong>the</strong> use of partial models. • The use of principle-based valuation criteria, ra<strong>the</strong>r than prescriptive rules. Peer-review among supervisors is needed <strong>to</strong> ascertain harmonisation of regula<strong>to</strong>ry practices, which is dealt with in answer <strong>to</strong> CfA 17. • If <strong>the</strong> undertaking would enjoy benefits from <strong>the</strong> approval of <strong>the</strong> internal model, <strong>the</strong>n it risks losing its benefits when it 'overoptimizes' its calculations in areas that are difficult <strong>to</strong> measure and validate. • If <strong>the</strong> SCR-target criterion were <strong>to</strong> be calibrated <strong>to</strong> a level such that it would be anticipated that most reasonably well-capitalized undertakings would in any event have available capital above <strong>the</strong> fair, internal SCR-estimate, 97 <strong>the</strong>n <strong>the</strong> motivation for gaming <strong>the</strong> system would be reduced. Conceptual Framework 11.14 An important aspect <strong>to</strong> consider is <strong>the</strong> degree <strong>to</strong> which internal models will be specified by <strong>the</strong> supervisor. In this context, it is useful <strong>to</strong> distinguish between • internal models in a narrower, quantitative, statistical sense; • internal models in a wider, risk management sense; and • <strong>the</strong> capital requirement that is derived from <strong>the</strong> information that <strong>the</strong> actuarial model provides. Internal model Actuarial model exposure data * where necessary risk management function risk driver data forecast P&L distributions 97 This option is not acceptable <strong>to</strong> some CEIOPS’ members. Capital requirement initial estimate of SCR formulaic recalibration* Pillar I SCR discretionary adjustment following supervisory review* Pillar I SCR + Pillar II add-on 117
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CEIOPS-DOC-07/05 Answers</s
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Style convention The following has
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• Safety measures (CfA 9); • So
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sole purpose is to
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Call for Advice No. 7 Technical pro
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one year). Therefore, capital requi
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perhaps through an explicit additio
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Discounting 7.22 The present value
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exposed to risk fr
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insurance liabilities set by refere
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Profit sharing In practice, for uni
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future cash flows will have <strong
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Explanatory text S
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always have resources to</s
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developed. They would help
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8.28 A fourth option could be envis
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In principle, "the
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8.48 Three alternatives can be cons
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essential part of the</stro
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statistical estimate (with a level
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8.77 It may be argued that
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to use more sophis
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consequence on the
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8.105 In some cases, the</s
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This shall be reviewed, at least an
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ut the exposure <s
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Explanatory text M
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9.15 Solvency II could also employ
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9.28 The life formula yields itself
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underestimate them
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'Prudent person plus' approach 9.52
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Uniform or different rules for tech
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14.43 Regarding the</strong
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off all contracts; • to</
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Call for Advice No. 15 Solvency con
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Minimum capital requirement (MCR) D
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adjusted SCR. From a purely technic
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to be implemented.
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capital
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absolute floor (expressed in euros
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Bolkestein agreed to</stron
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16.14 Generally speaking, complianc
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appoint an additional person <stron
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16.28 It should also be noted that
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Time of application 16.41 The asses
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of the individual
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Background 17.1 This document aims
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Review Panel would be a permanent g
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• the developmen
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asis for considering improvements <
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(I) Regulatory arb
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(II) Capital requirements at group
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into a SCR at grou
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18.31 Additionally, it must be deci
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Capital requirements 18.39 The Fram
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(III) Supervisory Review Process of
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18.60 In view of the</stron
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new structure would need to
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future Framework Directive. CEIOPS
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18.94 Model validation in t
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the assumptions us
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Annexes Annex A (Call for Advice No
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pursuing a strategy which t
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Specific principles for non-life in
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Conformity, suitability and suffici
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• existence of significant insuff
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A.64 In the tests
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the rules on <stro
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TVaR1-α for Tail Value-at-risk. In
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Degree of personalisation B.24 Tran
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B.34 There are two approaches <stro
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Segmentation B.44 In general terms,
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technical technical technical techn
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B.61 The second alternative was cho
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Dutch supervisory authority for <st
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Market risk Equity risk this altern
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B.95 In a scenario-based approach,
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B.106 As an alternative one could t
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where: KTSA = the
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Results from the a
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Solvency ratio prior to</st
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Number of instances Risk group Deta
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Conclusion In general, the<
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where: TP gross = technical provisi
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premium risk, the
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“While proportional reinsurance t
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contribute with any additional info
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E.29 Another way <
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programmes on the
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Answers to the European Commission on the ... - Eiopa - Europa

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