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

The narrower, actuarial view of <strong>the</strong> internal model is <strong>the</strong> system that
transforms risk exposure data (how many contracts of which type are
written) and risk driver data (his<strong>to</strong>ric information on <strong>the</strong> likelihood of
certain events) <strong>to</strong> forecasts of profit and loss (P&L 98 ) distributions. In
practice, an undertaking may use a collection of models that make
predictions for <strong>the</strong> P&L at different levels of aggregation. CEIOPS calls
<strong>the</strong> whole system that transforms input data in<strong>to</strong> forecast P&L
distributions <strong>the</strong> actuarial model 99 .
11.15 However, <strong>the</strong> internal model is more than this mechanistic process. It
should also encompass <strong>the</strong> way in which <strong>the</strong> actuarial model is
integrated with <strong>the</strong> internal risk management system. Integration
demonstrates that <strong>the</strong> actuarial model is genuinely relevant <strong>to</strong> <strong>the</strong>
management of <strong>the</strong> business and has not been developed simply <strong>to</strong>
satisfy regula<strong>to</strong>ry requirements. Validation and approval of <strong>the</strong> internal
model should apply in this broader context, ra<strong>the</strong>r than focussing solely
on <strong>the</strong> actuarial techniques <strong>to</strong> arrive at <strong>the</strong> forecast distributions or <strong>the</strong>
single SCR number.
11.16 The actuarial model can also be used as a basis <strong>to</strong> derive <strong>the</strong> capital
requirement. While <strong>the</strong> SCR estimate will be computed by <strong>the</strong>
undertaking, <strong>the</strong> way it is derived from <strong>the</strong> distributional forecast is
fully specified by <strong>the</strong> regula<strong>to</strong>ry framework and hence not part of <strong>the</strong>
internal model. The distinction between SCR estimate, Pillar I SCR and
adjusted SCR does not imply that <strong>the</strong>re should necessarily be a
difference between <strong>the</strong> three, but it facilitates <strong>the</strong> discussion on how
<strong>the</strong> link from <strong>the</strong> internal model <strong>to</strong> <strong>the</strong> SCR should be defined and in
which pillar.
Compliance Criteria
11.17 For <strong>the</strong> actuarial model, three different aspects might be considered:
• input criteria: concerning, for example <strong>the</strong> quality of data and
<strong>the</strong> scope of <strong>the</strong> model (what can and can’t be included);
• process criteria: <strong>the</strong> inner logic for how <strong>the</strong> model should
produce its required output; and
• output criteria: for example, <strong>the</strong> requirement <strong>to</strong> produce a full
distribution, or <strong>to</strong> use a certain risk measure.
11.18 SCR criteria set out how <strong>the</strong> output from <strong>the</strong> internal model is
transformed in<strong>to</strong> a capital requirement.
98 Within <strong>the</strong> answer <strong>to</strong> CfA11, “P&L” shall mean <strong>the</strong> change in economic value (plus any intermediate cash
flows) of assets minus liabilities over <strong>the</strong> time horizon that is <strong>the</strong> basis for <strong>the</strong> SCR target. Within <strong>the</strong>
internal model, economic valuation and risk measurement need <strong>to</strong> be consistent.
99 The ‘actuarial model’ is used as a short-hand for ‘<strong>the</strong> internal model in a narrower, quantitative, statistical
sense’ in <strong>the</strong> rest of <strong>the</strong> answer <strong>to</strong> CfA 11. The use of <strong>the</strong> attribute ‘actuarial’ does, however, not imply that
<strong>the</strong> actuarial model is solely within <strong>the</strong> responsibility of <strong>the</strong> actuarial function in <strong>the</strong> sense of A.22.
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