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

metric; translate <strong>to</strong> <strong>the</strong> proper level of prudence by making
assumptions on <strong>the</strong> shape of <strong>the</strong> distribution;
• use robust estima<strong>to</strong>rs instead of estima<strong>to</strong>rs that are optimal only
in a specific model.
11.23 The more flexible approach could ensure that <strong>the</strong> actuarial model
retains its relevance in <strong>the</strong> wider risk management context. With a
limited degree of prescription, insurers are able <strong>to</strong> select <strong>the</strong> <strong>the</strong>oretical
approach that is most appropriate <strong>to</strong> <strong>the</strong>ir individual circumstances.
The model can be continually upgraded as financial markets, actuarial
science and technology evolve. This would suggest that <strong>the</strong> regulation
of internal models should be expressed in terms of broad principles.
But it should be noted that <strong>the</strong> degree of subjective judgement on <strong>the</strong>
part of individual supervisors might have implications for
harmonisation.
11.24 Within <strong>the</strong> Swiss Solvency Test 101 it is argued that <strong>the</strong> evaluation of
actuarial models has similarities <strong>to</strong> <strong>the</strong> scientific method:
• use of objective quality/target criteria, such that <strong>the</strong> quality of <strong>the</strong>
model’s predictions can be objectively tested;
• use of extensive peer review. 102
This raises <strong>the</strong> important question how <strong>the</strong> cooperation and exchange
of information between supervisors, consulting companies and
undertakings should be organized and linked <strong>to</strong> establishing proper
guidance on level 3. This will be considered fur<strong>the</strong>r in answering
CfA 20 103 .
Input and process criteria for <strong>the</strong> actuarial model
11.25 Under a flexible approach, requirements on <strong>the</strong> inputs and inner logic
of <strong>the</strong> actuarial internal model would be described more as general
quality criteria than as prescriptive rules. This implies that <strong>the</strong> model
may use different risk driver categorizations than <strong>the</strong> standard formula
and that internal modelling across all business lines and all risk driver
categories is allowed in principle. However, an undertaking should be
able <strong>to</strong> justify its choices <strong>to</strong> its supervisor.
11.26 Standardization of contract terms and pooling of risk driver data should
help undertakings improve <strong>the</strong> quality of <strong>the</strong> input data <strong>the</strong>y use in
<strong>the</strong>ir actuarial models. But <strong>the</strong> availability of richer external data should
also help facilitate a greater understanding of <strong>the</strong> risks <strong>to</strong> which an
101
Presentation by Phillipp Keller (March 1, 2005): Supervisory framework for risk assessment and risk-based
solvency, slide 66.
102 See also Beglinger, S. (2004) – Regulation of <strong>the</strong> non-life insurance industry: Why is it so damn difficult?
103 CEIOPS-CP-06/05, available on CEIOPS’ website: www.ceiops.org.
120