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

• visualizations of flows of products and information along business
processes (flow charts) and
• visualizations of <strong>the</strong> most important control systems (control
loops).
11.41 The two control loops identified in paras. 11.31 and 11.32 are <strong>the</strong>
framework for identifying <strong>the</strong> actual business processes that an
undertaking has established. Once <strong>the</strong> actual business processes in <strong>the</strong>
undertaking are identified, <strong>the</strong> examination looks at whe<strong>the</strong>r processes
are 'in control' and 'capable'.
Safeguards
11.42 In its CfA, <strong>the</strong> <strong>Commission</strong> Services note that prudential aspects
regarding <strong>the</strong> transition from <strong>the</strong> standard formula <strong>to</strong> internal models
should be addressed, including <strong>the</strong> risk of modelling errors. Safeguards
could be envisaged that ensure both supervisors and undertakings can
begin <strong>to</strong> enjoy <strong>the</strong> benefits of internal models at an early stage, without
undermining <strong>the</strong> objective of policyholder protection. In particular, <strong>the</strong>
supervisor can be given <strong>the</strong> opportunity <strong>to</strong> test how an undertaking’s
internal model performs in practice before allowing significant
reductions in regula<strong>to</strong>ry requirements.
11.43 A period of parallel running might assist supervisors in determining
whe<strong>the</strong>r <strong>the</strong> SCR calculated using an internal model is an adequate
reflection of an undertaking's risk profile 108 . An undertaking would
produce an SCR calculated under <strong>the</strong> standard formula alongside <strong>the</strong>
estimate produced by its internal model. A supervisor would need <strong>to</strong> be
reasonably satisfied that material differences in capital requirements
resulted from risk characteristics that <strong>the</strong> standard formula would not
be capable of capturing. The result of this analysis might be adjustment
of <strong>the</strong> SCR estimate, requirement of changes <strong>to</strong> <strong>the</strong> model or
withdrawal of model approval.
11.44 In <strong>the</strong> banking context, a descending floor has been used <strong>to</strong> smooth
<strong>the</strong> transition between approaches <strong>to</strong> calculating regula<strong>to</strong>ry
requirements. 109 Undertakings that wish <strong>to</strong> use <strong>the</strong> 'Internal Ratings-
Based' approach for credit risk or <strong>the</strong> 'Advanced Measurement
Approach' for operational risk must also calculate <strong>the</strong> equivalent
requirements under <strong>the</strong> standardised approaches. In <strong>the</strong> first year of
<strong>the</strong> Directive’s implementation, a floor of 95% of <strong>the</strong> equivalent
standardised calculation is imposed on <strong>the</strong> internal calculation. This
percentage falls <strong>to</strong> 90% and 80% in <strong>the</strong> second and third years. A
similar approach could be considered for implementing Solvency II.
108 CEIOPS notes <strong>the</strong> transitional arrangements put in place for <strong>the</strong> Capital Reqirements Directive, where
parallel running is possible before <strong>the</strong> Directive’s implementation. This gives supervisors <strong>the</strong> ability <strong>to</strong>
recognise models at an early stage.
109 See Article 152 of <strong>the</strong> Capital Requirements Directive for credit institutions and investment firms.
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