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

Partial models and <strong>the</strong> interplay with <strong>the</strong> standard formula
11.47 Conceptually a grid could be drawn by categorizing risk exposure data
across lines of business and risk driver data across risk categories.
Each combination is referred <strong>to</strong> as a segment: 111
Portfolio subdivision
Insurance classes
Accident
Sickness
Aircraft
Mo<strong>to</strong>r
Marine
General liability
Credit
...
Underwriting
IAA risk categories
If internal modelling is confined <strong>to</strong> rows, columns or segments of <strong>the</strong>
matrix, and it is used <strong>to</strong> substitute parts of <strong>the</strong> standard formula for <strong>the</strong>
computation of <strong>the</strong> SCR, <strong>the</strong>n this will be called a partial internal
model.
11.49 In principle, a partial model could apply <strong>to</strong> any line of business (row),
risk category (column) or combination (segment). 112 In practice, any
partial approach might present considerable validation difficulties. If
<strong>the</strong> partial model applies <strong>to</strong> a complete row, <strong>the</strong>n risk drivers in <strong>the</strong>
model for <strong>the</strong> business unit need not be <strong>the</strong> same as those of <strong>the</strong>
standard formula. Conservative assumptions on diversification should
be used <strong>to</strong> aggregate <strong>the</strong> SCR derived from <strong>the</strong> partial model with <strong>the</strong>
SCR of <strong>the</strong> o<strong>the</strong>r business units as computed by <strong>the</strong> standard formula.
11.50 Partial modelling along columns is more challenging <strong>to</strong> validate, but
needed, for example, for <strong>the</strong> approval of ALM-systems that model <strong>the</strong>
influence of interest rates on P&L across business lines. A pre-requisite
for such partial models is that risk drivers of <strong>the</strong> partial model have a
certain degree of consistency with <strong>the</strong> risk drivers of <strong>the</strong> standard
formula. Moreover, a natural decomposition of <strong>the</strong> P&L is needed, such
that <strong>the</strong> appropriate part of <strong>the</strong> P&L can be attributed <strong>to</strong> <strong>the</strong> influence
111 IAA risk categories and (non-life) classes from <strong>the</strong> First Council Directive 73/239/EEC (1973) – First
Council Directive on <strong>the</strong> taking-up and pursuit of <strong>the</strong> business of direct insurance o<strong>the</strong>r than life assurance
- are used for illustrative purposes.
112
If <strong>the</strong> partial model applies <strong>to</strong> a complete row, <strong>the</strong>n risk drivers in <strong>the</strong> model for <strong>the</strong> business unit need
not be <strong>the</strong> same as those of <strong>the</strong> standard formula.
Market
Credit
Operational
Liquidity
127