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

of <strong>the</strong> modelled risk driver. This is necessary <strong>to</strong> enable application of
<strong>the</strong> statistical quality test <strong>to</strong> <strong>the</strong> decomposed P&L.
11.51 In segments where <strong>the</strong> standard formula for <strong>the</strong> SCR is inappropriate, a
supervisor should have <strong>the</strong> power <strong>to</strong> require an undertaking <strong>to</strong> adopt a
partial or full internal model, if this seems feasible. There is an obvious
tension, however, between compelling an undertaking <strong>to</strong> develop a
model and satisfying <strong>the</strong> 'use test'.
11.52 There are important differences between internal models and <strong>the</strong>
standard formula for <strong>the</strong> computation of <strong>the</strong> SCR:
• The defining property of an actuarial model is that it provides a
forecast for <strong>the</strong> whole distribution of <strong>the</strong> profit or loss (P&L) of a
portfolio instead of just one parameter of that distribution
(VaR/TailVaR) like <strong>the</strong> standard formula.
• The standard formula will usually be only applied <strong>to</strong> <strong>the</strong> <strong>to</strong>p level
portfolio of <strong>the</strong> legal entity at hand, while an internal model will
usually be applied <strong>to</strong> several levels of aggregation.
11.53 If <strong>the</strong> standard formula were not just a formula, but a fully specified,
actuarial model structure that provides <strong>the</strong> qualitative properties of an
actuarial model, <strong>the</strong>n this would promote internal model enhancements
<strong>to</strong> <strong>the</strong> 'standard model'.
11.54 The benefit of 'simple enhancements <strong>to</strong> <strong>the</strong> standard formula' should
be considered. CEIOPS must avoid regulation that invites every
<strong>European</strong> insurance undertaking <strong>to</strong> bargain with <strong>the</strong>ir supervisor on
every parameter of <strong>the</strong> standard formula. Gaming <strong>the</strong> supervisor on
<strong>the</strong> parameters of <strong>the</strong> standard formula is nei<strong>the</strong>r beneficial for <strong>the</strong>
companies nor for <strong>the</strong> supervisor (representing society). There should
be a clear distinction between adjustments <strong>to</strong> <strong>the</strong> standard formula and
partial internal models. Bargaining <strong>the</strong> parameters of <strong>the</strong> standard
formula should not be done at <strong>the</strong> company level.
Information technology
11.55 To <strong>the</strong> extent an internal model used in <strong>the</strong> context of <strong>the</strong> SCR makes
use of information technology (IT) resources, additional criteria are
required.
11.56 IT systems are essential and supportive for all aspects of insurance
business and especially for risk modelling and management
procedures. Hence, requirements concerning IT systems are closely
related <strong>to</strong> all o<strong>the</strong>r aspects of internal models and should not be
formulated in a detached way.
11.57 Proper IT risk management routines should independently from <strong>the</strong> use
of internal models have already been implemented within <strong>the</strong> company,
and any IT routine for internal models should naturally be included in
<strong>the</strong> overall IT risk management.
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