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

management processes relating <strong>to</strong> internal models, conducted at
least once a year. The results of such reviews must be documented.
Approval & ongoing supervision
11.79 The moni<strong>to</strong>ring of <strong>the</strong> results of <strong>the</strong> actuarial model and thus <strong>the</strong>
undertakings’ risk profile should be an integral part of <strong>the</strong> supervisory
review process. CEIOPS recommends that <strong>the</strong> approval of an internal
model for an undertaking's SCR calculation should be subject <strong>to</strong>:
• a statistical quality test;
• a calibration test; and
• a use test.
11.80 An undertaking should be responsible for meeting <strong>the</strong> costs
associated with approval of its internal model for <strong>the</strong> purposes of
calculating <strong>the</strong> SCR. An undertaking should also ensure that it
continues <strong>to</strong> meet <strong>the</strong>se tests, notifying its supervisor of any material
breach. In addition, supervisors should have <strong>the</strong> power <strong>to</strong> review
compliance with <strong>the</strong>se tests on an ongoing basis – not simply when
<strong>the</strong> model is submitted for approval.
11.81 An undertaking may improve its internal model in line with a model
change policy agreed with <strong>the</strong> supervisor. Provided <strong>the</strong> amendments
do not lead <strong>to</strong> material changes in <strong>the</strong> results obtained from <strong>the</strong>
model, it is not necessary <strong>to</strong> re-test <strong>the</strong> model. Supervisors may test
adherence <strong>to</strong> this policy and <strong>the</strong> functioning of <strong>the</strong> model change
control loop.
11.82 An undertaking should use an approved internal model for its SCR
calculation until its approval <strong>to</strong> do so is withdrawn by <strong>the</strong> supervisor.
Undertakings should not have <strong>the</strong> option of switching back <strong>to</strong> <strong>the</strong>
standard formula simply because it delivers a more favourable result.
11.83 Supervisors should have <strong>the</strong> power <strong>to</strong> ei<strong>the</strong>r, reject <strong>the</strong> actuarial
model, require improvement or require <strong>the</strong> undertaking <strong>to</strong> calculate
and apply a recalibration fac<strong>to</strong>r. CEIOPS will consider whe<strong>the</strong>r and
how such a recalibration fac<strong>to</strong>r could be estimated in a reliable and
consistent manner. Supervisors may also impose a period of 'parallel
running' <strong>to</strong> compare <strong>the</strong> results generated by <strong>the</strong> internal model with
<strong>the</strong> standard formula. A descending floor might be used <strong>to</strong> ensure
that <strong>the</strong> transition <strong>to</strong> internal models for <strong>the</strong> SCR calculation does not
result in sudden, extreme changes in regula<strong>to</strong>ry requirements.
11.84 As with <strong>the</strong> standard formula, <strong>the</strong> SCR calculated using an internal
model (including any recalibration fac<strong>to</strong>r) may, if necessary, be
fur<strong>the</strong>r adjusted at <strong>the</strong> discretion of <strong>the</strong> supervisory authority <strong>to</strong>
arrive at an 'adjusted SCR' which operates as a separate solvency
control level. It should be clearly recognised that <strong>the</strong> imposition of an
adjustment in <strong>the</strong>se circumstances is not a means of solving <strong>the</strong>
deficiencies in <strong>the</strong> quantification of risk, which must be addressed via
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