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

18.94 Model validation in <strong>the</strong> context of insurance entities is a much more
complex question than in banking. Firstly, banking supervisors have
long recognised modelling of market risk and model validation is
subject <strong>to</strong> a wide range of established quantitative and qualitative
criteria, whilst in insurance <strong>the</strong>re is limited experience in <strong>the</strong> use of
integrated models. Secondly, while credit risk modelling is a more
recent phenomenon, <strong>the</strong> number of inputs, <strong>the</strong> time horizon and data
on loss experience raise less complex hurdles than that for risks faced
by insurance companies, and <strong>the</strong>re are important underlying
differences, e.g. <strong>the</strong> definition given <strong>to</strong> <strong>the</strong> event that determines
default. Thirdly, market and credit risk models can be designed for
special niche entities or portfolios within a banking group.
18.95 In general, <strong>the</strong>re should be little or no difference of approach between
sec<strong>to</strong>rs in terms of model validation. The collegiate model proposed in
<strong>the</strong> banking sec<strong>to</strong>r forms a sound basis for <strong>the</strong> approach in insurance,
although <strong>the</strong> aforementioned particularities of <strong>the</strong> supervision of
insurance groups suggest that in case supervisors cannot reach an
agreement, different solutions may be considered (instead of just
assuming <strong>the</strong> one in banking, where <strong>the</strong> group supervisor would
impose his criteria in case of lack of consensus, after a 6 month
period). Should <strong>the</strong> approaches not be convergent between sec<strong>to</strong>rs, it
is possible that it will give rise <strong>to</strong> anticompetitive consequences and
increased scope for regula<strong>to</strong>ry arbitrage.
18.96 The approach should have regard <strong>to</strong> both <strong>the</strong> resource implications for
supervisors and <strong>the</strong> potential costs <strong>to</strong> industry. For this reason, <strong>the</strong>
group supervisor would be best placed <strong>to</strong> deal with all <strong>the</strong> initial stages
of model validation i.e. assessing <strong>the</strong> risk measures, <strong>the</strong> time horizon
and <strong>the</strong> scope of risks covered. The group supervisor could be assisted
by o<strong>the</strong>r supervisors within <strong>the</strong> group structure where this is
considered necessary but it is suggested that contact with <strong>the</strong>
insurance undertaking would be between it and <strong>the</strong> group supervisor,
thus avoiding unnecessary burden as much as possible. The group
supervisor should <strong>the</strong>n share and discuss <strong>the</strong> information with o<strong>the</strong>r
supervisors.
18.97 It is at <strong>the</strong> second phase of <strong>the</strong> assessment where all supervisors
within <strong>the</strong> group would have additional input i.e. developing <strong>the</strong>
detailed compliance criteria for <strong>the</strong> use of <strong>the</strong> model within <strong>the</strong> group.
Here, <strong>the</strong> detailed knowledge of local supervisors as <strong>to</strong> <strong>the</strong> governance,
skills base and data availability within <strong>the</strong>ir authorised entity, as well as
<strong>the</strong> specificities of <strong>the</strong> local market, would be essential, so local
supervisors should in all cases validate <strong>the</strong> specific assumptions that
refer <strong>to</strong> <strong>the</strong>ir individual undertaking and market. In terms of
compliance criteria <strong>the</strong>re is no 'one size fits all' solution. While <strong>the</strong>
possible future implementing measures may set out detailed minimum
criteria <strong>to</strong> be fulfilled each group will pose its own idiosyncrasies that
will require <strong>to</strong> be addressed by all supervisors within a group.
Moreover, it may be <strong>the</strong> case that different entities within an insurance
group will be at different stages of development. This raises <strong>the</strong> issue
of partial use of a model within a group. It may be <strong>the</strong> case that only
some group entities are sufficiently sophisticated <strong>to</strong> use <strong>the</strong> group
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