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

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model and o<strong>the</strong>rs will have <strong>to</strong> use <strong>the</strong> standard approach – this decision will, in <strong>the</strong> first instance, have <strong>to</strong> be taken by each individual supervisor. 18.98 Issues that need <strong>to</strong> be addressed in model validation at group level include –<strong>to</strong>ge<strong>the</strong>r with all <strong>the</strong> issues relevant at solo level-, but are not limited <strong>to</strong>: CEIOPS’ Advice • <strong>the</strong> predictive power of <strong>the</strong> model; • <strong>the</strong> use test i.e. that <strong>the</strong> model is used by Senior Management as a <strong>to</strong>ol for calculating and allocating economic capital, both at group and at solo level; • <strong>the</strong> different assumptions chosen in <strong>the</strong> concrete model, that need <strong>to</strong> be in line with <strong>the</strong> real risk profile of <strong>the</strong> insurance group, <strong>the</strong> solo undertaking and <strong>the</strong>ir particular circumstances and relationships; • <strong>the</strong> data inputs i.e. that <strong>the</strong> data are sufficiently robust and reliable and that <strong>the</strong>y are representative of all significant risks that <strong>the</strong> model is designed <strong>to</strong> measure; • data oversight i.e. that <strong>the</strong>re is a system in place <strong>to</strong> constantly review and assess data inputs and quality; • model validation (by <strong>the</strong> insurer) i.e. <strong>the</strong> insurer moni<strong>to</strong>rs model performance and stability; reviews model specification; and tests model outputs against outcomes; • governance: all material aspects of <strong>the</strong> model and its use are agreed upon (and unders<strong>to</strong>od) by <strong>the</strong> Board of Direc<strong>to</strong>rs. 18.99 CEIOPS advises that <strong>the</strong> supervisor with responsibility for parent undertaking of <strong>the</strong> group or <strong>the</strong> group supervisor should lead <strong>the</strong> process for validation and approval of use of group models 145 . The group supervisor should disseminate all relevant information pertaining <strong>to</strong> <strong>the</strong> model <strong>to</strong> all o<strong>the</strong>r supervisors in <strong>the</strong> group. 18.100 All supervisors in <strong>the</strong> group may have input in<strong>to</strong> <strong>the</strong> validation process. 18.101 All supervisors in <strong>the</strong> group will input <strong>to</strong> <strong>the</strong> compliance criteria. 18.102 In general models approved at group level will be used throughout <strong>the</strong> group. However decisions as <strong>to</strong> <strong>the</strong> adjusted solo SCR requirement ultimately rest with <strong>the</strong> supervisor who has legal responsibility for <strong>the</strong> solo entity. In case <strong>the</strong> supervisor of a solo undertaking considers that 145 See draft answer <strong>to</strong> CfA 20. 222
<strong>the</strong> assumptions used in <strong>the</strong> model related <strong>to</strong> this undertaking are not valid, he should provide <strong>the</strong> group supervisor with <strong>the</strong> findings and reasons why he considers that an add-on <strong>to</strong> <strong>the</strong> result of <strong>the</strong> model is necessary. The group should be allowed and encouraged <strong>to</strong> tailor its model <strong>to</strong> <strong>the</strong>se criteria in order for <strong>the</strong> model <strong>to</strong> be validated 146 . The cooperation process for <strong>the</strong> validation of internal models and <strong>the</strong> resolution of possible dispute will be developed in <strong>the</strong> answer <strong>to</strong> CfA 20. 18.103 Calculation of <strong>the</strong> adequacy of group capital will remain <strong>the</strong> responsibility of <strong>the</strong> group supervisor, subject <strong>to</strong> <strong>the</strong> specific rules for capital allocation determined by <strong>the</strong> EU. 18.104 Capital should, regardless of <strong>the</strong> use of internal models, be distributed adequately within <strong>the</strong> group, <strong>to</strong> ensure that sufficient capital is available at solo level. CEIOPS’ general Advice on <strong>the</strong> amendments <strong>to</strong> IGD 18.105 As a result of <strong>the</strong>se developments, it appears that <strong>the</strong> current framework for <strong>the</strong> supplementary supervision of groups will have <strong>to</strong> move <strong>to</strong>wards a different model within <strong>the</strong> Solvency II context. In effect, <strong>the</strong> above developments show that, following CEIOPS’ advice, <strong>the</strong> future legislation will need <strong>to</strong>: • explicitly define groups, in <strong>the</strong> spirit of <strong>the</strong> FCD, which is necessary <strong>to</strong> address properly <strong>the</strong> challenges raised by Solvency II; • include proper requirements raised by <strong>the</strong> Solvency II framework (concerning <strong>the</strong> calculation for SCR at group level, <strong>the</strong> supervisory review process at group level, <strong>the</strong> validation of internal models in a group context) 18.106 So, <strong>the</strong>re would appear <strong>to</strong> be a clear need <strong>to</strong> amend <strong>the</strong> IGD, although how this should be done is a separate issue. In this respect, CEIOPS considers <strong>the</strong>re <strong>to</strong> be possible significant difficulties <strong>to</strong> amend <strong>the</strong> current IGD article by article. In fact, given <strong>the</strong> extent <strong>to</strong> which <strong>the</strong> current insurance acquis needs <strong>to</strong> be amended in light of <strong>the</strong> Solvency 146 Ano<strong>the</strong>r view is that Article 129 CRD forms a useful basis for developing a decision-making process adequate for insurance groups. The precise cooperation and mediation process for <strong>the</strong> validation of internal models and <strong>the</strong> resolution of possible dispute should be developed in <strong>the</strong> answer <strong>to</strong> CfA 20. If <strong>the</strong> competent supervisors cannot agree on an internal model within <strong>the</strong> mediation phase, <strong>the</strong> group supervisor’s decision would be binding for all solo supervisors. However, CEIOPS recognizes that <strong>the</strong> legal responsibilities between group and solo supervisors must be balanced carefully. Given that compliance with <strong>the</strong> MCR and ground floor for internal models (see CfA 9, para. 9.117) on solo level ensures that subsidiaries remain adequately capitalized. Additional add-ons under <strong>the</strong> Pillar II process would be possible <strong>to</strong> be set by solo supervisors for identified risks outside <strong>the</strong> scope of <strong>the</strong> internal model that has been approved. 223
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CEIOPS-DOC-07/05 Answers</s
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Style convention The following has
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• Safety measures (CfA 9); • So
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sole purpose is to
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Call for Advice No. 7 Technical pro
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one year). Therefore, capital requi
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perhaps through an explicit additio
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Discounting 7.22 The present value
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exposed to risk fr
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insurance liabilities set by refere
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Profit sharing In practice, for uni
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future cash flows will have <strong
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Explanatory text S
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always have resources to</s
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developed. They would help
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8.28 A fourth option could be envis
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In principle, "the
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8.48 Three alternatives can be cons
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essential part of the</stro
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statistical estimate (with a level
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8.77 It may be argued that
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to use more sophis
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consequence on the
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8.105 In some cases, the</s
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This shall be reviewed, at least an
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ut the exposure <s
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Explanatory text M
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9.15 Solvency II could also employ
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9.28 The life formula yields itself
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underestimate them
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'Prudent person plus' approach 9.52
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Uniform or different rules for tech
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through a prescribed list. Lists ar
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addition a range of stresses so tha
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(including the Rei
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for review of the
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eligibility criteria, or principles
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should not lead to
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• the degree of
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9.156 The senior management shall r
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- going-concern aspects of business
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features. 81 TailVaR is an example
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10.17 The SCR should also reflect <
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10.26 The risk of asset liability m
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Naturally, the pra
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too few categories
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- Choice of volume measures 10.57 W
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Underwriting risk in non-life insur
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volatility of thei
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those insurers this possible increa
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10.103 A factor-ba
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10.112 Assessing whethe</st
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10.121 The SCR should deliver a lev
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whenever its effects on the
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scenario techniques to</str
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Operational risk just ratings infor
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Call for Advice No. 11 Solvency cap
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Costs and Benefits 11.6 It should b
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• Qualitative requirements for <s
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11.19 Risk management criteria set
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individual undertaking is exposed a
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• sensitivity analyses that have
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• visualizations of flows of prod
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Partial models and the</str
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11.58 There should be few descripti
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of the SCR estimat
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equirements to imp
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Call for Advice No. 12 Reinsurance
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Reflection in technical provisions
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• provide an estimate of an under
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particular reinsurer(s)’ aggregat
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they auto<
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einsurer to <stron
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should be a reduction in risk regar
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Call for Advice No. 13 Quantitative
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• the process of
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• handling questions from insuran
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member countries and in the
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components of the
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Background 14.1 Current insurance D
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14.12 In order to
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groups in its answer to</st
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affected; • Impose restrictions o
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14.43 Regarding the</strong
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off all contracts; • to</
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“While proportional reinsurance t
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contribute with any additional info
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E.29 Another way <
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programmes on the
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