Internal models
Title of the event – (Arial 28pt bold)
Gareth
SubtitleTruran
for event – (Arial 28pt)
Date (Arial
Head
of16pt)
Department, London Markets
General Insurance Division
Agenda
1. Introductory remarks
2. Timeline
3. Lessons learned from pre-application
4. Moving from pre-application to formal application
5. Formal application
6. Other considerations
2
The PRA’s approach to internal model reviews
•
Context relevant not just for those firms in IMAP
•
Internal models and the standard formula
•
Internal models cannot be viewed in isolation from the broader suite of
requirements within Solvency II
•
Internal model tests and standards set a high bar for good reason
3
Timeline
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Implementation
1 January 2016
Transposition
31 March 2015
CP23/14
published
15/10/14 details
IMAP application
process
PRA pre-application review,
assessment and feedback
Submission of
formal
application to
PRA
2016
Other approvals granted or declined by the
PRA
PRA formal review and assessment
Ongoing
evaluation of
internal model
appropriateness
PRA decision
making and
feedback
PRA communication to firms
PRA decision/activity
Firm activity
4
Lessons from the internal model pre-application phase
Key judgments and assumptions inherent in models are not
always highlighted or justified appropriately by firms
Significant gaps
that firms still
have to close on
internal models in
order to meet the
test and standards
required by the
Directive
No appropriate escalation to senior decision makers for the
most material assumptions
Number of areas where the PRA continues to question the validity of
firms’ underlying modelling assumptions
Boards and senior management should be engaged to ensure
the model meets the needs of the business and will be used in
practice
5
Moving from pre-application to formal application
The PRA has given clear feedback on areas where it believes further work
needs to be done to address serious weaknesses
•
Between now and 1 April 2015, the PRA will review each firm’s IMAP submission
•
The PRA will give feedback on areas which need to be addressed before
approval can be given
The PRA will ask firms to delay an internal model application or revert to a
simpler approach if too much work is required ahead of implementation
6
Planning for the formal application
Firms should have a clear plan outlining the remaining work needed to meet
the tests and standards
•
Firms need to monitor progress against plans
•
Important to provide us with clear and complete information
•
Be aware of the college dimension and the added complexity this brings to the
process
•
The PRA has been actively engaging with the colleges and will be undertaking a
similar process in the formal application phase
7
The format of the formal application process
The EIOPA draft Implementing Technical Standard on internal model approval
clarifies what should be included in a an internal model application
•
The PRA published CP 23/14 on Solvency II approvals which sets its
expectations of the application process
•
For the formal application phase, the PRA will require firms to use the EIOPA
Common Application Template (CAT)
•
Firms in the pre-application phase can continue to use the existing PRA SAT
•
The new CAT will be compulsory for all firms when making their formal application
Internal model decisions will either be ‘approve’ or ‘reject’
Other approvals and how they impact the internal model
•
Consider the other approvals the firm intends to apply for during the same period
•
What dependencies exist between them?
•
How will this affect the order in which the firm submits the internal model
application?
Discuss plans with PRA supervisors when each approval application will be
submitted
9
The importance of contingency planning
If model approval cannot be granted in time for 1 January 2016, firms should
consider:
•
Delaying the formal application until the tests and standards can be met
•
Partial internal model rather than a full model
•
Standard formula either with or without undertaking specific parameters
Firms should also consider the impact on the internal model if permissions to use
other approvals are not granted
10
Accepting applications and the decision making
process – practical questions
Series of practical questions relating to the application process that are very
important to firms’ planning
•
How will equivalence decisions impact internal model decisions?
•
How should model changes between now and Solvency II implementation be
handled?
•
What will happen following model approval?
11
Summary
•
Little time left to complete remaining development work for those firms that plan
to seek model approval in time for implementation on 1 January 2016
•
Important for a firm to take on board PRA feedback which may increase chance
of model approval
•
The PRA will not approve internal models which do not adequately reflect the
risks firms face
•
Firms should also consider the impact on the internal model if permissions to use
other approvals are not granted
•
Boards need to be fully engaged to ensure overall Solvency II implementation
plans are delivered on time and to the appropriate standards