The Internal Model Approval Process

Stefano Pasqualini

The internal model approval process aims to assess if (re)insurance firms’ internal modelling framework can be used to calculate the solvency capital requirement (SCR). This process requires firms to demonstrate compliance with several mandated tests and requirements. For example, among other things, (re)insurance firms need to provide evidence that:

• • the internal model is able to calculate the SCR;

• • the systems concerned for identifying, measuring, monitoring, managing and reporting risk are adequate;

• • the use test, statistical quality, calibration and profit and loss (P&L) attribution, validation, documentation, external models and data standards have been met; and

• • any potential interrelation between these requirements has been properly considered.

Moreover, if the application refers to a partial internal model, the (re)insurance firm also needs to:

• • justify the limited scope of the model (ie, provide evidence that there is no cherry-picking);

• • demonstrate that the resulting SCR reflects more appropriately the risk profile of the (re)insurance firm; and

• • provide evidence