Internal Models and Solvency II
First published:
If you are a Risk.net subscriber you are entitled to 20% off your Risk books purchases. Please email enquiries@riskbooks.com for more information.
As part of your Risk.net subscription you are entitled to 20% off all of your Risk Books purchases. If you would like to place an order please email enquiries@riskbooks.com
Profit and Loss Attribution
Andrew Candland and Christopher Lotz
Profit and Loss Attribution
Foreword
Introduction
Balance Sheet, Capital Requirements and Internal Models
Partial Internal Models
The Internal Model Approval Process
Policy for Model Changes
Internal Models to Calculate the Group Solvency Requirement: The Perspective of the Home and Host Supervisor
Use Test: Challenges and Opportunities
Statistical Quality Standards: Challenges in Internal Model Implementation
Representation, Reality and the Solvency II Data Challenge
The Calibration Standards
Profit and Loss Attribution
Internal Model Validation: The Regulatory Perspective
Model Validation: An Industry Perspective
Solvency II Internal Model Documentation Requirements
How to Review External Models and Data Embedded in the Modelling Framework
The Limitations of Internal Models and the Supervisory Review Process
Profit and loss (P&L) attribution is an important tool of model risk management that has a long history. It is very well known in banking circles, especially in the area of traded markets, and the concept of analysis of movement is widely used in insurance. Much can be learnt about the risks of an undertaking by closely studying its P&L, because this incorporates all the effects that have materialised over a given horizon from all the risks that the undertaking faces.
With the advent of Solvency II, especially Article 123 of the directive, regulators have required firms that use an internal model to carry out a P&L attribution at least annually.11 For further details, see European Parliament and the Council of the European Union (2009). This formalises the link between P&L and risks and means it has a permanent position in the armoury of techniques of any insurance undertaking seeking approval for an internal model under Solvency II.
P&L attribution is the process of analysing the change between two valuations, linking this to the developments of their causes and sources (risk drivers) between the two valuation dates. The two valuations in question can be two balance sheets
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
