How to Review External Models and Data Embedded in the Modelling Framework

Åsa Larson

As we know, an internal model is a tool that a firm uses for risk management, risk control and risk measurement.¹¹ For further details about the definition of an internal model, see Chapter 1. After the supervisor’s review and approval, this model can also be used for the calculation of the solvency capital requirement (SCR). What is an “external” model, then? It should be noted that there is no clear definition of the term “external model” in the Solvency II directive (see European Parliament and the Council of the European Union, 2009). Only the wording in Article 126 suggests that a model or data obtained from a third party could be used as an internal model or form part of an internal model.

This chapter will deal with external models and data in this sense – ie, models and/or data from an external third party – and compare the use of external models to the use of purely internal models, ie, models and data developed and run in-house by a firm. The Solvency II requirements that a firm and a model need to meet to qualify as the tool for the calculation of the SCR, including the fulfilment of these requirements when external models are used, will be discussed throughout the