Internal Models and Solvency II
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Foreword
Gabriel Bernardino
Foreword
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
Solvency II will bring about a transformation of insurance supervision in Europe. It will replace an outdated and fragmented regulatory regime with a harmonised approach based on sound core principles that will increase policyholder protection.
Internal models play an important role in Solvency II. Through them, the same modern developments in risk management and actuarial science, tailored to the risk profile of an individual company, can be used to calculate regulatory capital and make decisions in running a company.
Internal models must necessarily be as complex as the risks they are seeking to quantify, but this must not be at the expense of transparency and responsibility. Solvency II rightly sets high standards for any company wanting to gain approval to use its internal model to calculate regulatory capital requirements.
For all but the most advanced insurers, internal models have been something of a new world. As with any new place, it takes a while to become familiar with the surroundings, to discover pitfalls and dangers that may not be evident at first, and to find shortcuts that can save time. A book that shares the knowledge of experienced practioners and
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