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Internal model

Internal model 
 |  Standard formula  |  Other Pillar 1 aspects 

This page gives information to help firms prepare to submit a formal application to use a Solvency II internal model. It also includes information on the PRA’s internal model review and assessment work.

Internal model applications

The European Insurance and Occupational Pensions Authority (EIOPA) published the Common Application Package for Internal Models (CAP) for firms intending to submit a formal application to use an internal model. The CAP can be found on the ‘Standards, Guidelines, and Recommendations’ page of the EIOPA website - see External Links. An explanatory note, which details the requirements of the CAP, is also available on the same page of the EIOPA website.

All firms intending to submit a formal internal model application to the PRA should use the EIOPA Self-Assessment Template (EIOPA S.A.T.) which is part of the CAP. Firms who used the PRA SAT in pre-application must transfer all existing information to the EIOPA S.A.T.  Please be aware that the PRA SAT published in early 2012 was based on draft legislation so firms need to be careful when transferring information due to the minor differences between the PRA SAT and the EIOPA S.A.T.

The EIOPA CAP is divided into separate Excel spreadsheet tabs:

  1. Contents
  2. Instructions
  3. Self-Assessment Template (EIOPA S.A.T.)
  4. Background information
  5. Application package (‘tabs related to ITS on Internal Models Approval process (article 2)’)

Firms should read and review the ‘Instructions’ tab before completing any of the spreadsheets in the EIOPA S.A.T. In the ‘Background Information’ tab, PRA-authorised firms submitting an application to the PRA, and groups where the PRA is the lead supervisor, should only complete the sections entitled ‘General Requirements’ and, where relevant, ‘Additional Requirements for Groups’.

If firms have any questions regarding the completion of the CAP, including the S.A.T., they should refer to the ‘Instructions’ tab. The explanatory note is also a useful reference. Other questions should be addressed to firms’ usual supervisory contact.

The logistics of submitting a formal internal model application from 1 January 2016

The PRA is unable to accept inward email submissions larger than a pre-defined file size. The way firms need to submit formal internal model applications will therefore vary depending upon the firm and the size of the application.  To agree a mutually acceptable approach, firms should speak to their usual supervisory contact well in advance of the planned application date.

Volatility adjustment and the internal model update

On 5 June 2015, the PRA provided clarification for firms on volatility adjustment in the modelling of market and credit risk stresses.

Internal model change policy

All internal model firms are required to have a model change policy. The policy needs to be developed as part of the internal model approval process. Following approval, the model change policy is expected to play a key role in the wider governance of a firm's internal model. For example, it helps ensure that, on an ongoing basis, the internal model appropriately reflects the risks to which a firm is exposed and that it continues to meet the requirements of Solvency II.
It is important that the model change policy is of a good standard; however, the PRA has seen a wide variation in the quality. On 7 May 2015, the PRA produced the following good practice in a number of key aspects of model change policy. This is not an exhaustive list and firms should consider all the relevant Solvency II requirements and Guidelines when developing their model change policy. 

Partial internal models

Some firms intending to use standard formula may need to consider the use of a partial internal model to calculate their SCR if the result of the standard formula is not appropriate for their firm. Firms using a partial internal model will still be expected to uphold the requirements of the standard formula for the risk areas for which they are using the standard formula, and to meet the relevant tests and standards.