This supervisory statement sets out the Prudential Regulation Authority’s (PRA) expectations of firms with an approved internal model, and provides further information on the PRA’s approach to monitoring model drift and the reporting of standard formula Solvency Capital Requirement (SCR) information.
The supervisory statement is relevant to UK solo insurance firms within the scope of Solvency II, including undertakings where the solo SCR is calculated by a group internal model, the Society of Lloyd’s in respect of each of their syndicates, and in respect of outputs of the Lloyd’s internal model.
Response to feedback to Consultation Paper (CP) 22/16
The PRA received a small number of responses to the CP from firms and industry bodies. Broadly, respondents recognised the importance of the PRA being able to track developments in firms’ internal models against a suite of measures. Respondents questioned the usefulness of the standard formula calculation for this purpose, the re-basing of ‘model drift’ ratios on approval of major changes, and raised concerns about possible disclosure of results.
In response to the feedback, the PRA provides the following clarifications in the final statement that:
- The standard formula is one of a suite of metrics that can be used to monitor model drift, recognising there may be limitations with the standard formula calculation for firms with approved internal models.
- Ratios will be re-based only if there is a major model change or change in risk profile resulting in a material change to the SCR to ensure the value in recording trends in model drift ratios over time is maintained where possible.
- The results of the standard formula SCR calculation is privately reported to the PRA.
- Firms are not required to have their standard formula calculation externally audited. Submissions should be approved by a member of the senior management team with suitable authorisation before being submitted.
- Firms should submit their standard formula SCR information four weeks following the submission date for their annual quantitative reporting templates.
The technical artefacts will be available on the Bank’s webpages in due course.