This consultation paper (CP) sets out the PRA’s proposal to consider applications from internal model firms that include a dynamic volatility adjustment (DVA). It sets out the PRA’s draft expectations of internal model firms when determining the risks that might arise from the DVA when calculating the solvency capital requirement (SCR).
This CP is relevant to UK Solvency II firms and to the Society of Lloyd’s and its managing agents. It is most relevant to firms with, or seeking, volatility adjustment (VA) approval and which use a full or partial internal model to determine the SCR, together with UK Solvency II firms that may develop a full or partial internal model in future.
Summary of proposals
The PRA proposes a new supervisory statement (SS) ‘Solvency II: Internal models – volatility adjustment in the modelling of market risk and credit risk stresses’ (Appendix 1), and amendments to SS17/16 ‘Solvency II: internal models – assessment, model change and the role of non-executive directors’ (Appendix 2).
Responses and next steps
This consultation closes on Wednesday 11 July 2018. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP9_18@bankofengland.co.uk.