Eddy Vanbeneden, Managing Director
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This series concludes its review of the implementation measures described by CEIOPS regarding procedures to be followed for the approval of an internal model. The appendices are presented today.
Eddy Vanbeneden, Managing Director
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This series continues its review of the implementation measures described by CEIOPS regarding procedures to be followed for the approval of an internal model.
4. Approval timeline
When the application package for internal model approval is submitted, the regulator will have six months to approve the model or reject it. This period starts on the date when the application is considered complete and will be suspended while the regulator waits for any additional information or for any minor adjustment. It will be stopped when the regulator asks for any major or new modification or when the company decides to withdraw its model from the approval process.
This series continues its review of the implementation measures described by CEIOPS regarding procedures to be followed for the approval of an internal model.
3. Approval process of internal models
The official form submitted by (re)insurers for approval of their internal model has many requirements:
Eddy Vanbeneden, Managing Director
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The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published many consultation papers in 2009 focusing on Level 2 implementation measures for Solvency II. Consultation Paper (CP) 37 addressed the procedures for approval of internal models. It was followed by a final paper entitled “CEIOPS Advice for Level 2 Implementing Measures on Solvency II ‘The procedure to be followed for the approval of an internal model’”, published in October, 2009.
Frank Achtert, Managing Director, and Eddy Vanbeneden, Managing Director
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Group support will not be permitted when Solvency II becomes effective in 2012. As a result, the flexibility to use capital held anywhere in the group in calculating the Solvency Capital Requirement (SCR) will not be available. Rather, each entity will have to calculate its SCR based on the capital it has, regardless of its group’s position as a whole. This last-minute change to eliminate group support could prompt some European insurance groups to change their structures - or at least rethink how much risk they will take in each entity.
Financial Intelligence Team
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In April 2009, Guy Carpenter’s Financial Intelligence Team published a briefing entitled Risk Profile, Appetite and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness. That briefing included definitions of Risk Profile, Appetite and Tolerance and how these concepts fit into an Enterprise Risk Management (ERM) framework. It also presented the results of our initial Risk Tolerance Benchmarking study, which summarized the information publicly disclosed in this area.
Frank Achtert, Managing Director, and Eddy Vanbeneden, Managing Director
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Lately, discussion about the use of capital models in Europe has been driven by Solvency II. A major regulation is on the horizon and is progressively introducing considerable change in the how the insurance industry will manage risk. Important investment has already begun and will continue, as companies have to integrate this new regulatory regime in their management approaches. With Solvency II compliance driving the adoption of economic capital models, though, many (re)insurers could miss an opportunity to secure a competitive advantage. Instead of using compliance as the impetus for capital modeling, strategy should come first.
Financial Intelligence Team
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CP31 sets out the principles an entity must adhere to in order to allow the recognition of financial mitigation techniques (e.g., financial derivatives) for Solvency Capital Requirement (SCR) purposes. It states the capital requirement should allow for an appropriate reduction to reflect the mitigation techniques in place while avoiding allowing deductions based on inappropriate mitigation techniques.
Financial Intelligence Team
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Special purpose vehicles (SPVs) are used to transfer insurance risks to the capital markets. This document addresses the authorization, regulatory requirements, and scope of supervisory review of SPVs under Solvency II. The requirements refer only to SPVs domiciled in the European Economic Area (EEA); SPVs established outside the EEA are not subject to the rules discussed in this paper.
Financial Intelligence Team
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Own funds are comprised of “basic own funds” and “ancillary own funds.” Ancillary own funds are only accepted as own funds under certain limited circumstances. Examples of ancillary own funds are unpaid common shares or letters of credit and guarantees.
