The PRA has published a consultation paper on proposed changes to the internal models used by UK insurance firms.

Under Solvency II, the PRA may approve applications to use an internal model to calculate the Solvency Capital and an internal model change policy.

Under Regulation 48 of the Solvency II Regulations 2015 (2015/575) firms may apply to the PRA for supervisory approval of a major change to an internal model, as specified in the firm’s approved internal model change policy, or for changes to the internal model change policy itself.

The inclusion of new elements in the internal model, such as additional business units or risks not included in the scope of the internal model, are subject to supervisory approval as laid down in Article 112 of the Solvency II Directive.

In its paper (which is designated CP19/16), the PRA proposes a draft supervisory statement setting out its expectations on firms and the Society of Lloyd’s in relation to changes to internal models and extensions to the scope of internal models that have been approved under Solvency II.

In particular, the draft supervisory statement sets out the PRA’s expectations regarding:

  1. Firms and the Society of Lloyd’s for the period before and during an internal model change application.
  2. The quality of firms’ model change applications.
  3. The information which the PRA expects to be provided with in a model change application.

The PRA is consulting on the draft supervisory statement to allow firms the opportunity to provide feedback and highlight any issues of concern.

The consultation is relevant to insurance firms with an internal model approval under Solvency II. It may also be of interest to UK insurance firms seeking approval to use an internal model in the future and also to UK subsidiaries of EEA or non-EEA groups.

The consultation is open until Friday 5 August 2016. A copy of the consultation paper can be found here:http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp1916.pdf.