The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has published a report that sets out the results of a stock taking exercise on the use of internal models in insurance.
The report is set out as follows:
- Section 2 – “The approval process” section summarises the experience of the banking sector, securities and insurance supervisory authorities with respect to the review and monitoring of internal models for regulatory purposes.
- Section 3 – “Technical characteristics” summarises the nature of a typical model’s assumptions, structure and mechanics, modelling of risk variables and dependencies, and calibration of the models used by firms.
- Section 4 – “Data” provides an overview of the data management and data processing currently implemented by firms (e.g. data quality, sources of data, lack of data, expert judgment, etc.).
- Section 5 – “Operational performance” explains some IT aspects of internal models, issues related to the use of various systems and around the timeliness and integrity of computations.
- Section 6 – “Mitigation of risks” reviews the risk mitigation methods and the extent to which they are reflected in the model outputs (e.g. management actions, hedging, reinsurance, securitisation, alternative risk transfer techniques (ART), etc.).
- Section 7 – “Validation” describes the methodologies used by firms for the verification of data integrity, including market prices; extent of the independent review of the methodologies, documentation and their implementation; sensitivity and stability of the model; performance of the model, back-testing, accuracy of predictions and ability to rank-order risks; validation of the soundness of the systems, etc.
- Section 8 – “Model Governance” provides an overview of the internal approval structure of models used by firms; involvement of senior management; degree of independence between people that are assessing and quantifying risks and those that are selling products (i.e. between front and back office); use of model management information by senior management; stress testing and impact on business decisions.
- Section 9 – “Documentation Standards” describes the existing practices about documentation of methodologies, risk policies, calibration procedures, etc.
- Section 10 – “Use test” covers the current uses of internal models by firms, including the setting of the risk appetite, limit monitoring, pricing purposes and capital allocation.
- Section 11 – “Partial internal models” describes issues related to partial internal models.
- Section 12 – “Group internal models” examines issues specific to groups.