The Solvency ii
Directive
SECTION
4 - SOLVENCY CAPITAL REQUIREMENT
SUBSECTION 1 - GENERAL
PROVISIONS FOR THE SOLVENCY CAPITAL REQUIREMENT USING THE STANDARD
FORMULA OR AN INTERNAL MODEL
Article 100
General
provisions
Member States shall require that insurance and
reinsurance undertakings hold eligible own funds covering the
Solvency Capital Requirement.
The Solvency Capital
Requirement shall be calculated, either in accordance with the
standard formula in Subsection 2 or using an internal model, as set
out in Subsection 3.
Article 101
Calculation of
the Solvency Capital Requirement
1. The Solvency Capital
Requirement shall be calculated in accordance with paragraphs 2 to
5:
2 The Solvency Capital Requirement shall be calculated on
the presumption that the undertaking will carry on its business as a
going concern.
3. The Solvency Capital Requirement shall be
calibrated so as to ensure that all quantifiable risks to which an
insurance or reinsurance undertaking is exposed are taken into
account.
It shall cover existing business, as well as the
new
business expected to be written over the next twelve months.
With
respect to existing business, it shall cover unexpected losses
only.
It shall correspond to the
Value-at-Risk of the basic
own funds of an insurance or reinsurance undertaking subject to a
confidence level of 99,5 % over a one-year period.
4. The
Solvency Capital Requirement shall cover at least the following
risks:
(a) non-life underwriting risk;
(b) life
underwriting risk;
(c) health underwriting risk;
(d)
market risk;
(e) credit risk;
(f) operational
risk.
Operational risk as referred to in point (f) of the
first subparagraph shall include legal risks, and exclude risks
arising from strategic decisions, as well as reputation
risks.
5 When calculating the Solvency Capital Requirement,
insurance and reinsurance undertakings shall take account of the
effect of risk mitigation techniques, provided that credit risk and
other risks arising from the use of such techniques are properly
reflected in the Solvency Capital Requirement.
Article
102
Frequency of calculation
1. Insurance and
reinsurance undertakings shall calculate the Solvency Capital
Requirement at least once a year and report the result of that
calculation to the supervisory authorities.
Insurance and
reinsurance undertakings shall ensure that they hold eligible own
funds which cover the last reported Solvency Capital
Requirement.
Insurance and reinsurance undertakings
shall
monitor the amount of eligible own funds and the Solvency Capital
Requirement on an on-going basis.
If the risk profile of an
insurance or reinsurance undertaking deviates significantly from the
assumptions underlying the last reported Solvency Capital
Requirement, the undertaking concerned shall recalculate the
Solvency Capital Requirement without delay and report it to the
supervisory authorities.
2. Where there is evidence to
suggest that the risk profile of the insurance or reinsurance
undertaking has altered significantly since the date on which the
Solvency Capital Requirement was last reported, the supervisory
authorities may require the undertaking concerned to recalculate the
Solvency Capital Requirement.
SUBSECTION 2 - SOLVENCY CAPITAL REQUIREMENT – STANDARD FORMULA
Article 103
Structure of the standard formula
The Solvency
Capital Requirement calculated on the basis of the standard formula
shall be the sum of the following items:
(a) the Basic
Solvency Capital Requirement, as laid down in Article
104;
(b) the capital requirement for operational risk, as
laid down in Article 106;
(c) the adjustment for the
loss-absorbing capacity of technical provisions and deferred taxes,
as laid down in Article 107.
Article
104
Design of the Basic Solvency Capital
Requirement
1. The Basic Solvency Capital Requirement shall
comprise individual risk modules,
which are aggregated in accordance
with point 1 of Annex IV.
It shall consist of at least the
following risk modules:
(a) non-life underwriting
risk;
(b) life underwriting risk;
(c) health
underwriting risk;
(d) market risk,
(e) counterparty
default risk.
2. For the purposes of points (a), (b) and (c)
of paragraph 1, insurance or reinsurance operations shall be
allocated to the underwriting risk module that best reflects the
technical nature of the underlying risks.
3. The
correlation
coefficients for the aggregation of the risk modules referred to in
paragraph 1, as well as the calibration of the capital requirements
for each risk module, shall result in an overall Solvency Capital
Requirement which complies with the principles set out in Article
101.
4. Each of the risk modules referred to in paragraph 1
shall be calibrated using a Value-at-Risk measure, with a 99.5%
confidence level, over a one year period.
Where appropriate,
diversification effects shall be taken into account in the design of
each risk module.
5. The same design and specifications for
the risk modules shall be used for all insurance and reinsurance
undertakings, both with respect to the Basic Solvency Capital
Requirement and to any simplified calculations as laid down in
Article 108.
6. With regard to risks arising from
catastrophes, geographical specifications may, where appropriate, be
used for the calculation of the life, non-life and health
underwriting risk modules.
7. Subject to approval by the
supervisory authorities, insurance and reinsurance undertakings may,
within the design of the standard formula, replace a subset of its
parameters by parameters specific to the undertaking concerned when
calculating the life, non-life and health underwriting risk
modules.
Such parameters shall be calibrated on the basis of
the internal data of the undertaking concerned, or of data which is
directly relevant for the operations of that undertaking using
standardised methods.
When granting supervisory approval,
supervisory authorities shall verify the completeness, accuracy and
appropriateness of the data used.
Article
105
Calculation of the Basic Solvency Capital
Requirement
1. The Basic Solvency Capital Requirement shall
be calculated in accordance with paragraphs 2 to 6.
2. The
non-life underwriting risk module shall reflect the risk arising
from non-life insurance obligations, in relation to the perils
covered and the processes used in the conduct of business.
It
shall take account of the uncertainty in the results of insurance
and reinsurance undertakings related to the existing insurance and
reinsurance obligations as well as to the new business expected to
be written over the forthcoming twelve months.
It shall be
calculated, in accordance with point 2 of Annex IV, as a combination
of the capital requirements for at least the following
sub-modules:
(a) the risk of loss, or of adverse change in
the value of insurance liabilities, resulting from fluctuations in
the timing, frequency and severity of insured events, and in the
timing and amount of claim settlements (non-life premium and reserve
risk);
(b) the risk of loss, or of adverse change in the
value of insurance liabilities, resulting from significant
uncertainty of pricing and provisioning assumptions related to
extreme or exceptional events (non-life catastrophe risk).
3.
The life underwriting risk module shall reflect the risk arising
from life insurance obligations, in relation to the perils covered
and the processes used in the conduct of business.
It shall
be calculated, in accordance with point 3 of Annex IV, as a
combination of the capital requirements for at least the following
sub-modules:
(a) the risk of loss, or of adverse change in
the value of insurance liabilities, resulting from changes in the
level, trend, or volatility of mortality rates, where an increase in
the mortality rate leads to an increase in the value of insurance
liabilities (mortality risk);
(b) the risk of loss, or of
adverse change in the value of insurance liabilities, resulting from
changes in the level, trend, or volatility of mortality rates, where
a decrease in the mortality rate leads to an increase in the value
of insurance liabilities (longevity risk);
(c) the risk of
loss, or of adverse change in the value of insurance liabilities,
resulting from changes in the level, trend or volatility of
disability, sickness and morbidity rates (disability – morbidity
risk);
(d) the risk of loss, or of adverse change in the
value of insurance liabilities, resulting from changes in the level,
trend, or volatility of the expenses incurred in servicing insurance
or reinsurance contracts (life expense risk);
(e) the risk of
loss, or of adverse change in the value of insurance liabilities
resulting from fluctuations in the level, trend, or volatility of
the revision rates applied to annuities, due to changes in the legal
environment or in the state of health of the person insured
(revision risk);
(f) the risk of loss, or of adverse change
in the value of insurance liabilities, resulting from changes in the
level or volatility of the rates of policy lapses, terminations,
renewals and surrenders (lapse risk);
(g) the risk of loss,
or of adverse change in the value of insurance liabilities,
resulting from the significant uncertainty of pricing and
provisioning assumptions related to extreme or irregular events
(life catastrophe risk).
4. The health underwriting risk
module shall reflect the risk arising from the underwriting of
health insurance obligations, whether it is pursued on a similar
technical basis to that of life insurance or not, following from
both the perils covered and the processes used in the conduct of
business.
It shall cover at least the following risks:
(a) the risk of loss, or of adverse change in the value of
insurance liabilities, resulting from changes in the level, trend,
or volatility of the expenses incurred in servicing insurance or
reinsurance contracts;
(b) the risk of loss, or of adverse
change in the value of insurance liabilities, resulting from
fluctuations in the timing, frequency and severity of insured
events, and in the timing and amount of claim settlements at the
time of provisioning;
(c) the risk of loss, or of adverse
change in the value of insurance liabilities, resulting from the
significant uncertainty of pricing and provisioning assumptions
related to outbreaks of major epidemics, as well as the unusual
accumulation of risks under such extreme circumstances.
5.
The market risk module shall reflect the risk arising from the level
or volatility of market prices of financial instruments which have
an impact upon the value of the assets and liabilities of the
undertaking. It shall properly reflect the structural mismatch
between assets and liabilities, in particular with respect to the
duration thereof.
It shall be calculated, in accordance with
point 5 of Annex IV, as a combination of the capital requirements
for at least the following sub-modules:
(a) the sensitivity
of the values of assets, liabilities and financial instruments to
changes in the term structure of interest rates, or in the
volatility of interest rates (interest rate risk);
(b) the
sensitivity of the values of assets, liabilities and financial
instruments to changes in the level or in the volatility of market
prices of equities (equity risk);
(c) the sensitivity of the
values of assets, liabilities and financial instruments to changes
in the level or in the volatility of market prices of real estate
(property risk);
(d) the sensitivity of the values of assets,
liabilities and financial instruments to changes in the level or in
the volatility of credit spreads over the risk-free interest rate
term structure (spread risk);
(e) the sensitivity of the
values of assets, liabilities and financial instruments to changes
in the level or in the volatility of currency exchange rates
(currency risk);
(f) additional risks to an insurance or
reinsurance undertaking stemming, either from lack of
diversification in the asset portfolio, or from large exposure to
default risk by a single issuer of securities or a group of related
issuers (market risk concentrations).
6. The counterparty
default risk module shall reflect possible losses due to unexpected
default, or deterioration in the credit standing, of the
counterparties and debtors of insurance and reinsurance undertakings
over the forthcoming twelve months.
The counterparty default risk
module shall cover risk-mitigating contracts, such as reinsurance
arrangements, securitisations and derivatives, and receivables from
intermediaries, as well as any other credit exposures which are not
covered in the spread risk sub-module.
It shall take appropriate
account of collateral or other security held by or for the account
of the insurance or reinsurance undertaking and the risks associated
therewith.
For each counterparty, the counterparty default
risk module shall take account of the overall counterparty risk
exposure of the insurance or reinsurance undertaking concerned to
that counterparty, irrespective of the legal form of its contractual
obligations to that undertaking.
Article
105a
Calculation of the equity risk sub-module: symmetric
adjustment mechanism
1. The equity risk sub-module calculated
in accordance with the standard formula shall include a symmetric
adjustment to the equity capital charge applied to cover the risk
arising from changes in the level of equity prices.
2. The
symmetric adjustment made to the standard equity capital charge,
calibrated in accordance with Article 104(4), covering the risk
arising from changes in the level of equity prices shall be based on
a function of the current level of an appropriate equity index and a
weighted average level of that index. The weighted average shall be
calculated over an appropriate period of time which shall be the
same for all insurance and reinsurance undertakings.
3. The
symmetric adjustment made to the standard equity capital charge
covering the risk arising from changes in the level of equity prices
shall not result in an equity capital charge being applied that is
more than 10 percentage points lower or 10 percentage points higher
than standard equity capital charge.
Article
106
Capital requirement for operational risk
1. The
capital requirement for operational risk shall reflect operational
risks to the extent they are not already reflected in the risk
modules referred to in Article 104. That requirement shall be
calibrated in accordance with Article 101(3).
2. With respect
to life insurance contracts where the investment risk is borne by
the policyholders, the calculation of the capital requirement for
operational risk shall take account of the amount of annual expenses
incurred in respect of those insurance obligations.
3. With
respect to insurance and reinsurance operations other than those
referred to in paragraph 2, the calculation of the capital
requirement for operational risk shall take account of the volume of
those operations, in terms of earned premiums and technical
provisions which are held in respect of those insurance and
reinsurance obligations. In this case, the capital requirement for
operational risks shall not exceed 30% of the Basic Solvency Capital
Requirement relating to those insurance and reinsurance
operations.
Article 107
Adjustment for the
loss-absorbing capacity of technical provisions and deferred
taxes
The adjustment referred to in point (c) paragraph 1 of
Article 103 for the loss-absorbing capacity of technical provisions
and deferred taxes shall reflect potential compensation of
unexpected losses through a simultaneous decrease in technical
provisions or deferred taxes or a combination of both.
That
adjustment shall take account of the risk mitigating effect provided
by future discretionary benefits of insurance contracts, to the
extent insurance and reinsurance undertakings can establish that a
reduction in such benefits may be used to cover unexpected losses
when they arise.
The risk mitigating effect provided by future
discretionary benefits shall be no higher than the sum of technical
provisions and deferred taxes relating to these future discretionary
benefits.
For the purpose of the second paragraph, the value
of future discretionary benefits under adverse circumstances shall
be compared to the value of such benefits under the underlying
assumptions of the best-estimate calculation.
Article
108
Simplifications in the standard formula
Insurance
and reinsurance undertakings may use a simplified calculation for a
specific sub-module or risk module where the nature, scale and
complexity of the risks they face justifies it and where it would be
disproportionate to require all insurance and reinsurance
undertakings to apply the standardised
calculation.
Simplified calculations shall be calibrated in
accordance with Article 101(3).
Article
108a
Significant deviations from the assumptions underlying
the standard formula calculation
Where it is inappropriate to
calculate the Solvency Capital Requirement in accordance with the
standard formula, as set out in Subsection 2, because the risk
profile of the insurance and reinsurance undertakings concerned
deviates significantly from the assumptions underlying the standard
formula calculation, the supervisory authorities may, by a decision
stating the reasons, require the undertakings concerned to replace a
subset of the parameters used in the standard formula calculation by
parameters specific to those undertakings when calculating the life,
non-life and health underwriting risk modules, as set out in Article
104(7).
Those specific parameters shall be calculated in such a way
to ensure that the undertaking complies with Article
101(3).
Article 109
Implementing
measures
1. In order to ensure that the same treatment is
applied to all insurance and reinsurance undertakings calculating
the Solvency Capital Requirement on the basis of the standard
formula, or to take account of market developments, the Commission
shall adopt implementing measures laying down the
following:
(a) a standard formula in accordance with the
provisions of Articles 101 and 103 to 108;
(a) any
sub-modules necessary or covering more precisely the risks which
fall under the respective risk modules referred to in Article 104 as
well as any subsequent updates;
(b) the methods, assumptions
and standard parameters to be used, when calculating each of the
risk modules or sub-modules of the Basic Solvency Capital
Requirement laid down in Articles 104 and 105, the symmetric
adjustment mechanism and the appropriate period of time, expressed
in the number of months, as referred to in Articles 105a and 305b,
as well as the appropriate approach for integrating the method
referred to in Article 305b related to the use of this method in the
Solvency Capital Requirement as calculated in accordance with the
standard formula;
(c) the correlation parameters, including,
if necessary, those set out in Annex IV, and the procedures for the
updating of those parameters;
(d) where insurance and
reinsurance undertakings use risk mitigation techniques, the methods
and assumptions to be used to assess the changes in the risk profile
of the undertaking concerned and adjust the calculation of the
Solvency Capital Requirement;
(e) the qualitative criteria
that the risk mitigation techniques referred to in point (d) must
meet in order to ensure that the risk has been effectively
transferred to a third party;
(f) the methods and parameters
to be used when assessing the capital requirement for operational
risk set out in Article 106, including the percentage referred to in
paragraph 3 of Article 106;
(fa) the methods and adjustments
to be used to reflect the reduced scope for risk diversification of
insurers related to ring-fenced funds;
(g) the method to be
used when calculating the adjustment for the loss-absorbing capacity
of technical provisions, as laid down in Article 107;
(h) the
subset of standard parameters in the life, non-life and health
underwriting risk modules that may be replaced by
undertaking-specific parameters as set out in Article
104(7);
(i) the standardised methods to be used by the
insurance or reinsurance undertaking to calculate the
undertaking-specific parameters referred to in point (h), and any
criteria with respect to the completeness, accuracy, and
appropriateness of the data used that must be met before supervisory
approval is given;
(j) the simplified calculations provided
for specific sub-modules and risk modules, as well as the criteria
that insurance and reinsurance undertakings, including captive
insurance and reinsurance undertakings, shall be required to meet in
order to be entitled to use each of these simplifications, as set
out in Article 108;
(ja) the approach to be used with respect
to related undertakings within the meaning of Article 210 in the
calculation of the Solvency Capital Requirement, in particular the
calculation of the equity risk sub-module referred to in Article
105(5), taking into account the likely reduction in the volatility
of the value of those related undertakings arising from the
strategic nature of those investments and the influence exercised by
the participating undertaking on those related
undertakings.
Those measures designed to amend non-essential
elements of this Directive, by supplementing it, shall be adopted in
accordance with the regulatory procedure with scrutiny referred to
in Article 304(3).
2. The Commission may adopt implementing
measures laying down quantitative limits and asset eligibility
criteria in order to address risks which are not adequately covered
by a sub-module. Such implementing measures shall apply to assets
covering technical provisions, excluding assets held in respect of
life insurance contracts where the investment risk is borne by the
policyholders. Those measures shall be reviewed by the Commission in
the light of developments in the standard formula and financial
markets.
Those measures designed to amend non-essential
elements of this Directive, by supplementing it shall be adopted in
accordance with the regulatory procedure with scrutiny referred to
in Article 304(3).
SUBSECTION 3 - SOLVENCY CAPITAL
REQUIREMENT – FULL AND PARTIAL INTERNAL MODELS
Article
110
General provisions for the approval of full and partial
internal models
1. Member States shall ensure that insurance
or reinsurance undertakings may calculate the Solvency Capital
Requirement using a full or partial internal model as approved by
the supervisory authorities.
2. Insurance and reinsurance
undertakings may use partial internal models for the calculation of
one or more of the following:
(a) one or more risk modules,
or sub-modules, of the Basic Solvency Capital Requirement, as set
out in Articles 104 and 105;
(b) the capital requirement for
operational risk as laid down in Article 106;
(c) the
adjustment referred to in Article 107.
In addition, partial
modelling may be applied to the whole business of insurance and
reinsurance undertakings, or only to one or more major business
units.
3. In any application for approval, insurance and
reinsurance undertakings shall submit, as a minimum, documentary
evidence that the internal model meets the requirements set out in
Articles 118 to 123.
Where the application for that approval
relates to a partial internal model, the requirements set out in
Articles 118 to 123 shall be adapted to take account of the limited
scope of the application of the model.
4. The supervisory
authorities shall decide on the application within six months from
the receipt of the complete application.
5. Supervisory
authorities shall give approval to the application only if they are
satisfied that the systems of the insurance or reinsurance
undertaking for identifying, measuring, monitoring, managing and
reporting risk are adequate and in particular, that the internal
model complies with the requirements referred to in paragraph
3.
6. Any decision by the supervisory authorities to reject
the application for the use of an internal model shall be
accompanied by the reasons therefore.
7. After having
received approval from supervisory authorities to use an internal
model, insurance and reinsurance undertakings may, by a decision
stating the reasons, be required to provide supervisory authorities
with an estimate of the Solvency Capital Requirement determined in
accordance with the standard formula, as set out in Subsection
2.
Article 111
Specific provisions for the
approval of partial internal models
1. In the case of a
partial internal model, supervisory approval shall only be given if
that model complies with the requirements set out in Article 110 and
the following additional conditions:
(a) the reason for the
limited scope of application of the model is properly justified by
the undertaking;
(b) the resulting Solvency Capital
Requirement reflects more appropriately the risk profile of the
undertaking and in particular meets the principles set out in
Subsection 1;
(c) its design is consistent with the
principles set out in Subsection 1 so as to allow the partial
internal model to be fully integrated into the Solvency Capital
Requirement Standard Formula.
2. When assessing an
application for the use of a partial internal model which only
covers certain sub-modules of a specific risk module, or some of the
business units of an insurance or reinsurance undertaking with
respect to a specific risk module, or parts of both, supervisory
authorities may require the insurance and reinsurance undertakings
concerned to submit a realistic transitional plan to extend the
scope of the model.
The transitional plan shall set out the
manner in which insurance and reinsurance undertakings plan to
extend the scope of the model to other sub-modules or business
units, in order to ensure that the model covers a predominant part
of their insurance operations with respect to that specific risk
module.
Article 112
Implementing
measures
The Commission shall adopt implementing measures
setting out following:
(1) the procedure to be followed for
the approval of an internal model;
(2) the adaptations to be
made to the standards set out in Articles 118 to 123 in order to
take account of the limited scope of the application of the partial
internal model.
Those measures designed to amend
non-essential elements of this Directive, by supplementing it, shall
be adopted in accordance with the regulatory procedure with scrutiny
referred to in Article 304(3).
Article 113
Policy
for changing the full and partial internal models
As part of
the initial approval process of an internal model, the supervisory
authorities shall approve the policy for changing the model of the
insurance or reinsurance undertaking. Insurance and reinsurance
undertakings may change their internal model in accordance with that
policy.
The policy shall include a specification of minor and
major changes to the internal model.
Major changes to the
internal model, as well as changes to the policy, shall always be
subject to prior supervisory approval, as laid down in Article
110.
Minor changes to the internal model shall not be subject
to prior supervisory approval, insofar as they are developed in
accordance with the policy.
Article
114
Responsibilities of the administrative and management
bodies
The administrative or management bodies of the
insurance and reinsurance undertakings shall approve the application
to the supervisory authorities for approval of the internal model
referred to in Article 110, as well as the application for approval
of any subsequent major changes made to that model.
The
administrative or management body shall have responsibility for
putting in place systems which ensure that the internal model
operates properly on a continuous basis.
Article
115
Reversion to the standard formula
After having
received approval in accordance with Article 110, insurance and
reinsurance undertakings shall not revert to calculating the whole
or any part of the Solvency Capital Requirement in accordance with
the standard formula, as set out in Subsection 2, except in duly
justified circumstances and subject to the approval of the
supervisory authorities.
Article
116
Non-compliance of the internal model
1.
If, after
having received approval from the supervisory authorities to use an
internal model, insurance and reinsurance undertakings cease to
comply with the requirements set out in Articles 118 to 123,
they
shall, without delay, either present to the supervisory authorities
a plan to restore compliance within a reasonable period of time, or
demonstrate that the effect of non-compliance is
immaterial.
2. In the event that insurance and reinsurance
undertakings fail to implement the plan referred to in paragraph 1,
the supervisory authorities may require insurance and reinsurance
undertakings to revert to calculating the Solvency Capital
Requirement in accordance with the standard formula, as set out in
Subsection 2.
Article 117
Significant deviations
from the assumptions underlying the standard formula
calculation
Where it is inappropriate to calculate the
Solvency Capital Requirement in accordance with the standard
formula, as set out in Subsection 2, because the risk profile of the
insurance and reinsurance undertakings concerned deviates
significantly from the assumptions underlying the standard formula
calculation, the supervisory authorities may, by a decision stating
the reasons, require the undertakings concerned to use an internal
model to calculate the Solvency Capital Requirement, or the relevant
risk modules thereof.
Article 118
Use
test
Insurance and reinsurance undertakings
shall demonstrate
that the internal model is widely used in and plays an important
role in the following their system of governance, referred to in
Articles 41 to 49, in particular
(a) their risk-management
system as laid down in Article 43 and their decision-making
processes;
(b) their economic and solvency capital assessment
and allocation processes, including the assessment referred to in
Article 44.
In addition, insurance and reinsurance
undertakings shall demonstrate that the frequency of calculation of
the Solvency Capital Requirement using the internal model is
consistent with the frequency with which they use their internal
model for the other purposes covered by the first
paragraph.
The administrative or management body shall be
responsible for ensuring the on-going appropriateness of the design
and operations of the internal model, and that the internal model
continues to appropriately reflect the risk profile of the insurance
and reinsurance undertakings concerned.
Article
119
Statistical quality standards
1. The internal
model, and in particular the calculation of the probability
distribution forecast underlying it, shall comply with the criteria
set out in paragraphs 2 to 9.
2. The methods used to
calculate the probability distribution forecast shall be based on
adequate, applicable and relevant actuarial and statistical
techniques and shall be consistent with the methods used to
calculate technical provisions.
The methods used to calculate
the probability distribution forecast shall be based upon current
and credible information and realistic assumptions.
Insurance
and reinsurance undertakings shall be able to justify the
assumptions underlying their internal model to the supervisory
authorities.
3. Data used for the internal model shall be
accurate, complete and appropriate.
Insurance and reinsurance
undertakings shall update the data sets used in the calculation of
the probability distribution forecast at least once a
year.
4. No particular method for the calculation of the
probability distribution forecast shall be prescribed.
Regardless of the method of calculation chosen, the ability
of the internal model to rank risk shall be sufficient to ensure
that it is widely used in and plays an important role in the system
of governance of insurance and reinsurance undertakings, in
particular their risk-management system and decision-making
processes, and capital allocation in accordance with Article
118.
The internal model shall cover all of the material risks
to which insurance and reinsurance undertakings are exposed. As a
minimum, internal models shall cover the risks set out in Article
101(4).
5. As regards diversification effects, insurance and
reinsurance undertakings may take account in their internal model of
dependencies within risk categories, as well as across risk
categories, provided that supervisory authorities are satisfied that
the system used for measuring those diversification effects is
adequate.
6. Insurance and reinsurance undertakings may take
full account of the effect of risk mitigation techniques in their
internal model, as long as credit risk and other risks arising from
the use of risk mitigation techniques are properly reflected in the
internal model.
7. Insurance and reinsurance undertakings
shall accurately assess the particular risks
associated with
financial guarantees and any contractual options in their internal
model, where material.
They shall also assess the risks associated
with both policyholder options and contractual options for insurance
and reinsurance undertakings.
For this purpose, they shall take
account of the impact that future changes in financial and
non-financial conditions may have on the exercise of those
options.
8. In their internal model, insurance and
reinsurance undertakings may take account of future management
actions that they would reasonably expect to carry out in specific
circumstances.
In the case set out in the first
subparagraph, the undertaking concerned shall make allowance for the
time necessary to implement such actions.
9. In their
internal model, insurance and reinsurance undertakings shall take
account of all payments to policy holders and beneficiaries which
they expect to make, whether or not these payments are contractually
guaranteed.
Article 120
Calibration
standards
1. Insurance and reinsurance undertakings may use a
different time period or risk measure than that set out in Article
101(3) for internal modelling purposes as long as the outputs of the
internal model can be used by those undertakings to calculate the
Solvency Capital Requirement in a manner that provides policyholders
and beneficiaries with a level of protection equivalent to that set
out in Article 101.
2. Where practicable, insurance and
reinsurance undertakings shall derive the Solvency Capital
Requirement directly from the probability distribution forecast
generated by the internal model of those undertakings, using the
Value-at-Risk measure set out in Article 101(3).
3. Where
insurance and reinsurance undertakings cannot derive the Solvency
Capital Requirement directly from the probability distribution
forecast generated by the internal model, the supervisory
authorities may allow approximations to be used in the process to
calculate the Solvency Capital Requirement, as long as those
undertakings can demonstrate to the supervisory authorities that
policyholders are provided with a level of protection equivalent to
that set out in Article 101.
4. Supervisory authorities may
require insurance and reinsurance undertakings to run their internal
model on relevant benchmark portfolios and using assumptions based
on external rather than internal data in order to verify the
calibration of the internal model and to check that its
specification is in line with generally accepted market
practice.
Article 121
Profit and loss
attribution
Insurance and reinsurance undertakings shall
review, at least annually, the causes and sources of profits and
losses for each major business unit.
They shall demonstrate
how the categorisation of risk chosen in the internal model explains
the causes and sources of profits and losses. The categorisation of
risk and attribution of profits and losses shall reflect the risk
profile of the insurance and reinsurance
undertakings.
Article 122
Validation
standards
Insurance and reinsurance undertakings shall have a
regular cycle of model validation which includes
monitoring the
performance of the internal model, reviewing the on-going
appropriateness of its specification, and testing its results
against experience.
The model validation process shall
include an effective statistical process for validating the internal
model which enables the insurance and reinsurance undertakings to
demonstrate to their supervisory authorities that the resulting
capital requirements are appropriate.
The statistical methods
applied shall not only test the appropriateness of the probability
distribution forecast compared to loss experience,
but also to all
material new data and information relating thereto.
The model
validation process shall include an analysis of the stability of the
internal model and in particular the testing of the sensitivity of
the results of the internal model to changes in key underlying
assumptions. It shall also include an assessment of the accuracy,
completeness and appropriateness of the data used by the internal
model.
Article 123
Documentation
standards
Insurance and reinsurance undertakings
shall
document the design and operational details of their internal
model.
The documentation shall demonstrate compliance with
Articles 118 to 122.
The documentation shall provide a
detailed outline of the theory, assumptions, and mathematical and
empirical basis underlying the internal model.
The
documentation shall indicate any circumstances under which the
internal model does not work effectively.
Insurance and
reinsurance undertakings shall document all major changes to their
internal model, as set out in Article 113.
Article
124
External models and data
The use of a model or
data obtained from a third-party shall not be considered to be a
justification for exemption from any of the requirements for the
internal model set out in Articles 118 to 123.
Article
125
Implementing measures
The
Commission shall, in
order to ensure a harmonised approach to the use of internal models
throughout the Community and to enhance the better assessment of the
risk profile and management of the business of insurance and
reinsurance undertakings, adopt implementing measures with respect
to Articles 118 to 124.
Those measures designed to amend
non-essential elements of this Directive, by supplementing it, shall
be adopted in accordance with the regulatory procedure with scrutiny
referred to in Article 304 (3).
  
Return to Index
Solvency ii Introduction (1) to (10)
Solvency ii Introduction (11) to (20)
Solvency ii Introduction (21) to (30)
Solvency ii Introduction (31) to (40)
Solvency ii Introduction (41) to (50)
Solvency ii Introduction (51) to (60)
Solvency ii Introduction (61) to (70)
Solvency ii Introduction (71) to (80)
Solvency ii Introduction (81) to (95)
Solvency ii Articles 1 to 10
Solvency ii Articles 11 to 20
Solvency ii Articles 21 to 30
Solvency ii Articles 31 to 39
Solvency ii Articles 40 to 49
Solvency ii Articles 50 to 62
Solvency ii Articles 63 to 71
Solvency ii Articles 72 to 85
Solvency ii Articles 86 to 99
Solvency ii Articles 100 to 125
Solvency ii Articles 126 to 142
Solvency ii Articles 143 to 159
Solvency ii Articles 160 to 173
Solvency ii Articles 174 to 203
Solvency ii Articles 204 to 215
Solvency ii Articles 216 to 233
Solvency ii Articles 234 to
262
Solvency ii Articles 263 to 298
Solvency ii Articles 300 to 313
Solvency ii ANNEX 1 to 3
Solvency ii ANNEX 4 to 5
|
