Instructions
Insurers who want to use an internal model have to demonstrate, according to Article 125 of the directive,
that they have fulfilled all the requirements to use an internal model. DNB has prepared a high level self-
assessment on the basis of a selection of the CEIOPS paper "Articles 118 to 124 Tests and Standards for
Internal model approval" (former CP56). It does not mean that items that are not selected in this list are not
important or necessary for approval of the model. The current level of self-assessment represents an initial
basis and format and is as this stage of the pre-application sufficient. The answers to this list can be given at
a consolidated level. The final self-assessment (complying with Article 125) will need to be done per model
component and should include all the requirements set out in the directive and level 2 and level 3 measures.
For each question, please select one of the four choices from the drop-down box:
- At or nearly at requirement
- Small gap to requirement
- Medium gap to requirement
- Large gap to requirement
A comment is required for each question. In addition, please provide a comprehensive explanation
regarding your choice of answer.
Moreover, answers need to be complete and to the point. Referrals to the model documentation are
High Level Self-Assessment Internal Model
Name insurer
Date
Please select from
Requirement or question Comments
drop-down box
Use test
The internal model can be used for different areas. Below are some examples of possible areas listed. Please compare the undertaking's current situation versus its
1
final objective
Technical provisions: best estimate and risk margin
Economic capital
Internal capital allocation (RAROC)
ORSA
Pricing and/or acceptance of new business
Profit and loss attribution (including causes and sources)
Embedded value and/or value new business
Analysis and determination reinsurance policy
(Strategic) asset allocation
Business strategy (e.g. mergers and acquisitions, investment decisions,
reinsurance decisions, product development)
Bonus crediting
Foundation principle: the undertaking's use of the internal model shall be sufficiently material to result in pressure to improve the quality of the internal
model
The internal model outputs are not only calculated for regulatory purposes, but
2
there is also an incentive for ensuring the quality for internal use
The undertaking has a process for monitoring the appropriateness of and
3
improving the internal model
The undertaking can demonstrate that the internal model plays an important role
4
in the system of governance, risk management and decision-making
Principle 1: Senior management and the administrative, management or supervisory body, shall be able to demonstrate understanding of the internal
model
The undertaking can demonstrate that senior management and the administrative or supervisory body have an overall understanding of the internal model,
including:
5 The structure of the model
6 The methodology behind the model
The limitations of the model and how these limitations are taken into account in
7
decision-making
In which areas/entities diversification effects arise as well as the dependencies
8
throughout the risk profile of the undertaking
9 The risks covered by the internal model, as well as those not covered
Principle 2: The internal model shall fit the business model
The design of the internal model is in alignment with the undertaking's business model, in at least the following aspects:
The outputs of the internal model reconciles with internal and external
10
(financial) reporting
11 The internal model can be changed to reflect the changes in the business model
The capital-allocation approach and the granularity of allocation can reflect the
12
undertaking's risk-management system and its business model
The internal model is at least able to produce results between entities and
13
material lines of business and have overall capital results split by material risks
Principle 3: The internal model shall be used to support and verify decision-making in the undertaking
The internal model is used in decision-making processes, including the setting
14
of a business or risk strategy
The internal model output is documented in decision-making reports which
incorporates the additional information that has been used to arrive at the
15 decision, and why decisions differ from those indicated by the internal model
output, as well as documenting the rationale for decisions where the internal
model output supports the decision
Principle 4: The internal model shall cover sufficient risks to make it useful for risk management and decision-making
16 There is evidence that the internal model covers all potentially material risks
17 The internal model reflects the risk appetite of the business
Principle 5: Undertakings shall design the internal model in such a way that it facilitates analysis of business decisions
The internal model is designed to ensure that the results will be used to inform
18
internal debate in the undertaking
The internal model results are discussed with the people responsible for risk in
19
the administrative, management or supervisory body
The results of the internal model are communicated to the board members so
20
that they are able to take responsibility of the results
The results of the internal model have been used for:
21 The development plans for the internal model
22 Internal project plans
23 Governance strategy
24 Model change and data policy
Principle 6:The internal model shall be widely integrated with the risk-management system
The undertaking can demonstrate that the internal model is central in the risk-
25
management system
The quantifications of risks and risk ranking, including diversification, produced
26
by the internal model trigger action
The quantifications and risk ranking are used to formulate risk strategies and
27
risk mitigation
The outputs are used to formulate risk limits and appear on reports to internal
28
forums in the undertaking
Principle 7: The internal model shall be used to improve the undertaking's risk-management system
The internal model is used to quantify risks, and improves risk management by
29
using a feedback loop between risk management system and the internal model
Improvements as a result of the internal model include:
30 Risk mitigation techniques
31 Clarifying risk appetite of the undertaking
32 Allowing more informed risk monitoring of risks
33 More risk based decision making
Principle 8: The integration into risk-management system shall be on a consistent basis for all uses
The internal model's output is based on the relevant internal or external
34 accounting basis for each use. The administrative, management or supervisory
body shall demonstrate that they understand the basis of the output
Principle 9: The Solvency Capital Requirement shall be calculated at least annually from a full run of the internal model, and also when there is a
significant change to the undertaking's risk profile, assumptions underlying the model and / or the methodology arising from decisions or business model
changes, and whenever a recalculation is necessary to provide up to date information for decision making or any other use of the model, or to fulfil
supervisory reporting requirements
The undertaking is able to update the methodology, parameters and data input
on a regular basis, in particular when a significant change has occurred, e.g., a
35 significant change to your risk profile, assumptions underlying the internal
model and / or the methodology arising from the decisions or business model
changes
The undertaking can calculate the change in the SCR for only the risk module
36
affected by these changes
Methodology and assumptions
Methodology
The undertaking can demonstrate that the methods used to calculate the
37 probability distribution forecast are consistent with the methods used to
calculate the technical provisions
The same holds for all other areas where valuations or models are used for the
38
internal model and for other purposes inside the undertaking
The undertaking can demonstrate that the methods used are based upon current
39
and credible information
Assumptions
40 The undertaking identifies all assumptions inherent to the internal model
41 The undertaking can explain and justify in detail these assumptions
The undertaking can document all internal model assumptions, their
42
justification and the corresponding procedure
Calibration
The undertaking uses the standard Solvency II risk measure and time horizon
43
(VaR 99.5% / 1 year) to derive the SCR (Yes or No)
Undertakings for which the standard risk meausre and time period (VaR 99.5% / 1 year) are not appropriate express their risk appetite with a different
calibration. Those undertakings should be allowed to use another calibration for their internal model to meet the requirements (see Article 122 and 101)
The undertaking can demonstrate that the alternative time period and/or risk
measure used is appropriate and justifiable. Please explain in the comments cell
44
which risk measure, time period and confidence level are used in the internal
model.
The undertaking can evidence that the alternative time period and/or risk
45 measure provides at least the same protection as the standard risk measure and
time horizon (VaR 99.5% / 1 year)
If the time period used by the undertaking is different from the one set out in Article 101:
The undertaking can demonstrate that the internal model takes into account the
46
time effects of the risks to which is exposed
The undertaking can demonstrate that all significant risks over a one-year-period
47
are properly managed
48 The undertaking can give special attention to the choice of the data used
The undertaking can justify the choice of time horizon (if different from one
49 year) in view of the average duration of the liabilities of the undertaking, of the
business model and of the uncertainties associated with too far time horizons
Group aspects
The internal model offers possibilities for an analyses by legal entity and
50
by line of business
The model allows for possible restrictions within a group, for example the
51
(non-) transferability of capital.
Risk mitigation
Reinsurance is accurately adopted in the model and the model allows for an
52
analysis of pre and post reinsurance calculations
53 Risk mitigation by financial instruments is accurately incorporated in the model
The model allows for management actions and these actions have been
54
tested on their feasibility
The undertaking can adopt an adequate and justifiable risk mitigation
55
technique
The undertaking can make sure that the use of risk mitigation techniques
56
actually causes a reduction in net risk
Data management
Data quality
Requirements from the Data Quality Standards for Technical Provisions (CEIOPS Advice on Data Quality Standards for Technical Provisions) shall apply,
where applicable to internal model data
57 The undertaking can specify its own concept of data quality
The undertaking is able to define the abstract concept of data quality in relation
58
to the various types of data in use, for example for the data of each risk category
The undertaking can demonstrate that data is
59 Accurate
60 Complete
61 Appropriate
Data quality control / monitoring
The undertaking has designed processes to provide assurance of the accuracy,
62
completeness and appropriateness of the data used
63 The undertaking has establish its policy on data quality and data update
64 The undertaking has processes in place for checking and validating data quality
The undertaking has standards regarding the frequency of regular data updates
65 and circumstances that trigger unscheduled data updates or require a prompt
recalculation of the SCR, respectively, and the timelines of their realization
Operational performance / IT Service
The IT organisation controls risks and vulnerabilities with respect to the model
66
software
67 The undertaking has IT solution that supports the business
The undertaking has maintenance arrangements for the IT platforms and
68
application
The integration of different (sub) models and external models is appropriately
69
implemented by the undertaking
Model governance and change policy
The undertaking can demonstrate how independence within the model
70
development, testing and model use is maintained
The undertaking has an adequate version control system of the input and the
71 output of the internal model to reproduce results using different datasets and
model versions
Profit and loss attribution
72 The undertaking has conducted a Profit and loss attribution (Yes or No)
The profit and loss attribution for each major business unit is as transparent as
73
possible
The attribution enables the undertaking to explain a large part of its annual
74
profit and loss
The economic capital requirements resulting from the internal model lead
directly to categorisation of all material risks. The qualitative assessment of non-
75
material risks or non-quantifiable risks completes the categorisation of risks
based upon the internal model results
Validation
What percentage of the internal model has been independently validated in
76 accordance with the validation requirements in the CEIOPS Advice (former
CP56) as of July 1, 2010?
The validation report includes at least the following areas of the internal model:
77 data, methods, assumptions, expert judgement, documentation, system-IT,
model governance and use test
Undertakings shall have a validation policy, which sets out the way in which they will validate their own internal model and why that way is appropriate.
The validation policy shall set out at least the following:
78 The undertaking has a validation policy with a clearly defined scope
The undertaking can set out which validation tools it will use to achieve the
79
purpose and scope which it has defined in the validation policy
The frequency with which validation will be carried out for the various
80
components of the model is established within the validation policy
The undertaking can demonstrate the governance structure surrounding the
81
validation policy
82 The undertaking can set out all the known limitations of the internal model
The undertaking can set out its planned developments in its validation policy to
83
meet these limitations
The validation policy is clearly documented and it must be understandable for
84
knowledgeable third parties
The undertaking can demonstrate how independence within the validation
85
process is maintained
Validation tools to be used by all undertakings using an internal model:
The undertaking can demonstrate the use of backtesting to validate the model
86
results
The undertaking can perform an analysis of the robustness of their internal
87 model by including at least sensitivity testing and further tests on the stability of
the model
The undertaking can demonstrate the use of stress and scenario testing to
88
validate the model results
The undertaking is able to conduct reverse stress tests to validate the model
89
results
Profit and loss attribution
Any indication from the results of the profit and loss attribution which imply
90 that the risk categorisation of the internal model does not reflect the risk profile
of the undertaking can be escalated to the management body
Documentation
The documentation of an internal model is thorough, sufficiently detailed and
91 sufficiently complete to satisfy the criterion that an independent knowledgeable
third party could form a sound judgement
The documentation describes the drawbacks and weaknesses of the model,
92
including the circumstances under which the model does not work effectively
93 A record of version control of the internal model is kept
The documentation includes evidence that all levels of management of the
94
undertaking understand the relevant aspects of the internal model
The documentation includes an overview of the historical development of the
95
internal model, including methodologies, assumptions and data
What percentage of the model documentation meets the documentation
96
requirements as stated above?