Date (Arial 16pt)

Title of the event – (Arial 28pt bold)Subtitle for event – (Arial 28pt)

Internal models

Gareth Truran

Head of Department, London Markets

General Insurance Division

Agenda

1. Introductory remarks

2. Timeline

3. Lessons learned from pre-application

4. Moving from pre-application to formal application

5. Formal application

6. Other considerations

2

3

The PRA’s approach to internal model reviews

• Context relevant not just for those firms in IMAP

• Internal models and the standard formula

• Internal models cannot be viewed in isolation from the broader suite of requirements within Solvency II

• Internal model tests and standards set a high bar for good reason

PRA decision/activity

Firm activity

• Q4 2014

• Q1 2015

• Q2 2015

• Q3 2015

• Q4 2015

• 2016

Transposition

31 March 2015

CP23/14 published

15/10/14 details IMAP application

process

PRA pre-application review, assessment and feedback

Ongoing evaluation of

internal model appropriateness

PRA communication to firms

Submission of formal

application to PRA

4

Timeline

PRA decision making and

feedback

PRA formal review and assessment

Other approvals granted or declined by the PRA

Implementation

1 January 2016

Lessons from the internal model pre-application phase

Significant gaps that firms still have

to close on internal models in order to meet the

test and standards required by the

Directive

Boards and senior management should be engaged to ensure the model meets the needs of the business and will be used in practice

Key judgments and assumptions inherent in models are not always highlighted or justified appropriately by firms

No appropriate escalation to senior decision makers for the most material assumptions

Number of areas where the PRA continues to question the validity of firms’ underlying modelling assumptions

5

Moving from pre-application to formal application

• Between now and 1 April 2015, the PRA will review each firm’s IMAP submission

• The PRA will give feedback on areas which need to be addressed before approval can be given

The PRA has given clear feedback on areas where it believes further work needs to be done to address serious weaknesses

The PRA will ask firms to delay an internal model application or revert to a simpler approach if too much work is required ahead of implementation

6

Planning for the formal application

• Firms need to monitor progress against plans

• Important to provide us with clear and complete information

• Be aware of the college dimension and the added complexity this brings to the process

• The PRA has been actively engaging with the colleges and will be undertaking a similar process in the formal application phase

Firms should have a clear plan outlining the remaining work needed to meet the tests and standards

7

The format of the formal application process

• The PRA published CP 23/14 on Solvency II approvals which sets its expectations of the application process

• For the formal application phase, the PRA will require firms to use the EIOPA Common Application Template (CAT)

• Firms in the pre-application phase can continue to use the existing PRA SAT

• The new CAT will be compulsory for all firms when making their formal application

The EIOPA draft Implementing Technical Standard on internal model approval clarifies what should be included in a an internal model application

Internal model decisions will either be ‘approve’ or ‘reject’

Other approvals and how they impact the internal model

• Consider the other approvals the firm intends to apply for during the same period

• What dependencies exist between them?

• How will this affect the order in which the firm submits the internal model application?

Discuss plans with PRA supervisors when each approval application will be submitted

9

The importance of contingency planning

If model approval cannot be granted in time for 1 January 2016, firms should consider:

• Delaying the formal application until the tests and standards can be met

• Partial internal model rather than a full model

• Standard formula either with or without undertaking specific parameters

Firms should also consider the impact on the internal model if permissions to use other approvals are not granted

10

Accepting applications and the decision making process – practical questions

Series of practical questions relating to the application process that are very important to firms’ planning

• How will equivalence decisions impact internal model decisions?

• How should model changes between now and Solvency II implementation be handled?

• What will happen following model approval?

11

Summary

• Little time left to complete remaining development work for those firms that plan to seek model approval in time for implementation on 1 January 2016

• Important for a firm to take on board PRA feedback which may increase chance of model approval

• The PRA will not approve internal models which do not adequately reflect the risks firms face

• Firms should also consider the impact on the internal model if permissions to use other approvals are not granted

• Boards need to be fully engaged to ensure overall Solvency II implementation plans are delivered on time and to the appropriate standards