Aspects on calculating the Solvency Capital Requirement with the use of internal models

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Raoul Berglund~Lasse Koskinen~Vesa Ronkainen, Finlande
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Summary:
The main reasons for giving insurance companies the option to apply internal models for calculating the solvency requirement within the Solvency II framework is to enhance better risk management and to allow a more accurate risk oriented capital requirement than the standard Solvency Capital Requirement (SCR) would provide. The possibility to use internal models within Pillar I basically means freedom to calculate the solvency requirement using some other formulae and even principles than those given by the standard formula. In our view within Pillar I, contrary to Pillar II, there is a clear need both for insurance supervisors and for those developing internal models in practise to have a common guideline among EU member states on how to validate and approve internal models. The tentative advice from The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) to the European Commission roughly follows the same approach. However, we believe that a broader scope of models and a more detailed approach to the validation will be needed for the final standard. This standard should give principles for the design of internal models and highlight areas that will be of greatest importance in the process of using internal models for calculating the SCR. This paper gives a brief background review of the Solvency II project, deals with different aspects on internal models within Pillar I, and finally illustrates a rather detailed guideline that could be included in the standard for approving internal models. The main focus is on life insurance, but several issues concern equally well non-life insurance.
 
Date: 1 June - Time: 16:15 to 17:45 - Room: 251
Theme: 1.B. Solvency measurements and asset-liability management