EIOPA has published a brief Opinion on the preparation of internal models. Although it’s addressed to the regulators in the European Union’s Member States, it will still be of interest to (re)insurers preparing internal model applications, because it should affect the way in which the regulators respond when they receive an application for permission to use a model. Well: that’s the theory. You might have thought that at least some of EIOPA’s assertions would be uncontroversial – unfortunately not. I wonder if your list of “quick! state the obvious!” is the same as mine?

Here’s EIOPA’s list:

  1. risks related to sovereign exposures [should be] appropriately taken into account in internal models“;
  2. the Commission is required to “adopt delegated acts determining the risk-free interest rate term structure, the specifications with respect to matching adjustment and fundamental spread, and the methods and assumptions for the calculation of volatility adjustment” – if it hasn’t done that by the time an application is submitted, everyone should proceed on a “best endeavours basis“;
  3. the Commission will be publishing its decisions about third-country equivalence for EEA groups with third-country subsidiaries later this year. These decisions are subject to scrutiny by the European Council and Parliament. Supervisory authorities should not make assumptions about the decisions the Commission will take – subject to one exception: If the Commission has published its decision, but the Council and Parliament have not yet accepted it, “it is not unreasonable … to presume that the final [decision] will be [the same]. However, … a new [internal model] application [may be required] if [it’s not]“; and
  4. it’s best practice for regulators to compare internal models at a national level, and to contribute to comparative studies at an EU level.

So, how did you do? 3 out of 4;  4 out of 4, or have you still got your head in your hands?

Posted by Cooley