Some of the most important challenges for insurance and reinsurance firms have to do with risk management, the use test, data management and model validation.

It is time to study a really good paper from the FSA (UK) that covers all the above.

Financial Services Authority
Solvency II: Internal Model Approval Process
Thematic review findings

The thematic review focused on four areas:

• Risk management;

• Use test;

• Data management; and

• Model validation.

The purpose of the review was to identify better practice in firms to help us understand the four areas in preparation for the pre-application phase of the internal model approval process.

Firms were also able to use the review to help them understand our expectations and to evaluate how ready they are to meet the requirements of Solvency II where appropriate.

The thematic review was conducted using three different techniques between December 2009 and May 2010.

1. A questionnaire was sent to all insurance firms (approximately 100 in total) who had declared their intention to apply to use an internal model to calculate their Solvency Capital Requirement (SCR) under the Solvency II framework.

Firms were asked to rate themselves according to what they needed to do to meet the required Solvency II standard.

Firms were also asked whether they would be happy to discuss what they considered to be good practice for at least one of the four areas being focused on. 81 firms responded to the questionnaire.

2. We visited a selection of insurance firms to discuss one or more of the four areas. We visited up to nine firms for each topic and covered a range of different firms (both life and non-life) of different size and complexity. In total we visited 25 firms.

3. We discussed with other stakeholders – such as consultants, specialist model providers and trade associations – what they considered to be good practice in these areas. We spoke to nine organisations in total.

We found that firms are working hard to understand the requirements of Solvency II and have already made good progress in some areas and have plans to improve in others.

We understand that firms will not currently meet all the Solvency II
requirements (particularly as some of the Solvency II requirements are still not known), but they need to have identified where the key gaps are and have a plan to close them by the end of the pre-application.

Our review was designed to assess better practice, rather than assess the extent of gaps against the requirements.

Data management appeared to be one area where firms still have comparatively more to do to achieve the likely Solvency II requirements.

Also, firms interviewed did not have a documented validation policy that clearly explained all the processes used to validate their internal model.

We will be looking at these areas in more detail at a firm-by-firm level during the pre-application phase of IMAP.

In some cases, firms judged themselves to be already close to Solvency II standards, but on closer questioning were ***not able to provide evidence to justify this***.

An understanding of how prepared they actually are will be important as we begin the IMAP pre-application phase.

Once firms enter pre-application, they will be asked to complete a self-assessment explaining what evidence they plan to submit to support their internal model application, how that evidence will help to show that they meet the Solvency II standards and when that evidence will be ready for review by the FSA.

This self-assessment will help firms to ensure that they are clear about what evidence they need to include in their application as well as the evidence the firm will be able to provide on request to support the application.

It is important to note that supporting evidence need not only take the form of documents.
For example, supporting evidence could also take the form of a review of a firm’s processes or an interview with key personnel to gain a full understanding of how the internal model is used in the firm.

The self-assessment will enable the FSA to take into account when evidence will be available for review, along with other factors, when planning its review and assessment work.

Firms will be requested to provide the FSA with regular updates of the self-assessment in order to enable firms’ progress towards submission of
their final application to be tracked.

The FSA recognises that it will sometimes be necessary during the pre-application phase to conduct reviews before all relevant evidence has been finalised.

A summary of the findings relating to each thematic topic is shown below.