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Erscheinung:15.12.2014 | Topic Own funds Interview with Thorsten Arhold, Head of Section VA 45 dealing with internal model assessment and qualitative issues

Interview: “Testing phase for internal models is essential“

BaFin has been regularly inviting interested insurance undertakings to exchange views on issues relating to internal models since 2006. The Internal Models Working Group (Arbeitskreis Interne Modelle – AKIM) gives representatives of the undertakings the opportunity to present the current state of their internal models or to address particular topics.

In turn, BaFin updates the undertakings on the ongoing discussions in the EU bodies and on the findings it has made during the review of the internal models of insurers.

The most recent meeting of the Working Group took place at the end of November. Thorsten Arhold, head of the internal models section at BaFin, explains how supervisors and undertakings prepare themselves for the use of internal models and what challenges are still to be met.

Mr Arhold, what issues topped the agenda at the recent meeting of the Internal Models Working Group?

Firstly, of course, the planned European rules for internal models, which the European Commission and the European Supervisory Authority EIOPA are about to issue in the form of a Delegated Act and Implementing Technical Standards and Guidelines. These rules will complement the regulatory framework and in particular specify what the applications of insurers and the tests and standards for their internal models should look like.

Another important topic was trial applications: since the beginning of October, insurers that want to calculate their SCR using an internal model1) may submit a trial application. BaFin will check if the application documents are complete and verify if they describe the internal model in sufficient detail, and if they provide sufficient evidence that all the necessary tests and standards have been fulfilled.For applications submitted by groups, even at this early stage, BaFin coordinates its activities with the other member states’ supervisors in the supervisory colleges.

Why a testing phase? Couldn’t the companies submit their final applications right away?

The testing phase is essential. BaFin is now in the position to provide feedback to insurers in time with all the relevant information required for the formal application procedure, which is quite complex. Besides, for internal models of insurance groups operating in more than one EU member state, there is a comprehensive process in which BaFin must consult with the other supervisory authorities concerned – and all this has to happen within six months. When you consider that the documentation undertakings have submitted so far contains between 6,500 and 100,000 pages per application, you will see that this is not a very generous timeframe. We will discuss the result of our review with the insurers so that they can make appropriate improvements to the documents where necessary. This is the last step of the so-called pre-application phase before the formal application phase begins on 1 April 2015.

What exactly is the “pre-application phase”?

Since 2009, as part of the pre-application phase, BaFin has been assisting those insurers that intend to use an internal model. At that time, the Solvency II Directive was adopted. It provided orientation for insurers to set up an internal model and gave BaFin preliminary information on supervisory requirements with which models would have to comply. We held intensive discussions with the insurers – also during the Working Group meetings – and reviewed the internal models during on-site inspections. To start with, these inspections were carried out by BaFin alone, but later the competent supervisors of other member states became more and more involved.

At the end of October 2013, EIOPA published Guidelines on Pre-Application of Internal Models2), which specified the supervisory expectations in greater detail and enabled us to intensify the reviews. If weaknesses were identified in an internal model, we informed the undertaking accordingly. In addition, we exchanged views with the undertakings during intensive workshops on selected topics, for example the modelling of risks arising from natural catastrophes, and then brought the information gained into the discussions held in the supervisory colleges.

What are the next steps?

The application phase will begin next year, which means that things then start getting serious. Moreover, the EIOPA Guidelines on Submission of Information to National Competent Authorities require undertakings to prepare for reporting requirements under Solvency II, and insurers that want to use internal models have to observe special rules – it goes without saying that individual models require individual approaches. BaFin published supplementary information (only available in German) with regard to these Guidelines. In the weeks to come, BaFin will define appropriate reporting formats together with the individual undertakings concerned. It will be important to ensure that, overall, the data provided by insurers that use an internal model are as detailed as the data submitted by insurers that apply the standard formula. Together with the other supervisory authorities concerned, we also want to develop uniform reporting formats for insurers that operate on an EU-wide basis.

All in all, we are on the right track, but we still have a long way to go. The Internal Model Working Group will remain an important forum for exchanging views with the insurers – even after the initial approvals.

Footnotes

1) Internal models: The Solvency II Directive permits insurers and reinsurers to determine their Solvency Capital Requirement (SCR) by applying the standard formula approach or by using an internal model. The standard formula has been defined in Articles 103 ff. of the Directive, whereas internal models are to be individually developed by the undertakings. They will be reviewed and approved by the supervisory authority.

2) BaFin published explanatory texts on the EIOPA Guidelines (only available in German) on its website.

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