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Solvency Assessment and Management
SA QIS1 Qualitative Questionnaire: Internal Models
Version 1 15 June 2011
1
Questions which should be answered using the EXCEL spreadsheet are formatted in Italic letters.
Please use this word document only for answering the other questions or indicating additional opinions that could not be answered through the use of the given spreadsheet format.<QIMx>
In order to ease the treatment of your submission by the FSB , please reply to the question filling the grey shaded area between the provided beginning and ending tags <Qx> and </Qx>, inserting as many lines as necessary. Please also give any other information that doesn’t follow the structure of the predefined questions at the beginning between the <Q0> and </Q0> tags. </QIMx>
(Re)insurer name:<QIMP>
</QIMP>
(Re)insurer number: <QIMR>
</QIMR>
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Internal modelsIM.A Introduction and backgroundIn order to allow an assessment of the impact of the use of internal models under SAM, (re)insurers should answer the questions listed in this questionnaire. Furthermore, the answers to these questions will help to assess the progress of internal modelling and to prepare the FSB and the insurance industry to the approval process of internal models. The goals of the first South African Quantitative Impact Study (SA QIS1) for internal models are:
(a) to collect reliable and comparable quantitative and qualitative data from partial and full internal models that are currently used by (re)insurers for assessing their capital needs. . This data will assist the FSB in conducting a range of statistical analyses and then providing a possible update of the calibration of the standard formula and its likely impacts on the SAM regime;
(b) to help (re)insurers in an assessment of how they are advanced in fulfilling the conditions and identify potential gaps between the current stage of their models and the requirements;
(c) to collect general information from all (re)insurers to assess the current and potential future levels of applications for full and partial internal models to enable the FSB to prepare itself and to provide an estimate of the costs related to the application for (re)insurers and the FSB.
To achieve the first goal, (re)insurers will have to assess the quality and comparability of the data against high level principles. Therefore (re)insurers should concentrate on comparing the results and the modelling aspects of the standard formula with those derived from their internal models. A key area to address in this context is the data that has been used when (re)insurers calibrate their models. It is important also to understand the differences in assumptions and definitions between those underlying existing models in (re)insurers and those anticipated under SAM1.To this end, and to the extent that this is practicable, the estimates derived from internal models should be compatible with the overall calibration objectives for the standard formula (i.e. a VaR 99.5% confidence level for the variation of basic own funds over a one year time horizon).The importance of qualitative issues is highlighted by the second goal. The FSB is interested in the assessment how the internal models at the current stage comply with the standard requirements.Finally, the SA QIS1 exercise should also serve as a tentative mapping exercise of the current development stage of internal models used by (re)insurers, and to indicate to what extent they plan to use internal models for calculating their SCR or use partial internal models to calculate modules of the SCR or in respect of some or all modules for some but not all of their business units. To gain an 1 For instance the valuation of assets and liabilities under SAM differs from that currently used by insurers.
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accurate picture of current developments, internal models referred to in this section should be understood as comprising those that include any risk management analysis to quantify risks and to help to assess the economic capital needed to meet those risks.It should be noted that a disaggregation of the output from internal models to the level of granularity of the standard formula may not be feasible for all internal models and internal lines of business may not be fully compatible with those used in the QIS. However, internal estimates for capital corresponding to main risk classes and the overall SCR is especially welcomed (both solo-entity and group results). Similarly, more granular results (risk sub-classes) and capital requirements for lines of business or modules of the internal model that are different from the standard formula modules are also welcomed.The integration technique used by (re)insurers to integrate a partial internal model into the Solvency Capital Requirement standard formula should result in a Solvency Capital Requirement for the (re)insurer which complies with the principles included in point 4. In order to fully integrate the partial internal model into the standard formula for the purpose of calculating the Solvency Capital Requirement, (re)insurers should use the correlation matrices of the standard formula set out in these technical specifications unless there is strong evidence that:
– those correlation matrices are not possible to be used, having regard to the structure of the (re)insurer’s partial internal model; or
– The requirements set out in the previous points would not be met.In the event that correlation matrices are not possible to be used or that the requirements set out would not be met, (re)insurers should use an alternative integration technique provided that the requirements are met.Some specific data requests on internal models will be also included in the spreadsheet (e.g. correlations and diversification effects at different levels, risk mitigation effects, scenario parameters, volatility parameters). Moreover, description of the original calibration (i.e. before any recalibration) for the main risk categories should be disclosed (e.g. risk measure, confidence level, time horizon).Groups are required to provide the results obtained by their internal model implemented for the whole group. (Re)insurers should also provide the amounts of diversification effects obtained for each level of aggregation of risks.
Guidance how to fill in the questionnaire:
Under the SAM regime, groups may apply for an internal model which would be used to assess both the group SCR and the solo SCR for (re)insurers within the group. In this paper, this type of internal model will be referred to as a group internal model.
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The qualitative questionnaire for internal models is organised in 4 different sections (see table below).
(1) (Re)insurers a) which are not part of a group and which currently use or intend to use an internal model or,
b) which are part of a group, and intending to use an internal model for the solo SCR calculation which is not a group internal model,
should answer to the questions of the sections IM.B, IM.C, but not to the questions in the section IM.D and in the group section.
(2) (Re)insurers being part of a group and intending to use a group internal model for the solo SCR calculation are requested to answer to the questions in the sections IM.B, IM.C, IM.D but not in the group section. However, to allow an analysis of the specificities of the solo calculation compared to the general characteristics of the model, these (re)insurers should provide two sets of answers to the questions raised in the section IM.C: one set would be the same for all the (re)insurers of the group and should describe the general characteristics of the group internal model and the second set would, if relevant, describe the differences between these generalities and the characteristics of the group internal model when it is used for the solo SCR calculation.
(3) Groups willing to apply for an internal model for the group calculation should answer to questions raised in the sections IM.B, IM.C and in the group section.
(Re)insurers which plan to build, currently building or using internal models in order to get an approval to calculate SAM SCR or only for internal risk management
(Re)insurers which currently building or using internal models in order to get an approval to calculate SAM SCR
Solo (re)insurers or (re)insurers which are part of a group but solo internal model is not based on a internal model used for the calculation of the group SCR
IM B IM B
IM C
Solo (re)insurers which are part of a group and solo internal model is
IM B IM B
IM C (two sets of
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based on/part of a group internal model
answers, see above, point 2)
IM D
Groups IM B IM B
IM C
GIM (Group section)
IM.B Questions for (re)insurers (both solo entities and groups) which plan to build, are currently building or already use internal models in order to get an approval to calculate SAM SCR or only for internal risk management.
QIM1. Please identify which sections are applicable for you: IM.B/ IM.C/IM.C (two sets of answers)/ IM.D/Group section
QIM2. If you are a solo (re)insurer which is part of a group but the solo internal model is not based/part of the internal model used for the calculation of the group SCR please provide a brief rationale for building a separate internal model.
<QIM2>
</QIM2>
QIM3. If you are a solo (re)insurer which is part of a group and you intend to calculate the solo SCR from the internal model used to calculate the group SCR, has the internal model been created:
at your group level or
at a higher group level
by another (re)insurer?
QIM4. Are you already using internal models for some individual aspects of your business?
QIM5. If no, are you currently developing an internal model for comprehensive use in managing your business?
QIM6. If you are planning to apply to get your internal model approved in order to calculate the SCR (a) are you currently working on the implementation of your internal model for SAM purposes?
(b) if no, could you provide the potential date of the beginning of such work?
<QIM6b>
</QIM6b>
(c) could you provide the planned date of submitting the application?<QIM6c>
</QIM6c>
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(d) if you consider that your risk profile deviates from the assumptions underlying the standard formula, please provide the main reasons for this (e.g. deviations in terms of risk exposure, deviations in terms of volatility, non-linear dependency of risks, presence of cycles, incompatibilities of your risks with the SCR modular approach, other – please specify).
<QIM6d>
</QIM6d>
(e) could you please identify risk modules that might lead to inappropriate capital requirements if the standard formula is adopted?
<QIM6e>
</QIM6e>
QIM7. If the internal model will be used only for internal risk management, under what circumstances would you reconsider this decision (i.e. to use an internal model rather than the standard formula)?
<QIM7>
</QIM7>
IM.C Questions for insurers or reinsurers which are currently building or already using an internal model for assessing economic capital and for which they plan to apply for approval to use to calculate the SCR under SAM (both solo entities and groups)C.1 Scope of the internal model
IM.C.1 Scope of the internal model:
(Re)insurers may model:- One or more or all risk modules for the whole business;
- One or more risk or all modules for one or more or all major business units;
- One or more risk sub-modules for the whole business, in the same or different risk modules;
- One or more risk sub-modules, in the same or different risk modules, for one or more major business units;
- The adjustment for the loss-absorbing capacity of technical provisions and deferred taxes for the whole business or for one or more major business units;
- The capital requirement for operational risk for the whole business or for one or more major business units.
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(re)insurers may use different risk categorizations than those in the standard formula. For example, they may decide to model risks not covered by the standard formula. Internal models do not need to follow a modular structure.For questions QIM8 to QIM57, the first answer should refer to the 1 st set of answer (please, see the second point of the Guidance how to fill in the questionnaire) “set1” (same for all the (re)insurers of the group and should describe the general characteristics of the group internal model) and the second answer to the 2 nd set of answer “set2” (In the Excel file, if relevant, describe the differences between the generalities of column D and the characteristics of the group internal model when it is used for the solo SCR calculation).
QIM8. What is the current scope of the internal model? In particular which risks / major business units / entities are included in your internal model?
<QIM8_set1>
</QIM8_set1>
<QIM8_set2>
</QIM8_set2>
QIM9. Please compare the structure of your internal model with that of the standard formula. For instance, which risk modules of the standard formula are a) combined, b) divided in your partial internal model.
<QIM9_set1>
</QIM9_set1>
<QIM9_set2>
</QIM9_set2>
For (re)insurers using or intending to use partial internal models (PIM):
QIM10. Please justify the scope of your partial internal model highlighting which criteria you used to define major business units (if relevant) and to choose the scope of the partial internal model (e.g partial internal model as transitory step to full internal model / risk not covered by the standard formula - which ones?/ certain risks covered adequately by standard formula (e.g. a non-life (re)insurer could have a premium and reserve PIM but rely on the standard formula for market risks) – which ones?/ business units not covered adequately by standard formula – which ones?/ acceptable trade off taking into account costs and benefits - for which risks?/ not enough data for some of the risks – which ones?/ an absence of a model which better reflects the risk profile - for which risks?/ other, please specify)
<QIM10_set1>
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</QIM10_set1>
<QIM10_set2>
</QIM10_set2>
IM.C.3 External models and data
QIM11. If you worked with consultants to develop your internal model, for which specific part of the implementation?
QIM11a - Yes/No in the excel file
<QIM11_set1>
</QIM11_set1>
<QIM11_set2>
</QIM11_set2>
QIM12. If you use external models / data in your internal model, which ones and for which risks / major business units / entities?
QIM12a - Yes/No in the excel file
<QIM12_set1>
</QIM12_set1>
<QIM12_set2>
</QIM12_set2>
QIM13. In which areas were amendments, which adjust the external model / data to your risk profile, necessary?
<QIM13a_set1>
</QIM13a_set1>
<QIM13a_set2>
</QIM13a_set2>
If you identified material and/or quantifiable external model / data limitations and risks arising from the use of external models / data, please describe them briefly.
QIM13b - Did you identify the external model / data limitations and risks arising from the use of external models / data? Yes/No in the excel file
QIM13c - Are those limitations and risks material and/or quantifiable? Yes/No in the excel file
<QIM13d_set1>
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</QIM13d_set1>
<QIM13d_set2>
</QIM13d_set2>
IM.C.4 Internal model changesQIM14. If you already have in place a process to develop the policy for internal
model changes, how did you distinguish major and minor changes? QIM14a - Yes/No in the excel file
<QIM14b_set1>
</QIM14b_set1>
<QIM14b_set2>
</QIM14b_set2>
If no, do you have any ideas about criteria which can be applied to distinguish between them?
<QIM14c_set1>
</QIM14c_set1>
<QIM14c_set2>
</QIM14c_set2>
QIM15. If you expect regular major changes to your internal model due to your yearly planning processes, in which areas or with respect to which circumstances.
QIM15a - Yes/No in the excel file
<QIM15b_set1>
</QIM15b_set1>
<QIM15b_set2>
</QIM15b_set2>
IM.C.5 Use test QIM16. How do you plan to demonstrate that the use of your internal model is
sufficiently material to result in pressure to improve the quality of the internal model?
<QIM16_set1>
</QIM16_set1>
<QIM16_set2>
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</QIM16_set2>
QIM17. Please provide some examples on to what extent is your internal model widely used and plays an important role in the system of governance, risk management and decision making.
QIM17a – Small/Medium/Large degree in the excel file
<QIM17_set1>
</QIM17_set1>
<QIM17_set2>
</QIM17_set2>
How would you demonstrate that persons who effectively run the (re)insurer take into account outcomes of the internal model in building and developing the business strategy?
<QIM17c_set1>
</QIM17c_set1>
<QIM17c_set2>
</QIM17c_set2>
QIM18. If your risk management strategy considers the results produced by your internal model to a small or medium degree, please identify gaps and if to a large degree please provide examples or a justification for such an assessment.
<QIM18b_set1>
</QIM18b_set1>
<QIM18b_set2>
</QIM18b_set2>
QIM19. Are the outputs of the internal model included in regular reporting for the
(a) administrative, management or supervisory body (monthly / quarterly / half-yearly / annually/ not yet), and
(b) other persons who effectively run the (re)insurer (monthly / quarterly / half-yearly / annually/ not yet)?
QIM20. How do you ensure that your administrative, management or supervisory body and the persons who effectively run the (re)insurer understand the internal model and its limitations? How do you plan to improve this understanding?
<QIM20_set1>
</QIM20_set1>
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<QIM20_set2>
</QIM20_set2>
QIM20b - Does the documentation include evidence that all levels of management understand the relevant aspects of the internal model? - Yes/No in the excel file
QIM21. Please indicate where you use your internal model, for example in internal project plans; accounting; financial reporting; budgeting; risk management; capital planning; capital allocation; investment policy; economic capital calculations; regulatory capital calculations; MCEV calculations; remuneration; strategic business decisions; product development; pricing; performance analysis; ALM; reinsurance; bonus setting; assessing other customer benefits; target setting; mergers and acquisitions; own risk and solvency assessment; assessment of risk mitigation; portfolio transfer pricing; investment policy; dividend payments; stress tests; market consistent technical provisions; CoC risk margin; assessment of uncertainty in technical provisions; asset allocation; dynamic hedging; other areas – please specify.
<QIM21_set1>
</QIM21_set1>
<QIM21_set2>
</QIM21_set2>
QIM22. Please report on possible instances that (will) require to re-run your internal model. (e.g. a model re-run due to a material data update). How long would a re-run take in each case? In estimating the time period, please take into account all processes involved in the redetermination of the probability distribution forecast (e.g. parameter estimation etc.) in order to calculate economic capital.
<QIM22_set1>
</QIM22_set1>
<QIM22_set2>
</QIM22_set2>
IM.C.6 Statistical quality QIM23. What is the nature of the probability distribution forecast(s) as result(s)
of your internal model (in terms of the number future events covered, underlying quantity of monetary amount etc.)? Where and for what reason does the internal model produce only key points of the distribution forecast? In that case, how do you ensure the appropriateness of the distribution forecast and compensate for the lack of full information?
<QIM23_set1>
</QIM23_set1>
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<QIM23_set2>
</QIM23_set2>
QIM24. If you do not consider the methods used to calculate the probability distribution forecast to be already consistent with the methods used to calculate SAM technical provisions and more general, with the valuation of assets and liabilities, what are the issues you are facing and how do you plan to deal with them.
QIM24a - Yes/No in the excel file
<QIM24b_set1>
</QIM24b_set1>
<QIM24b_set2>
</QIM24b_set2>
Ability to rank the risks:
On the basis of the criteria given (coverage, resolution, congruence consistency) the (re)insurer should provide evidence that the ability of the internal model to rank risk is sufficient to ensure that it is widely used in and plays an important role in the system of governance, in particular the risk management system, decision-making processes and capital allocation as described in the Use Test.The following interpretation is given for the four criteria:
• Coverage: The risk-ranking ability should exist for all material risks covered by the internal model.
• Resolution: The differentiation between the various risks and risk drivers has to be sufficiently precise to allow senior management to take appropriate decisions.
• Congruence: The structure of different kinds of risk-ranking reflects the structure of risks or risk categories and the risk management system.
• Consistency: Risks of a similar nature are ranked consistently throughout the (re)insurer and over time. The overall risk ranking should be reconciled with the capital allocation.
QIM25. If you do not consider yet that your internal model has the ability to rank risk sufficiently for risk management purposes, briefly describe the shortcomings existing at present. In doing so, please refer to the criteria given for risk ranking (coverage, resolution, congruence, consistency).
QIM25a - Yes/No in the excel file
<QIM25b_set1>
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</QIM25b_set1>
<QIM25b_set2>
</QIM25b_set2>
Accuracy, completeness and appropriateness of the data:
(Re)insurers should interpret the terms “accuracy”, “completeness” and “appropriateness” as having the following meaning:
Accuracy
The data are free of material mistakes.Data from different time periods used for the same estimation are consistent.
Completeness
There are available data for all relevant model variables and no relevant data are excluded from the use in the internal model without justification.The amount and nature of the data ensure that the estimations made in the internal model on the basis of the data do not include an undue estimation error.Appropriateness
The data are consistent with the underlying assumptions of the actuarial and statistical techniques that are applied to them in the internal model and are in particular of sufficient granularity.The data appropriately reflect the risks to which the (re)insurer is exposed.
QIM26. Please specify how you consider that the data used in your internal model is sufficiently accurate, complete and appropriate (totally / substantially / partially / substantially not) to the extent possible by risk category or activity.
QIM26a – totally/substantially/partially in the excel file
<QIM26b_set1>
</QIM26b_set1>
<QIM26b_set2>
</QIM26b_set2>
Which steps have you taken / will you take to establish the required data quality?
<QIM26c_set1>
</QIM26c_set1>
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<QIM26c_set2>
</QIM26c_set2>
QIM27. How do you assure the quality of the data used in your internal model? Please describe the regular data quality checks that you have or intend to put in place. You may address each risk category separately and/or refer to e.g. risk driver data vs. risk exposure data.
<QIM27_set1>
</QIM27_set1>
<QIM27_set2>
</QIM27_set2>
QIM28. What are your main sources (name or description of time series) of input data for key risk modules / drivers?
<QIM28a_set1>
</QIM28a_set1>
<QIM28a_set2>
</QIM28a_set2>
For each source and input data set, please specify if it is publicly available, entity-specific or external but not publicly available?
<QIM28b_set1>
</QIM28b_set1>
<QIM28b_set2>
</QIM28b_set2>
Expert judgement:
Expert judgement refers to the use by (re)insurers of appropriate and relevant assumptions to substitute or complement existing data, taking into account their business expertise.Expert judgment is applied in all internal modelling activities. The use of expert judgment is essential when estimating extreme scenarios, for example at/or beyond the 99.5% percentile. Here, observations are typically scarce (e.g. modelling of natural catastrophes). However, even when a large number of observations is available, expert judgment may also be required, for example, if the observations of past events are not suitable for predicting the future occurrence of events. Any analysis based purely on historical observations and
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without expert judgment may lead to parameter estimates which are not adequate.QIM29. Please indicate in which areas and to which aims you complement or
substitute data with expert judgment.<QIM29a_set1>
</QIM29a_set1>
<QIM29a_set2>
</QIM29a_set2>
QIM29b – Is the use of expert judgment adequately justified? - Small/Medium/Large degree in the excel file
If the use of expert judgment is adequately justified to a small or medium degree please identify gaps and if to a large degree please provide examples or a justification for such an assessment.
<QIM29c_set1>
</QIM29c_set1>
<QIM29c_set2>
</QIM29c_set2>
QIM30. Please describe the general architecture of your internal model and how dependencies are taken into account (what type of dependency measure). How does the dependency structure look like? Please describe the aggregation mechanism, and especially the modelling of diversification effects between risks categories for which only some key points of the probability distribution forecast are known.
<QIM30_set1>
</QIM30_set1>
<QIM30_set2>
</QIM30_set2>
QIM31. Which risk mitigation techniques do you take into account in your internal model (traditional reinsurance / ART / securitisation / loss absorbing technical provisions / loss absorbing other liabilities / tax issues / asset and liability hedging strategies / other ones – please specify)?
<QIM31_set1>
</QIM31_set1>
<QIM31_set2>
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</QIM31_set2>
Future management action:
Future management actions may be linked to any decision which the (re)insurer has the right to make. This may involve only the (re)insurer itself, or relate to any third party. Irrespective of whether the right to make the decision stems from a contractual, statutory or commercial option or from any other source, any and all decisions should be covered. A future management action is the currently anticipated exercise or implementation behaviour of any such right of decision. For example, future management actions may comprise changes in asset allocation or changes in the application of a market value adjustment.QIM32. What kinds of future management actions are taken into account in your
internal model (changes in future bonus rates / reductions in surrender values / changes in asset dispositions / changes in expense charges / changes in risk premium charges / changes in or use of dynamic option and guarantee charge mechanisms / restrictions in the ability to surrender / dynamic hedging/ other ones – please specify)?
<QIM32_set1>
</QIM32_set1>
<QIM32_set2>
</QIM32_set2>
QIM33. Please explain the process that you have or will have in place if a significant deviation from the planned management actions occurs (as a consequence of events beyond the (re)insurer's control).
<QIM33_set1>
</QIM33_set1>
<QIM33_set2>
</QIM33_set2>
Replicating portfolio and other techniques:
Internal models can be complex and demanding with respect to calculation times. The remaining questions in this part specifically relate to situations where an (re)insurer has a more accurate technique at its disposal but has chosen to use approximations at least in some instances, for example in order to reduce calculation times.QIM34. One example is the replicating portfolio technique: the main idea is to
represent the cash-flows arising from existing contracts by cash-flows arising from a portfolio of financial instruments in the calculation of the SCR. The replicating portfolio is the one that “best” reflects the liability cash-flows. There are several possible definitions of what “best” might
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mean in this context. For (re)insurers this technique can be useful to circumvent nested simulations or to assess quickly the impact of adverse market scenarios, as the replicating instruments are chosen so that valuation can be done using closed-form formulae. For the calculation of technical provisions, however, (re)insurers should rely on their more accurate valuation techniques (see in particular section V.2.4 on calculation of TP as a whole).
QIM34 - Yes/No in the excel file
If you use approximation techniques as described above, please answer to the following questions:
(a) For which risks and which instances do you use such approximation techniques?
<QIM34a_set1>
</QIM34a_set1>
<QIM34a_set2>
</QIM34a_set2>
(b) Do you nevertheless use the more complex and accurate technique for some instances? If yes, please elaborate on those instances.
<QIM34b_set1>
</QIM34b_set1>
<QIM34b_set2>
</QIM34b_set2>
(c) Do you calibrate the proxy model by means of the more accurate technique? How often is a recalibration done?
<QIM34c_set1>
</QIM34c_set1>
<QIM34c_set2>
</QIM34c_set2>
(d) To what extent is the calculation time reduced by using the approximation technique?
<QIM34d_set1>
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</QIM34d_set1>
<QIM34d_set2>
</QIM34d_set2>
(e) Do you quantify the quality of the proxy model with respect to the more complex technique? If yes, do you have a tolerance threshold put in place?
<QIM34e_set1>
</QIM34e_set1>
<QIM34e_set2>
</QIM34e_set2>
QIM35. If you use within your internal model in particular the replicating portfolio technique, please answer to the following questions: 1. In which part of your business do you use replicating portfolios (All /
Life / Non-Life / other – please elaborate)<QIM35_set1>
</QIM35_set1>
<QIM35_set2>
</QIM35_set2>
(a) Please provide the different uses of replicating portfolios.<QIM35a_set1>
</QIM35a_set1>
<QIM35a_set2>
</QIM35a_set2>
(b) How often do you determine the replicating portfolio? Does the use of the replicating portfolio involve its redetermination?
<QIM35b_set1>
</QIM35b_set1>
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<QIM35b_set2>
</QIM35b_set2>
(c) How do you asses the quality of the replicating portfolio? How do you validate the replicating portfolio?
<QIM35c_set1>
</QIM35c_set1>
<QIM35c_set2>
</QIM35c_set2>
(d) What are the most intricate parts in the determination of the replicating portfolio? What are the limitations associated with this technique?
<QIM35d_set1>
</QIM35d_set1>
<QIM35d_set2>
</QIM35d_set2>
IM.C.7 Calibration QIM36. In deriving economic capital from the probability distribution forecast
generated by your internal model, if you use other than zero/“breakeven” or its expected value as attachment point, please specify it
QIM36a – zero-“breakeven”, thereby using the expected profit as a first cushion of risk absorption / its expected value /other in the excel file
<QIM36b_set1>
</QIM36b_set1>
<QIM36b_set2>
</QIM36b_set2>
If for example you use the Value-at-Risk at 99.5% of the decrease of basic own funds, the question reads in mathematical terms as follows: Is the economic capital (EC) defined as
i. EC := VaR_99.5%
or
ii. EC := VaR_99.5% - EV
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EV denotes the expected value of increased own funds. For a graphical representation please cf. the figure below (please note that here a decrease in basic own funds corresponds to positive values of the distribution).
QIM37. Which risk measure do you use for your economic capital? Please describe the confidence level, the type of measure and the time horizon and the underlying variable.
<QIM37a_set1>
</QIM37a_set1>
<QIM37a_set2>
</QIM37a_set2>
If the risk measure is different from the standard formula risk measure, please explain the reason and how would you perform the recalibration (e.g. directly from the probability distribution forecast / scaling using normal distribution assumption / scaling using some other distribution assumption / other parametric transformation function / in other ways - please specify)? Please briefly describe the methods you used.
<QIM37b_set1>
</QIM37b_set1>
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ii.
i.
Losses
EV VaR 99.5%
<QIM37b_set2>
</QIM37b_set2>
QIM38. Do you use different risk measures, confidence levels or time horizons for different modules or risk drivers? Please indicate for which one and shortly justify the choice.
<QIM38_set1>
</QIM38_set1>
<QIM38_set2>
</QIM38_set2>
QIM39. If yes, briefly describe how results coming from different calibrations are aggregated.
<QIM39_set1>
</QIM39_set1>
<QIM39_set2>
</QIM39_set2>
IM.C.8 Profit and loss attribution
QIM40. Do you have a process in place that demonstrates how the categorisation of risk chosen in the internal model explains the causes and sources of profits and losses? Yes, totally/Yes, partially/No
QIM41. If you have a process in place that demonstrates totally or partly how the categorisation of risk chosen in the internal model explains the causes and sources of profits and losses, could you describe briefly your process?
<QIM41b_set1>
</QIM41b_set1>
<QIM41b_set2>
</QIM41b_set2>
QIM42. Are there any other links of the profit and loss attribution results to the uses of the internal model? Please describe.
QIM42a - Yes/No in the excel file
<QIM42_set1>
</QIM42_set1>
<QIM42_set2>
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</QIM42_set2>
IM.C.9 Validation Validation policy:
The validation policy sets out the way in which (re)insurers will validate their internal model and why that system is appropriate.The validation should not only apply to the calculation kernel, but should encompass the qualitative and quantitative processes of the internal model, and that the areas of the internal model that need to be validated should include at least data, methods, assumptions, expert judgement, documentation, systems IT, model governance and the use testQIM43. Do you have a validation policy in place for your internal model? Yes/No in the excel file
QIM44. If other aspects of the internal model - different from data / methods /assumptions / expert judgement / documentation / systems IT / model governance / use test - is/will be validated, please specify them
QIM44a - Small/Medium/Large extent in the excel file
<QIM44b_set1>
</QIM44b_set1>
<QIM44b_set2>
</QIM44b_set2>
If data / methods /assumptions / expert judgement / documentation / systems IT / model governance / use test / other, are/will be validated only to a small or medium degree, please identify gaps. If they are/will be validated to a large degree please provide examples or a justification for such an assessment.
<QIM44c_set1>
</QIM44c_set1>
<QIM44c_set2>
</QIM44c_set2>
QIM45. What is/will be the approach that you follow for the validation of the use of expert judgement in relation to data?
<QIM45_set1>
</QIM45_set1>
<QIM45_set2>
</QIM45_set2>
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QIM46. If you have a defined process and triggers which incorporates validation results into the internal model review, briefly describe them.
QIM46a - Yes/No in the excel file
<QIM46_set1>
</QIM46_set1>
<QIM46_set2>
</QIM46_set2>
Independence of validation:
The independence within the validation process is essential to effective validation, as it creates objective challenge to the internal model. Specifically the validation policy should set out how independent review, external or internal, is being used within the validation process. The (re)insurer should set out how the review is independent, taking into account at least the responsibilities and the reporting structures for internal review and remuneration structures for external review.QIM47. If you use any external review to assist you with the validation, how are
you satisfied that their review is independent?QIM47a - Yes/No in the excel file
<QIM47b_set1>
</QIM47b_set1>
<QIM47b_set2>
</QIM47b_set2>
QIM48. Have you set up an internal model validation department/unit? Yes, totally /Yes, partially / No
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QIM49. If you have set up totally or partly an internal model validation department/unit,1. Is the department/unit that is responsible for the validation task also
responsible for a) design, b) implementation, c) documentation and d) the use of the internal model?
<QIM49_set1>
</QIM49_set1>
<QIM49_set2>
</QIM49_set2>
(e) Are the people responsible for the validation task a) independent from the persons who take operational decisions and b) independent from the area/departments where risk activities are exercised?
<QIM49a_set1>
</QIM49a_set1>
<QIM49a_set2>
</QIM49a_set2>
(f) Is the validation task done independently from the a) design, b) implementation, c) testing, d) documentation and e) use of the internal model?
<QIM49b_set1>
</QIM49b_set1>
<QIM49b_set2>
</QIM49b_set2>
QIM50. If you do not have set up totally or partly an internal model validation department/unit, and you intend to use internal review within the validation process, how will you satisfy yourself that this internal review is independent?
<QIM50_set1>
</QIM50_set1>
<QIM50_set2>
</QIM50_set2>
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QIM51. Which validation tools do you use? Please describe them briefly and indicate how frequently they are used.
<QIM51_set1>
</QIM51_set1>
<QIM51_set2>
</QIM51_set2>
QIM52. If your internal model incorporates stress tests as part of the validation process, how are they designed and calibrated?
QIM52a - Yes/No in the excel file
<QIM52b_set1>
</QIM52b_set1>
<QIM52b_set2>
</QIM52b_set2>
QIM53. If you conduct any reverse stress tests, how are they chosen, designed and calibrated?
QIM53a - Yes/No in the excel file
<QIM53b_set1>
</QIM53b_set1>
<QIM53b_set2>
</QIM53b_set2>
QIM54. Please briefly describe known internal model shortcomings / weaknesses including any circumstances where the internal model does not work effectively.
<QIM54_set1>
</QIM54_set1>
<QIM54_set2>
</QIM54_set2>
IM.C.10 Documentation Documentation must be sufficiently detailed and comprehensive enough to allow knowledgeable third parties to understand the internal model. Furthermore, the outputs of the internal model should in principle be reproducible on the basis of the documentation if all the input of the internal model were available. This
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creates a high standard requirement for internal model documentation; the questions below should be answered bearing in mind these requirements.The list of documents below is not intended to be exhaustive, but rather is a representative list of key documents that will be required for Internal Model approval.QIM55. Please see the table in the Excel file. Additionally, if you have any
comments to the listed documents, please provide them.QIM55 - Documentation complete - substantially fulfils the requirements / Documentation partly complete or partially fulfils the requirements / Documentation does not exist in the excel file for all the relevant sub sections below
1. Model description and overview<QIM55b_set1>
</QIM55b_set1>
<QIM55b_set2>
</QIM55b_set2>
General Model Governance:
2. Policies, controls and procedures for the management of the internal model 3. Model change policy4. Evidence of Use Test 5. Training Manual for Management and Staff Training in use and understanding of Internal Model <QIM55c_set1>
</QIM55c_set1>
<QIM55c_set2>
</QIM55c_set2>
Model changes:
6. Record of Major and Minor changes to the model<QIM55d_set1>
</QIM55d_set1>
<QIM55d_set2>
</QIM55d_set2>
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Technological Specifications:
7. Description of the Information Technology platform(s) used in the internal model8. Description of Contingency plans relating to the technology platform(s) used9. User guide10. Source code <QIM55e_set1>
</QIM55e_set1>
<QIM55e_set2>
</QIM55e_set2>
Data:
11. Data policy 12. Documentation evidencing or justifying the accuracy, completeness and appropriateness of the data13. Data directory <QIM55f_set1>
</QIM55f_set1>
<QIM55f_set2>
</QIM55f_set2>
Statistical Quality Standards
14. Detailed description of Internal Model Methodology15. Description of underlying assumptions<QIM55g_set1>
</QIM55g_set1>
<QIM55g_set2>
</QIM55g_set2>
Expert Judgement
16. Description of where Expert Judgement is applied in the model17. Validation of Expert Judgement as applied in the model<QIM55h_set1>
</QIM55h_set1>
<QIM55h_set2>
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</QIM55h_set2>
Calibration:
18. If your model output uses a risk measure other than 1-year VaR at 99.5%, do you have documentation evidencing or verifying that the chosen risk measure is at least as strong as 1 year VaR at 99.5%?<QIM55i_set1>
</QIM55i_set1>
<QIM55i_set2>
</QIM55i_set2>
Profit and Loss Attribution:
19. Results of Profit and Loss Attribution<QIM55j_set1>
</QIM55j_set1>
<QIM55j_set2>
</QIM55j_set2>
Validation:
20. Description and report/results of Validation Tests<QIM55k_set1>
</QIM55k_set1>
<QIM55k_set2>
</QIM55k_set2>
Scope:
21. Partial Internal Model Scope22. Qualitative and quantitative indicators for the coverage of risk<QIM55l_set1>
</QIM55l_set1>
<QIM55l_set2>
</QIM55l_set2>
Other:
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23. Description of risk mitigation techniques accounted for in the internal model24. Description of Future Management Actions accounted for in the internal model25. Description of known internal model shortcomings / weaknesses, including circumstances under which the internal model does not work effectively<QIM55m_set1>
</QIM55m_set1>
<QIM55m_set2>
</QIM55m_set2>
QIM56. As noted above, the above list is not intended to be exhaustive but rather is a representative list of key documents that will be required for Internal Model approval. Please list and describe any part of the internal model documentation not listed above which you would consider important documents necessary to allow the FSB to conduct an effective assessment of the internal model
<QIM56_set1>
</QIM56_set1>
<QIM56_set2>
</QIM56_set2>
IM.C.11 Partial internal models QIM57. Please provide a detail description of how, you would integrate the partial
internal model with the standard formula, if you were allowed to choose the aggregation method.
<QIM57a_set1>
</QIM57a_set1>
<QIM57a_set2>
</QIM57a_set2>
If the partial internal model includes risks not covered in the standard formula please specify how they are integrated.
<QIM57b_set1>
</QIM57b_set1>
<QIM57b_set2>
</QIM57b_set2>
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IM.D Questions for solo (re)insurers using an internal model used for the calculation of the group SCR
IM.D.1 Adjustments from the internal model used for the calculation of the group SCR
QIM58. How are intra-group transactions treated in the solo internal model from a quantitative point of view (e.g. same methodology than external counterparties, specific methodology, same parameterization than external counterparties, different parameterization than external counterparties, other, please specify)? Please differentiate the different types of transactions (e.g. reinsurance, participations, loans etc.).
<QIM58>
</QIM58>
QIM59. If there are risks for which you apply a different methodology than that used in the internal model used for the calculation of the group SCR, please specify them.
<QIM59b>
</QIM59b>
QIM60. If there are assumptions of the internal model used for the calculation of the group SCR which do not fit to your risk profile and where an adjustment was/will be necessary, please provide examples.
<QIM60b>
</QIM160b>
QIM61. If there are there risks for which you would opt for the standard formula at solo level, whereas the risks are included in the internal model used for the calculation of the group SCR, why would you do so?
<QIM61b>
</QIM61b>
QIM62. Please explain for which risks you use your own calibration and for which you use the same parameters as the internal model used for the calculation of the group SCR.
<QIM62a>
</QIM62a>
Which risk factors are not covered by the internal model used for the calculation of the group SCR?
<QIM62b>
</QIM62b>
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QIM63. Please describe to what extent you participate in the group internal model creation process (more than one answer is possible to choose): feeds with the data, discuss the methodology of the internal model used for the calculation of the group SCR, discuss the local specificities, calculates its SCR or calculation is done at the group level, validates the solo results, other? Please specify.
<QIM63>
</QIM63>
QIM64. If you see instances for which you cannot rely on the internal model used for the calculation of the group SCR to fulfil the use test requirements at solo level, how do you intend to address this issue?
<QIM64b>
</QIM64b>
QIM65. Please indicate any other features of the internal model used for the calculation of the group SCR for which you would deviate from the internal model used for the calculation of the group SCR to perform your solo SCR calculation.
<QIM65>
</QIM65>
Quantitative data requests for (re)insurers using an internal model for assessing capital needs (both solo entities and groups)QIM66. Undertakings should explain the reasons for differences between their
internal model estimates and the results of the standard formula modelling treatments.
<QIM66>
</QIM66>
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Qualitative questionnaire related to the use of internal models for group calculation (GIM)Scope of the model
QGIM1. Please describe the scope of your internal model and how you determined such scope for the group calculation, both in terms of risks and of legal entities.
<QGIM1a>
</QGIM1a>
Please also describe the risks and/or undertakings excluded from the scope of internal model, the reasons for their exclusion and, where applicable, the process you have in place to assess the materiality of risks/entities excluded from the scope of the model.
<QGIM1b>
</QGIM1b>
QGIM2. EXCEL QUESTION: Does the internal model provide for the calculation of the SCR for any solo undertakings within the group? (Y/N)
QGIM3. If the internal model is not intended to derive the solo SCR for some or all of your undertakings which are included in the scope of the group internal model, please provide the rationale for this choice. Would these undertakings use a different solo internal model or would they use the standard formula?
<QGIM3>
</QGIM3>
Technical characteristics of the model
QGIM4. EXCEL QUESTION: If you had to choose one sentence to describe your internal model, which one would it be?
(a) At the ultimate level of the group, the internal model aggregates capital charges estimated for the different undertakings.
(b) At the ultimate level, the internal model aggregates capital charges for the different risks, these risks being considered on a consolidated basis.
(c) At the ultimate level, the internal model aggregates all the capital charges estimated for a given risk and a given undertaking.
(d) All the risk factors are modelled simultaneously for all the undertakings and therefore no further aggregation step is required.
QGIM5. If the scope of your internal model does not encompass all the risks and/or undertakings and/or business units within the group, how do you integrate the results of the internal model in the standard formula calculation?
<QGIM5>
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</QGIM5>
QGIM6. If your internal model covers undertakings using different currencies, please describe how you assess, at group level, the risk related to the fluctuations of foreign exchange rates.
<QGIM6>
</QGIM6>
QGIM7. How does your model assess the contributions of the different undertakings to the group SCR (see section on non available own funds in the group section of technical specifications)?
<QGIM7>
</QGIM7>
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