PRA Letter from Sid Malik Presents Results of Proxy Modeling Survey
PRA published a letter from Sid Malik (Head of Division – Life Insurance and Pensions Risk, Insurance Supervision) to Chief Risk Officers of life insurers. The letter shares results from the recent survey on proxy modeling for the Solvency II calculations. PRA observed a wide range of practices in the survey responses, with no firm having adopted the best observed practices in all areas of proxy modeling. However, PRA recognizes that proxy modeling is an area where thinking and techniques continue to evolve. Given the wide range of practices observed in the survey, PRA is considering whether to issue a consultation on proposed expectations for how firms can continue to meet internal model tests and standards in respect of proxy modeling.
The purpose of this feedback is not to give an assessment of firms’ proxy models against the Solvency II internal model tests and standards, or of the PRA expectations on proxy modeling. PRA noted that the most appropriate approach for a firm will vary depending on the materiality and complexity of the risks modeled and firms should continue to be cognizant of these aspects when considering how their method compares to the best observed practice. PRA has divided its analysis into eight high-level categories, each representing a key area of the proxy model. These categories are use of the proxy model, fitting, out-of-sample testing, other testing, acceptance criteria, roll-forward, out-of-model adjustments, and documentation.
For internal model firms, PRA sets out the results of the industry survey, along with the firm-specific feedback. PRA has shared the details of best observed practices with all survey participants. Based on the survey response and documentation provided, PRA has highlighted where it has been concluded that the approach is or is not in line with the best observed practice. For standard formula firms, PRA sets out the results of the industry survey, which is information that has been provided to all survey participants. In the interest of transparency, PRA has also provided firm-specific feedback to other survey participants. PRA has not, however, included feedback specific to a firm.
Related Link: Letter
Keywords: Europe, UK, Insurance, Proxy Modelling, Life Insurers, Solvency II, Internal Model, Best Observed Practice, SCR, PRA
Featured Experts
Adam Koursaris
Asset and liability management expert; capable modeler; risk and capital specialist
Cassandra Hannibal
Life insurance actuary; risk management and economic capital specialist
Jerome Ogrodzki
Insurance asset and liabilities modeling specialist; stochastic modeling expert
Previous Article
FSB to Address Too-Big-to-Fail, Shadow Banking, and Fintech RisksRelated Articles
BoE Consults on Approach to Setting MREL, Publishes Bail-In Guidance
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
EBA Seeks Views on Proportionality Assessment Methodology
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
US Agencies Propose Changes to Call Reports and Instructions
Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.
PRA Finalizes Rulebook Definition of Higher Paid Material Risk-Taker
The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.
EBA Examines Asset Encumbrance in Banking Sector
The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.
EBA Publishes Methodological Guide to Mystery Shopping
The European Banking Authority (EBA) published a methodological guide to mystery shopping.
APRA Issues Update on Capital Reform Policy Settings for Banks
The Australian Prudential Regulation Authority (APRA) released a letter to authorized deposit-taking institutions to provide an update on key policy settings for the capital framework reforms, which will come into effect from January 01, 2023.
CPMI-IOSCO Assess Continuity Planning of Market Infrastructures
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report that assesses the business continuity planning activities of financial market infrastructures or FMIs.
BoE Announces Changes to Validation Rules for Form BTL
The Bank of England (BoE) published questions and answers (Q&A) on OSCA to BEEDS migration for statistical reporting as well a presentation from the project overview session held with statistical reporters.
BCBS Proposes Changes to Process for Reviewing G-SIB Methodology
The Basel Committee on Banking Supervision (BCBS) is consulting on a technical amendment to the Basel Framework to reflect a new process reviewing the global systemically important bank (G-SIB) assessment methodology.
