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
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