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December 20, 2017

EIOPA issued an opinion on the supervisory assessment of internal models, including a dynamic volatility adjustment (DVA). The opinion is addressed to national supervisory authorities and stresses the importance of common supervisory practices and approaches throughout the EU with regard to the use of internal models.

When using the DVA, undertakings should ensure prudency principle, meaning that the internal model should produce a Solvency Capital Requirement (SCR) "guarantying" a level of policyholder protection that is at least as high as if replicating the EIOPA Volatility Adjustment Methodology. EIOPA reminds undertakings to fulfill the Solvency II disclosure requirements and provide an explanation of the DVA methodology in their Solvency and Financial Condition Report. The EIOPA Chairman Gabriel Bernardino said that EIOPA will monitor the developments and assess the implementation of this opinion during 2019.

Volatility adjustment is one of the measures of the Long-Term Guarantee Package linked with the Solvency II valuation of insurance contracts with long-term guarantees. It aims to stabilize the Solvency II balance sheet during short periods of high market volatility by adding an extra spread component to the discount rate used for the calculation of technical provisions. This opinion considers internal models making use of a DVA by allowing the volatility adjustment to move in line with the modeled credit spreads during the one-year forecast of basic own funds. According to the assessment of EIOPA, DVA modeling is an area where supervisory convergence needs to be reinforced.

 

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Keywords: Europe, EU, Insurance, Supervisory Assessment, Internal Models, Volatility Adjustment, Solvency II, EIOPA

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