EIOPA published a report presenting the results of a comparative study on market and credit risk modeling in the insurance sector. The report summarizes key findings from the study undertaken in 2018 (and based on year-end 2017 data) and provides insights into the supervisory initiatives being undertaken following the conclusions of this study. The study is intended to further develop and refine European comparative studies as a supervisory tool in the area of market and credit risk modeling. The aim is also to support the supervision of models and foster convergence of supervisory approaches, given the potential choices of mathematical, statistical, and IT solutions to tailor models to the concrete risk profile.
The overall results show significant variations in asset model outputs, which could be partly attributable to model and business "specificities" already known by the relevant national competent authorities, but also indicate a certain need for further supervisory scrutiny. This report is part of an ongoing process of monitoring and comparing internal market and credit risk models. The study focused on euro-denominated instruments. The 19 participants from 8 different member states cover 98.5% of the Euro investments held by all undertakings with an approved internal model, covering market and credit risk in the European Economic Area. The study focused on drivers for the value of investments, but did not aim to cover the overall solvency capital requirement (SCR).
Market and credit risk contribute significantly to the SCR of insurance undertakings and are of material importance for the majority of internal model undertakings. Consequently, the EIOPA Board of Supervisors decided to perform annual European-wide comparative studies on the modeling of market and credit risks, to be run by a joint project group of several national competent authorities and EIOPA, to continue the study based on year-end 2015 data. Undertakings with a significant exposure to assets denominated in Euro and an approved internal model covering market and credit risk take part in this annual study.
Refinements and developments since the last study will be further developed already with the next study. The results, tools, and experience will be feeding in the Supervisory Review Process (SRP) on internal models and vice versa. The findings indicate the need for further supervisory scrutiny, including at the European level. Consequently, EIOPA has decided to perform regular annual studies to further develop supervisory tools and foster consistency of supervisory approaches.
Related Link: Report (PDF)
Keywords: Europe, EU, Insurance, Solvency II, SCR, Market Risk, Credit Risk, Internal Models, EIOPA
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