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    PRA Consults on Modeling of Volatility Adjustment for Solvency II

    April 11, 2018

    PRA published the consultation paper CP9/18, titled “Solvency II: Internal models – modeling of the volatility adjustment.” CP9/18 sets out the PRA proposal to consider applications from internal model firms that include a dynamic volatility adjustment (DVA). It sets out the draft expectations from internal model firms while determining the risks that might arise from DVA when calculating the solvency capital requirement (SCR). Comments are requested by July 11, 2018.

    CP9/18 is relevant to the UK Solvency II firms and to the Society of Lloyd’s and its managing agents. It is most relevant to firms with, or seeking, volatility adjustment approval and the firms that use a full or partial internal model to determine SCR, together with UK Solvency II firms that may develop a full or partial internal model in future. PRA proposes a new supervisory statement “Solvency II: Internal models – volatility adjustment in the modeling of market risk and credit risk stresses” (Appendix 1) and amendments to SS17/16 “Solvency II: internal models – assessment, model change and the role of non-executive directors” (Appendix 2). In SS17/16, PRA set out its expectation that an internal model firm should not recognize DVA within its SCR.

    PRA is consulting on the possibility of allowing firms to apply DVA in internal models when calculating SCR and the adoption of the draft supervisory statement. CP9/18 highlights the areas that PRA proposes firms to consider in their internal model and model change applications when seeking approval to apply DVA. These proposals are presented in the draft supervisory statement and revisions to SS17/16. 

     

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    Comment Due Date: July 11, 2018

    Keywords: Europe, UK, Insurance, Solvency II, Internal Models, CP9/18, SS17/16, Volatility Adjustment, PRA

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