‘Solvency II is not just about capital. It is a change of behaviour’ – Thomas Steffen, Chairman of the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS).
Effective risk management and policyholder protection are required to be embedded into the organisation, especially in its operational and decision-making procedures.
Organisations aiming for internal model approval through IMAP (internal model approval process) will require high quality internal models, which are used by the organisation.
If a company’s board and business teams do not buy in to the internal model, the regulators will not. It is therefore critical to engage with the business teams and boards early, to obtain their input, gain their understanding and to build models that adhere to their requirements.
To provide senior management with the ability to qualify the reasonableness of key assumptions used in the model, a much more comprehensive approach to stress testing is required. This is essential to allow management to take full account of the risk dynamics of shocked scenarios within the model.
A highly structured control framework around inputs, model calculations, and model output validation is required. If implemented successfully, such a framework will result in a model that is not only used throughout the organisation, but more importantly, a model that is trusted and valued by all management teams.
