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EIOPA: national insurance regulators need standardised Solvency II internal model approval processes

21 Apr 2015, 12:10 pm

Different EU member states need to be consistent when considering and approving applications by insurers to use their own 'internal models' to calculate new capital requirements, according to the regulator.

A new opinion published by the European Insurance and Occupational Pensions Authority (EIOPA) (3-page / 174KB PDF) sets out three areas where national regulators could potentially "jeopardise" a new EU-wide regulatory regime without a harmonised internal model approval process. Different approaches to internal modelling could "harm convergence and lead to an unlevel playing field", according to the opinion.

"Being an innovative element of the Solvency II framework, [the] internal model is an area particularly prone to inconsistent approaches," said EIOPA chair Gabriel Bernardino.

"The purpose of this opinion is to promote convergent supervisory practices in this critical area of Solvency II. Later on, we will engage in a follow-up exercise with the NCAs [national competent authorities] to understand what actions have been taken in light of our opinion and consider the further measures required," he said.

EIOPA intends to continue monitoring the approach taken to approving internal models by the different national regulators and "working on their convergence to ensure a common Union supervisory culture and consistent supervisory practices", according to the opinion.

The opinion reminds national regulators to ensure that risks related to sovereign exposures are appropriately taken account of in internal models submitted to them for approval, and to compare internal models at national level as best practice. It also contains guidance to help national regulators to assess those models that are dependent on decisions still to be taken by the European Commission, such as granting equivalence to non-EEA 'third' countries.

The Solvency II regime sets out broader risk management requirements for European insurers and dictates how much capital firms must hold in relation to their liabilities. It is due to come into force on 1 January 2016. Use of an internal model, which must be submitted to an insurer's home regulator for approval, will allow firms to develop their own methods to calculate these capital requirements appropriate to their own risks and liabilities. Firms will also be able to use a 'standard' model; however, this will usually mean higher capital charges.