Internal Model Monitoring and Validation
Validation
Validation is an important part of the internal model. Often there is a lot of focus on the bottom up checking of parameterisation and less emphasis on the top down sensibility checks. We will discuss the balance of the two and the processes to ensure a useful validation.
We discuss approximate ways to identify material risks in a large and complex Internal Models and this will generally result in a more focused validation.
Dependencies are a significant item in an Internal Model and because of the lack of data Firms often exercise expert judgement for its parameterization. We discuss some of the issues involved in expert judgement with applications on dependencies risk.
Monitoring Appropriateness of Internal Models
There is a risk that after their initial approval, Internal Models may weaken and gradually do not reflect the underlying risks. We discuss some of the ways we monitor “internal model drift” at the PRA-Bank of England.
Analysis of Solvency Ratios across Europe
We analyse SFCR data to compare solvency ratios across Europe and try to identify their determinants. We discuss how much of the solvency ratio differences between types of insurers and countries can be explained by the data and other factors that may affect them. We discuss the implication for comparisons of financial strength.