L2 Advice on Partial Internal Models CEIOPS-SEC-167-10 January 2010
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Summary of Comments on Consultation Paper 65 - CEIOPS- CEIOPS-SEC-167-10 CP-65/09 January 2010 CP No. 65 - L2 Advice on Partial Internal Models CEIOPS would like to thank AB Lietuvos draudimas, ACA , AFS, AMICE, Association of British Insurers, Assuralia, CEA, CNP Assurances, CRO Forum, Deloitte , DIMA , EMB Consultancy LLP, Equitable Life Assurance Society (UK), FEE, FFSA, German Insurance Association – Gesamtverband der D, GROUPAMA, Groupe Consultatif, Institut des actuaires (France), Investment & Life Assurance Group Ltd, IUA, Just Retirement Limited, KPMG ELLP, Legal & General Group, Lucida plc, Munich Re, Pacific Life Re, PricewaterhouseCoopers LLP, RBS Insurance, ROAM, RSA Insurance Group,UNESPA – Association of Spanish Insurers, and Unum Limited The numbering of the paragraphs refers to Consultation Paper No. 65 (CEIOPS-CP-65/09) No. Name Reference Comment Resolution 1. AB Lietuvos draudimas General We broadly agree with the contents of this paper. Our Noted. Comment only area of major disagreement is the choosing of Option 2 for integration techniques. This would appear to be less efficient and more time bound than Option 3. 2. ACA General Partial internal models are possible even for minor changes Noted. Comment in comparison to the standard model. We think that this is the right way to give small companies the same choices as bigger ones. This is especially important for small and even mid-sized companies for which some of the modules of the standard modules do not seem well fitted. Also the flexibility by allowing different risk categorizations is welcomed. For aggregation methods, option 2 seems to be alright. It should also be ensured that these standards are applied in the same way in every country. 3. AFS General The Association of Friendly Societies represents the Noted. Comment friendly society sector in the UK. We have 45 friendly Resolutions on Comments on CEIOPS-CP-65/09 1/236 Summary of Comments on Consultation Paper 65 - CEIOPS- CEIOPS-SEC-167-10 CP-65/09 January 2010 CP No. 65 - L2 Advice on Partial Internal Models society members, who are all member-owned mutual organisations. Typically they offer long term savings and protection policies, with generally low minimum premiums. Friendly societies are typically small, though well- capitalised, and have a distinctly different business model to shareholder-owned insurers. We would like to thank CEIOPS for the chance to comment on this paper. 4. AMICE General These are AMICE´s views at the current stage of the CEIOPS disagrees with the need Comment project. As our work develops, these views may evolve of such formal distinction, which depending in particular on other elements of the would be very subjective and framework which are not yet fixed. hard to make in many circumstances, for examples when 50% of risks and major A In our opinion, CEIOPS should distinguish between units are modelled within the the following two different situations related to the scope of the internal model. integration of partial internal models: CEIOPS draws the attention to o Integrating partial internal model results into the the fact when the wide majority standard formula; risks units fall under the scope of the partial internal model, the o Integrating standard formula results into the partial diversifications benefits between internal model: This case should be treated in this the internal model and standard consultation paper, where the PIM is close to be a full formula results’ will be typically internal model. In this regard, the undertaking should be lower and immaterial in many allowed to propose alternative methodologies. circumstances. For further details please to answer to comment 11. A Justification limited scope internal model Resolutions on Comments on CEIOPS-CP-65/09 2/236 Summary of Comments on Consultation Paper 65 - CEIOPS- CEIOPS-SEC-167-10 CP-65/09 January 2010 CP No. 65 - L2 Advice on Partial Internal Models We agree with CEIOPS that the undertaking should justify the limited scope of its internal model. We also agree that Noted. We do not intend that supervisory authorities should retain the power to disagree there should be appeal from the with the undertakings proposed scope and reject the decision of the supervisory model, to approve the internal model with conditions and authority. CEIOPS does not to require the undertaking to submit a transitional plan to have the power to overrule its extend the scope of the model. However, AMICE members members in their supervisory believe that if the internal model is rejected, the duties. Legal avenues of undertaking should have the right to appeal the objection will remain open. supervisory decision on the limited scope of the partial internal model. A Timeframe approval partial internal model In line with our comments to CP37, CEIOPS should provide Not agreed. This suggestion is a reasonable timeframe at Level 2 on the approval of the against Level 1 text. limited scope of the partial internal model. A List of Techniques to integrate Partial Internal Models in Level 3 We agree with CEIOPS that providing a list of acceptable methodologies to integrate partial internal models should Noted. not limit the flexibility of the undertaking to decide the best way to merge the internal model and standard formula results. This list of methodologies should be as principle-based as possible. Noted. Resolutions on Comments on CEIOPS-CP-65/09 3/236 Summary of Comments on Consultation Paper 65 - CEIOPS- CEIOPS-SEC-167-10 CP-65/09 January 2010 CP No. 65 - L2 Advice on Partial Internal Models If the list is too restrictive, it will be inappropriately burdensome for undertakings to prove the inappropriateness of these methodologies before being able to suggest an alternative way to integrate partial Agreed. internal models. CEIOPS is keen on working Additionally we believe that providing a list of techniques constructively with stakeholders at Level 3 will help undertakings to reduce costs and will on the chosen option, namely provide the needed flexibility to apply the techniques that on the Level 3 aggregation better reflect the risk profile of the undertaking. techniques. Consequently, CEIOPS proposes the creation of a joint taskforce between CEIOPS and stakeholders to address this question. On Level 3 Guidance CEIOPS will issues further provisions in order to ensure to an adequate level of harmonization and the However, we wonder whether CEIOPS foresees to reach an maintenance of a level playing acceptable level of harmonization in the application of field. integration mechanisms as part of the Level 3 guidance. After all, the establishment of a European level playing field across Europe is a key aim of Solvency II Although CEIOPS understands A Risks not covered in the Standard Formula the concern over the integration of risks not covered in the CEIOPS’ paper states that a partial internal model may standard formula, nevertheless, cover specific risks which may arise at solo or group level CEIOPS is sceptical of providing and which are not explicitly considered by the Standard Resolutions on Comments on CEIOPS-CP-65/09 4/236 Summary of Comments on Consultation Paper 65 - CEIOPS- CEIOPS-SEC-167-10 CP-65/09 January 2010 CP No. 65 - L2 Advice on Partial Internal Models Formula. We suggest that CEIOPS provide some examples further input either regarding of risks that might not be adequately captured in the type of risks or on how to model standard formula and which should be the best way to them (as they vary from approach them. Strategic and Reputational risks are good undertaking to undertaking), examples of risks which would be best covered by a other than the general qualitative approach. More analysis is needed on how to modelling requirements stated approach commodity and contagion risk. in Article 121, 122 and 124 as it would induce systemic risk which the internal model regime aims to mitigate. CEIOPS is of the opinion that such task is more suitable for the actuarial profession to undertake. 5. Unum General Where the standard formula correlation matrix is neither Noted. CEIOPS maintain its view Comment feasible nor appropriate for the integration of the partial on the policy option that should internal model into the standard formula, firms should be be followed, as justified in detail able to provide their own aggregation method subject to this consultation paper. supervisory approval. We would therefore support option Nonetheless as mentioned in 3: integration of the partial internal model using structures answer to comment 4, CEIOPS and parameters provided by the firm or (if these are is keen on working approved by supervisors) techniques provided by constructively with stakeholders supervisors. As firms will have developed the partial on the chosen option, namely models they will be better placed to design the most on the L3 aggregation appropriate approach to integrate their model into the techniques. standard formula. Consequently CEIOPS proposes Option 2 (use of one of the aggregation methods provided the creation of a joint taskforce by CEIOPS) could be retained where the integration between CEIOPS and approach proposed by the firm has been rejected by stakeholders to address this supervisors. For the enforcement of option 2 there should question. be clear harmonised criteria for all supervisors in order to avoid any regulatory arbitrage and ensure consistency of Agreed on the need to ensure Resolutions on Comments on CEIOPS-CP-65/09 5/236 Summary of Comments on Consultation Paper 65 - CEIOPS- CEIOPS-SEC-167-10 CP-65/09 January 2010 CP No. 65 - L2 Advice on Partial Internal Models application across Europe harmonization, for further details please refer to answer to comment nr. 4. 6. Association of British General We welcome CEIOPS’ advice and their flexible approach to Noted. Insurers Comment partial modelling as we believe partial models are a key instrument to enhance risk management.