Prudential Regulation Authority Rulebook

2.1

Firms are reminded that once a formal internal model application has been submitted to the PRA, there is limited opportunity for firms to make substantive changes. Firms should therefore make sure their applications are stable and approved by their internal governance processes prior to formal application. Where firms become aware that they may need to make changes during the application period, these should be discussed with their usual supervisory contact as soon as possible. Where changes are material, a new application is likely to be required. Alternatively, firms might reasonably be able to modify the existing application. If so, the PRA would need to reassess whether the modified application is complete and this may delay the PRA’s consideration of the application. Neither of these options should be approached lightly. If firms believe that significant model changes are likely in the formal application phase, they are encouraged to consider delaying their application to the PRA and to discuss options with their usual supervisory contact. In this respect, the preapplication process is a means to help firms verify they are on the right path before they submit an application.

2.2

The PRA will grant an internal model permission where the firm demonstrates to the PRA’s satisfaction that it satisfies the internal model requirements and calibration standards set out in the PRA Rulebook,^[7] or where safeguards mitigate non-compliance with the internal model requirements and ensure compliance with the calibration requirements. When reviewing an internal model application, the PRA may consider imposing two types of safeguards, a residual model limitation capital add-on (RML CAO) or a ‘requirement’ applicable in respect of firm’s business practices or model usage. For more information on the PRA’s approach to internal model permission applications, or model limitation adjustments (MLAs), firms should refer to SoP – Solvency II internal models: Permissions and ongoing monitoring.

2.3

Irrespective of the progress of the internal model application, firms should have an alternative approach that they can use if they fail to gain permission to use the model, for the purpose of calculating the SCR, after submitting an application, and ensure that they have a clear understanding of the actions they would take in those circumstances. For example, a merger or restructuring may make the existing standard formula inappropriate and therefore the applicant would need to have a contingency plan in the event that the PRA did not grant permission to use the internal model.