Prudential Regulation Authority Rulebook

10.1

A firm must demonstrate to the PRA that its internal model is widely used, and plays an important role in its system of governance (referred to in Conditions Governing Business 2 – 7, Insurance - Fitness and Propriety 2.1 to 2.3, 4.1, 4.3 and 4.4 and Insurance – Allocation of Responsibilities 4) and particularly in its:

1. (1) risk-management system, as set out in Conditions Governing Business 3.1 to 3.7, and decision-making processes; and
2. (2) economic and solvency capital assessment and allocation processes, including its ORSA, as set out in Conditions Governing Business 3.8 to 3.11.

[Note: Art. 120 of the Solvency II Directive]

10.1A

An internal model shall not be considered to be widely used in or to play an important role in the system of governance of a firm where the quantifications of risks and the risk ranking produced by the internal model do not trigger timely and appropriate risk management actions, where relevant.

10.2

A firm must also demonstrate to the PRA that the frequency of calculation of its SCR using the internal model is consistent with the frequency with which it uses its internal model for the purposes set out in 10.1.

[Note: Art. 120 of the Solvency II Directive]

10.3

A firm must ensure the ongoing appropriateness of the design and operations of its internal model, and that the internal model continues to appropriately reflect the risk profile of the firm.

[Note: Art. 120 of the Solvency II Directive]

10.4

A firm must ensure that the design of the internal model is aligned with its activities, including by ensuring that:

1. (1) the internal model is capable of producing outputs that are sufficiently granular to play an important role in the relevant management decisions of the firm; and
2. (2) as a minimum, the outputs of the internal model differentiate between lines of business, between risk categories and between major business units.

10.5

A firm must ensure that the internal model change policy provides that the internal model is to be adjusted for changes in the scope or nature of the activities of the firm.

10.6

Subject to 10.1, where a firm decides not to use the internal model for a part of the system of governance, the firm must notify the PRA and justify that decision.

10.7

Where the internal model is used for different purposes, a firm must ensure consistency between the different outputs of the internal model.

10.8

A firm must ensure that its governing body and any other persons who effectively run the firm have a sufficient understanding of the internal model which comprises knowledge about all of the following:

1. (1) the structure of the internal model and the way the internal model fits to the business and is integrated in the risk-management system of the firm;
2. (2) the scope and purposes of the internal model and the risks that are or are not included in the coverage of the internal model;
3. (3) the general methodology applied in the internal model calculations;
4. (4) the limitations of the internal model;
5. (5) the diversification effects taken into account in the internal model; and
6. (6) the material expert judgements used to set assumptions underlying the internal model.

10.9

A firm must ensure that the persons who effectively run the firm have a sufficiently detailed understanding of the parts of the internal model used in the area for which they are responsible.

10.10

In order to meet the requirements in 10.2, a firm may use a simplified calculation of the SCR, in which it carries out only a part of the calculations usually necessary to determine the SCR, if and to the extent that the firm:

1. (1) uses results from the previous calculation of the SCR for the remaining part of the calculation;
2. (2) is able to demonstrate upon request by the PRA that the results taken from the previous calculation of the SCR would not be materially different from the results of a new calculation; and
3. (3) does not use a simplified calculation of the SCR for the purposes of meeting Solvency Capital Requirements - General Provisions 4.