A number of undertakings have stated their intention to use either a full or partial internal model to calculate their Solvency Capital Requirement (“SCR”) following the implementation of Solvency II. Prior to implementation, the Central Bank of Ireland (“the Central Bank”) will engage in a pre-application process with undertakings. For some undertakings, this process has already begun.
The main aim of the pre-application process is to facilitate the Central Bank in forming a view of how prepared an undertaking is to submit a formal application. It is a learning process for both the undertaking and the supervisor, and involves in-depth discussions between both parties regarding the model composition and adherence to the requirements of the Directive.
The Central Bank will inform the undertaking of its view having assessed the model against each of seven criteria. Please note that by its nature, most feedback will be negative (refer to Level 3 Guidance on Solvency II: Pre-application process for Internal Models). This will allow the undertaking sufficient time to rectify any issues identified prior to the implementation date. The pre-application process will not involve a formal approval of the model. However, the Central Bank will indicate that it has completed each stage of its review when no further questions are raised – this will also be communicated in writing to each undertaking.
The process is voluntary and an undertaking may submit an application to use an internal model without having gone through the pre-application process. However, we do not advise this; rather undertakings are encouraged to participate in the pre-application process.
The pre-application process will allow each undertaking to rectify any issues prior to Solvency II implementation, putting the undertaking in a more prepared position post implementation. Participation in pre-application does not guarantee approval after the formal application is submitted. Undertakings need to prepare for the event that their model may not be approved and set up processes to calculate the SCR independently of the internal model. Similarly, if an undertaking decides to use the standard formula approach, and the Central Bank deems this an unsuitable reflection of their risks, then the Central Bank may either insist on an internal model or impose a capital add-on to the SCR calculated by the standard formula.
The Central Bank commenced the Internal Model Pre-Application Process in April 2010 and all previous interaction and general correspondence on the topic can be found hereunder.
Finally, if you intend to submit either a full or partial internal model, and have not yet declared your intention to do so nor submitted a pre-application readiness assessment questionnaire, we strongly urge you to contact your supervisor as soon as possible.
Correspondence on Internal Models
Third Circular - Documents
- April 2010 - Letter to companies who indicated they will engage in pre-application with the Central Bank of Ireland.
- April 2010 - Questionnaire assessing readiness by firms for the pre-application process which accompanied the above letter.
- May 2010 - Internal Model Pre-application Requirements - With Comments - In order to facilitate industry the Central Bank held a number of workshops to discuss the above questionnaire with those companies that expressed an interest in entering the Pre Application Process. The workshops were held in our offices in Spencer Dock on the 4th, 5th and 7th May 2010. Over the course of the workshops a number of questions were raised by industry attendees. We have listed these questions and comments within the relevant sections of the questionnaire and have set out our responses to same.
Second Circular - Documents:
- December 2009 - Letter to industry as a follow-up to the first circular correspondence requesting details on the nature and timing of firms' plans in relation to the use of full or partial models.
- December 2009 - Questionnaire issued in order to gain a more definitive indication of firms' plans with regard to internal model approach and to assist our own planning for the internal model approval process.
- February 2010 - Letter to the President of the Society of Actuaries in Ireland regarding feedback on the Central Bank's review of Financial Condition Reports and Statements of Actuarial Opinion.
First Circular - Documents:
- August 2009 - Letter sent to all Irish authorised insurance undertakings requesting information on their preparations for the Solvency II regime.
- August 2009 - Questionnaire issued in connection with the above letter. The questionnaire concerns the internal model approach to be adopted by firms under Pillar 1 of Solvency II.