Solvency II internal model

The internal model is the alternative to the standard formula for calculating the Solvency Capital Requirement under Solvency II. Rather than applying the uniform parameters set by the regulation, the insurer develops its own risk model, calibrated on its actual exposure profile, and submits it for supervisory approval. The model may be full, covering all risks, or partial, covering only certain modules deemed poorly represented by the standard formula. The benefit is twofold, better reflecting the economic reality of the firm's risks and, often, reducing the capital requirement where the insurer's profile is better than the average assumed by the standard formula. This possibility of reduction is precisely what justifies the requirement of approval and strict control, since an under-calibrated internal model would artificially lower the required capital and weaken solvency. Approval requires demonstrating the quality of the data, the robustness of the methodology and the model's effective use in management, known as the use test. For emerging risks such as cyber, the internal model offers valuable flexibility against an ill-suited standard formula, but it transfers to the insurer the heavy responsibility of correctly calibrating a still poorly understood risk.

A large cyber reinsurer develops a partial internal model for its underwriting risk, judging that the standard formula underestimates the correlation between its insureds relying on the same providers.

modèle interne, internal model, modèle interne partiel