Published 17 October 2018
Solvency II: Internal models – modelling of the volatility adjustment – PS23/18
Overview
This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 9/18 ‘Solvency II: Internal models – modelling of the volatility adjustment’. It also contains the PRA’s final Supervisory Statement (SS) 9/18 ‘Solvency II: Internal models – modelling of the volatility adjustment’ which sets out the PRA’s expectations of internal model firms when determining the risks that might arise from the dynamic volatility adjustment (DVA) when calculating the solvency capital requirement (SCR). It also contains the amendments to SS17/16 ‘Solvency II: internal models – assessment, model change and the role of non-executive directors’.
This PS is relevant to UK Solvency II firms and to the Society of Lloyd’s and its managing agents. It is most relevant to firms with, or seeking, volatility adjustment (VA) approval and which use a full or partial internal model to determine the SCR, together with UK Solvency II firms that may develop a full or partial internal model in future.
In CP9/18 the PRA consulted on the possibility of allowing firms to apply DVA in internal models when calculating the SCR and the adoption of a new SS. The CP highlighted the areas that the PRA proposed firms considered in their internal model and model change applications when seeking approval to apply the DVA.
The PRA received four responses to the CP. All of the respondents welcomed the PRA’s proposal to allow internal model firms to apply a DVA into the SCR calculation and many of the remaining comments made a number of observations and requests for clarification which are set out in Chapter 2, along with the PRA’s final decisions.
Implementation
The expectations set out in the updated SSs will come into effect on the publication of the PS on Wednesday 17 October 2018.
Policy Statement 23/18Appendix 1: SS9/18 ‘Solvency II: Internal models – modelling of the volatility adjustment
Appendix 2: SS17/16 ‘Solvency II: internal models – assessment, model change and the role of non-executive directors’
Published 11 April 2018
Solvency II: Internal models – modelling of the volatility adjustment – CP9/18
Background
This consultation paper (CP) sets out the PRA’s proposal to consider applications from internal model firms that include a dynamic volatility adjustment (DVA). It sets out the PRA’s draft expectations of internal model firms when determining the risks that might arise from the DVA when calculating the solvency capital requirement (SCR).
This CP is relevant to UK Solvency II firms and to the Society of Lloyd’s and its managing agents. It is most relevant to firms with, or seeking, volatility adjustment (VA) approval and which use a full or partial internal model to determine the SCR, together with UK Solvency II firms that may develop a full or partial internal model in future.
Summary of proposals
The PRA proposes a new supervisory statement (SS) ‘Solvency II: Internal models – volatility adjustment in the modelling of market risk and credit risk stresses’ (Appendix 1), and amendments to SS17/16 ‘Solvency II: internal models – assessment, model change and the role of non-executive directors’ (Appendix 2).
Responses and next steps
This consultation closed on Wednesday 11 July 2018. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP9_18@bankofengland.co.uk.