Published by Vivienne Maclure on
Amit Lad contributed to the writing of this blog post
Here we focus on the PRA’s comments on the guidelines surrounding the pre-application for using internal models. The key message is that internal model work should largely continue as it has been. In this blog, we will outline some of the other themes in the guidelines, what these mean for insurers and how we can help.
The guidelines are clearly pertinent for all firms that are currently in the Internal Model Approval Process (IMAP). Firms that are not currently engaged in the IMAP, but who intend to apply for entry to the process at a later date should also find the guidelines relevant.
The PRA did not make any surprising or unexpected comments in their statement; the underlying theme was that internal model work should continue as it has been doing.
The PRA did draw attention to the following themes that have been present in the PRA’s prior communications to the industry:
The PRA stressed that the pre-application process is just one stage of the internal model approval process. Firms are reminded that participating in the pre-application process does not automatically mean that their model will get pre-approved. All firms should be prepared for the scenario that their internal model does not get approved for use.
The principal of proportionality in EIOPA’s guidelines is consistent with the judgement-based approach that the PRA is already applying when engaging with firms
Despite internal models not yet being approved, much work has gone into them. If internal models are developed to the stage where they are sufficiently stable, firms should begin to demonstrate their use within their business. At this stage, firms can also be using their current experience to refine the model.
The PRA is anticipating that firms, which are using their sufficiently stable internal model, will be demonstrating adequate governance of their model. This can be done by testing the controls and processes surrounding the implementation of the model. For example the model change policy can be tested when using recent experience to refine the model.
Good communication makes any process run more smoothly. The PRA would like firms to discuss significant changes to their internal models at an early stage of the process.
Due to the individual nature of the pre-application and model approval process, many of the timescales are specific to each firm and will be communicated to them via their supervisory contact.