Topical modelling issues in Solvency II

The main reasons for giving European insurance companies the option to apply internal models for calculating the main solvency requirement within the Solvency II framework is to enhance better risk management in the firms, and to provide the opportunity to derive a more accurate risk-oriented capital requirement than the standard Solvency Capital Requirement (SCR) could provide. The possibility to use internal models within pillar 1 basically means freedom to calculate the solvency requirement using some other formula and even principles than those given by the standard formula. This freedom is more limited with partial models.

This paper gives a brief introduction and update to the Solvency II project, reviews and discusses some topical aspects of internal models from the supervisory point of view, and points out some relating results of the Quantitative Impact Studies carried out, thus far, in the EU by CEIOPS.