1 April 2016

Eiopa rules out single internal model indicator

The top EU insurance regulator with the purview of internal models has played down concerns that supervisors will use alternative indicators to second-guess the level of Solvency II capital of internal model insurers.

Vesa Ronkainen, the head of the Centre of Expertise in Internal Models at the European Insurance and Occupational Pensions Authority (Eiopa), admitted that a set of indicators could be used to trigger supervisory analysis, and ensure that the models remain fit for purpose over time.

But, in an interview with InsuranceERM, the Finnish actuary stressed these are intended to be simple tools that should not be looked at in isolation, and added they might not even be disclosed.

"We have no single formula in mind. We hope to find some simple ratios we deem sensible to look at, but we don't see these indicators as a reliable capital tool, rather as a trigger for supervisory investigation," he said.

The low-key approach is in contrast with that of the UK Prudential Regulation Authority (PRA), which over 2014 trialled "early warning indicators" for non-life, life and with-profits insurance businesses.

The head of the PRA, Andrew Bailey, admitted before Parliament this initiative could represent a breach of EU law, but justified it with the need to counter the risk of "over-reliance on complex models and of models being used to pare capital requirements".

The PRA's work on internal model indicators was subsequently put on hold, as devising simple and appropriate metrics was technical challenging.

While sharing the concerns of British authorities, Eiopa has deliberately lagged behind in its work as it sees indicators being a tool for once models have been approved

Over the last few months, it has started designing some possible indicators, but this work will only accelerate in the summer, once supervisors receive the first batch of Solvency II quantitative reports.

"You cannot rely on a simple ratio to define the right level of capital – that is too much responsibility to put on these instruments. The indicators will be useful to identify trends, but then you need at least a couple of years of data to do it," Ronkainen said.

Eiopa's plan is to eventually set the indicators out in the supervisory handbook, but there is currently no intention to disclose them. "The risk of publishing is that people start managing to it, and that is not our purpose."