Statement of Guidance for Licensees seeking approval to use an Internal Capital Model (ICM) to calculate the Prescribed Capital Requirement (PCR)

Summary

This is a Statement of Guidance issued by the Cayman Islands Monetary Authority (CIMA) setting out the criteria CIMA will apply when deciding whether to approve an insurance licensee's use of an Internal Capital Model (ICM) to calculate its Prescribed Capital Requirement (PCR), instead of using the standard regulatory capital formula. It applies to licensees under the Insurance Law, 2010 that are eligible under the applicable laws and regulations to seek ICM approval (i.e., certain Class B, C and D insurers), and is meant to be read alongside CIMA's separate Regulatory Procedure on the ICM submission process.

The guidance describes nine areas CIMA will assess before approving and continuing to accept an ICM. Throughout, it sets expectations for Board and senior management oversight, data quality and updating, assumption-setting and justification, and ongoing review and back-testing of the model.

• Use Test: The model must be embedded in the licensee's actual decision-making and risk management.
• Statistical Quality Tests: Assessment of data and methodology quality.
• Calibration: Calibration to a 99.5% VaR confidence level over a one-year horizon on a market-consistent balance sheet.
• Stress and Scenario Testing: Included as one of the nine assessment areas.
• Validation: Included as one of the nine assessment areas.
• Documentation: Included as one of the nine assessment areas.
• Model Governance: Included as one of the nine assessment areas.
• Internal Controls: Included as one of the nine assessment areas.
• Risk Assessment: Included as one of the nine assessment areas.

Because this is guidance rather than binding rule text, most requirements are framed as expectations ('should') that CIMA will use to evaluate an ICM application and its ongoing acceptability, though a small number of provisions are stated as firm requirements (e.g., that PCR determination via the ICM must be assessed at least annually).

Key obligations

• Licensees seeking ICM approval must ensure the model is central to and embedded in the licensee's decision-making processes and operations (the 'Use Test'), not merely a compliance exercise.
• The PCR must be assessed using the ICM at least annually, with processes in place to update the ICM for changes in risk strategy or business/external conditions.
• Statistical quality tests on the ICM's data, assumptions and methodology must be performed annually or more frequently if risks or assumptions change.
• Data used as inputs to and to determine parameters for the ICM must be updated at least annually and tested for accuracy, completeness, consistency and predictive propensity.
• The Licensee's Board of Directors must review the results of ICM testing procedures at least annually.
• The ICM must be calibrated so that the PCR is determined using the VaR metric at a 99.5% confidence level over a one-year time horizon, based on an economic balance sheet reconciling to the licensee's reporting balance sheet.
• Licensees must fully document ICM calibration, including selected parameters, justification for parameter selections, historical experience data by line of business, and any use of expert judgment.
• Assumptions used in the ICM must be supportable through quantitative analysis, explained and justified, with a written explanation of the methodology maintained.
• The Board and management must maintain overall control of and responsibility for the ICM's construction and use, and ensure appropriate governance and internal controls are in place.

Applies to

licensees under the Insurance Law, 2010 eligible to seek approval to use an Internal Capital Model (Class B, C and D insurers)

Deadlines

• at least annually: The PCR must be assessed using the ICM at least annually.
• annual basis or more frequently as required by changes in risks and assumptions: Statistical quality tests on the ICM must be performed.
• annually, at a minimum: Data used as ICM inputs and parameters must be updated and tested.
• annual basis or more frequently: The Licensee's Board of Directors must review the results of ICM testing procedures.