Guidance Note on Internal Models

Summary

This guidance note from the Guernsey Financial Services Commission explains the process by which (re)insurance licensees may use an internal model, instead of the Guernsey Standard Formula, to calculate regulatory solvency capital. It sets out a decision flow for determining whether Commission approval is needed and what documentation must be prepared depending on whether the model has been previously approved by the Commission or another acceptable supervisor.

• No approval needed: If a licensee intends to use the Guernsey Standard Formula, or a formula on the Commission's Recognised Standard Formulas list, Commission approval of an internal model is not required.
• New internal model: If the internal model has not previously been approved, the licensee must have an independent actuary prepare an Internal Model Assessment Report assessing the model against the Commission's internal model acceptance criteria, which are based on IAIS core principles and standards and may require statistical quality, calibration and use tests plus appropriate documentation.
• Previously approved model: If the internal model was previously approved by the Commission or by a supervisor acceptable to the Commission, the licensee must instead submit an Internal Model Reassessment Report prepared by an independent actuary, assessing the model's appropriateness to the risks of the Guernsey licensee against the Commission's reacceptance criteria.
• Recognised Standard Formulas list: The Commission maintains and publishes on its website a list of standard formulas (for example those used in the EU, Switzerland, South Africa, Bermuda, Japan and Australia) considered to provide a similar level of policyholder protection to the Guernsey Standard Formula.
• Costs: All costs, fees and expenses incurred by the Commission in approving an internal model are borne entirely by the licensee, though the Commission expects reassessment of a previously approved model to cost materially less than assessment of a new model.

The note is procedural guidance rather than binding rules, describing how licensees should engage with the Commission when seeking to use an internal model for regulatory solvency purposes.

Key obligations

• A licensee seeking to use a previously unapproved internal model must submit an Internal Model Assessment Report prepared by an independent actuary assessing the model against the Commission's acceptance criteria.
• A licensee seeking to use a previously approved internal model must submit an Internal Model Reassessment Report prepared by an independent actuary assessing the model against the Commission's reacceptance criteria.
• The licensee must bear all costs, fees and expenses incurred by the Commission in approving the internal model.
• A licensee may be required to validate an internal model through a statistical quality test, calibration test and use test, and to maintain appropriate documentation of the model.

Applies to

(re)insurers, insurance licensees