22 May 2018

EIOPA publishes the first study on the modelling of market and credit risk

The results of the study show significant variations in asset model outputs, partially resulting from model specificities, which indicates the need for further supervisory actions. The study is a first step in an ongoing process of monitoring and comparing internal market and credit risk models.

This report summarises the key findings from this study undertaken in 2016/2017 and provides an insight into the supervisory initiatives being taken following the conclusions of this study.

The year-end 2015 study focused on EUR denominated instruments and consisted of 14 participants from 7 different Member States covering 95% of the Euro investments (excluding unit-linked assets) held by all undertakings with an approved internal model covering market and credit risk in the EEA. 

It is important to note that the study focusses on drivers for the value of investments, but does not aim to cover the overall SCR. Hence, no direct conclusion could be drawn with regards to a specific undertaking solvency with this comparative study. In particular, specific undertaking risk profile, dynamics of liabilities under changing financial market conditions, tax impacts or volatility and matching adjustment are intentionally not considered – with the purpose of directly assessing the study’s key subject, taking into account the other aspects in the judgement of relevance of the findings. 

The overall results show significant variations in asset model outputs, which could be partly attributable to model specificities already known by the relevant NCAs, but also indicate a certain need for further supervisory scrutiny. However, this report should be considered as a first step in an ongoing process of monitoring and comparing internal market and credit risk models. This will be complemented by further refinements and developments in the future, and, the results, tools and experience will be feeding in the SRP on internal models and vice versa.

As a final introductory remark, internal models under Solvency II are governed by strong regulatory requirements, as on statistical quality, validation, documentation, justification of expert judgements, internal controls and model change governance. Ongoing compliance to these standards is safeguarded under the Supervisory Review Process (SRP).

Full study

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