## What is an internal model Solvency II?

Under the Solvency II regulatory framework, a firm’s Internal Model is at the heart of risk evaluation and will therefore be a key input to a wide range of business decisions. This is going to be a significant extension of scope for most existing capital models.

## What is the difference between SCR and MCR?

Solvency capital requirements (SCR) are EU-mandated capital requirements for European insurance and reinsurance companies. The SCR, as well as the minimum capital requirement (MCR), are based on an accounting formula that must be re-computed each year.

**What is an internal capital model?**

The Internal Capital Model (ICM) of an insurer is a financial forecasting system designed to support risk management decision making by placing a probability based statistical distribution around key financial variables such as projected claims, liabilities, asset values.

**What is a partial internal model?**

Partial internal models can be used to model one or more of the standard formula risk modules or sub-modules, the capital requirements for operational risk or for the loss-absorbing capacity of technical provision for either the whole business or one or more business units.

### What did Solvency II replace?

Solvency II will replace existing life and non-life directives, the reinsurance directive and various other insurance-related directives (but not the insurance mediation directive). Solvency II will be implemented for insurers on 1 January 2016.

### What is internal model method?

The Internal Model Method (IMM) was developed under Basel II (2004) as a means to better measure banks’ capital requirements for various counterparty credit risk scenarios. Before the introduction of IMM under Basel I (1988), banks commonly employed the Standardized Method (SM) to calculate required reserves.

**What is the internal models approach?**

The internal models approach is one of two methods banks can use to calculate market risk capital requirements under the forthcoming Fundamental Review of the Trading Book. The other is the standardised approach.

**What is the standard formula approach to Solvency II?**

The standard formula approach has been developed by Solvency II as an alternative to the internal model approach, so insurers can choose whether to use this standard formula or to develop their own model. The standard approach calculates the best estimate liabilities in the same way as the internal model. However, rather than determining the 99.

## Is the internal model approach better than the Solvency II standard approach?

From the graph it is easily seen that the internal model approach gives a far lower SCR than the Solvency II standard approach. It seems reasonable to conclude that the 99.

## How is the SCR calculated in Solvency II?

Afterwards, the SCR is calculated using some simplifications proposed in Solvency II for both the standard method and the internal Lee-Carter model. A sensitivity analysis is also salient to check whether the results are robust with respect to a number of input parameters.

**What are the four pillars of the Solvency II?**

1 Solvency II Balance Sheet 2 Valuation of Assets 3 Best Estimate Liability 4 Risk Margin 5 Internal Model v Standard Formula 6 SCR details 7 MCR 8 Own Funds Three Pillar Approach Measurement of assets, liabilities and capital Eligible capital Technical provisions Capital requirements Asset and liability valuation Pillar 1