SS15/16 – Solvency II: Monitoring model drift and standard formula SCR reporting for firms with permission to use an internal model
Executive Summary
SS15/16 establishes the PRA's expectations for UK insurance firms using approved internal models to calculate their Solvency Capital Requirement (SCR), requiring them to maintain the ability to calculate SCR using the standard formula and submit standard formula SCR calculations for regulatory monitoring purposes. This guidance is critical because it ensures capital requirements remain reflective of actual firm risks and protects policyholder security by preventing model drift—where internal models diverge from underlying risk realities over time.
What Changed
The supervisory statement introduces several core regulatory expectations: - Internal Model Maintenance Requirement: Firms with approved internal models must maintain the capability to calculate SCR using the standard formula, even if they primarily use internal models for capital calculations. - Standard Formula SCR Reporting: Firms using approved internal models to calculate solo SCR are expected to report standard formula SCR results privately to the PRA on an annual basis. - Model Drift Monitoring Framework: The PRA uses model drift ratios calculated at model approval and re-based following material changes in risk profile or major model changes to monitor whether internal models remain appropriate. - Submission Format and Timing: Standard formula SCR information must be submitted
What You Need To Do
- *Maintain Dual Calculation Capability
- *Establish Annual Reporting Process
- *Integrate into Risk Management
- *Obtain Senior Management Approval
- *Maintain Supporting Documentation
- *Monitor Model Drift Ratios
Key Dates
Compliance Impact
Urgency: HIGH
Who is Affected
Summary
Supervisory Statement 15/16