Standard vs Internal model

Question 1

Standard model benefits - Insurer

Answer 1

• Cost effective
• Less complex
• Less time consuming to build/use

Question 2

Standard model drawbacks - Insurer

Answer 2

• Only aims to capture risk profile of average insurer – May not be appropriate for particular insurer
• Approximations mad in modelling risks that may be inappropriate
• Regulator may build in level of prudence
• Risk of applying standard model blindly, rather than focusing on the unique risks faced and how best to manage such risks

Question 3

Internal model benefits – Insurer

Answer 3

• Allows insurer to calculate SCR using a model that reflects its specific risk profile
• Should be more sophisticated – SCR and economic capital more closely aligned which avoids unnecessary prudence
• May be able to choose between two – can choose that which results in lower capital requirements

Question 4

Internal model drawbacks - Insurer

Answer 4

• Need to seek approval from regulator

* Costly to develop/maintain

Question 5

Standard model– regulator

Answer 5

• Enables regulator to compare results for wide range of insurers
• Easier to decide which companies to scrutinise further
• Need to define model and ensure it is appropriate for the range of insurers being regulated
• May not provide sufficient info for regulator to understand what action to take

Question 6

Internal model – regulator

Answer 6

• Have to approve models before they can be used – time/effort
• Ensure insurers keep models up to date as risk profile of insurer will change over time
• Regulator responsible for maintaining confidence in financial system and protecting customers, so whichever model is used the regulator needs to ensure these objectives are met, both initially and over time