1. IMIF meeting
Top-Down Validation
16 March 2017

2. Top-Down Validation
Ian Marshall
Senior Adviser, PRA

3. Internal model today
Getting more comfortable but a number of issues for insurance firms
One year versus ultimate
Risk margin
Contract boundaries
Model anomalies
Key drivers - key assumptions including correlations - becoming clearer
Board involvement and discussion – variable
Validation not sufficiently focused on what moves the SCR

4. Past /current internal model process …
Initial focus was inevitably on detail
Legal framework
Bottom up build process
Model used not just for regulatory capital
Discussion remained at technical level within firms and with PRA.
Board involvement at times very difficult
Long difficult documents
Difficult to grasp the key assumptions including correlations

5. Move to top down validation
Important to identify key drivers – in practice very few
Not just ‘underwriting risk’ or ‘market risk’
Especially key correlations
Build Board discussion around 8 to 10 key assumptions
Challenge for technical experts
Allow Board to ‘play’ with model
More focused validation on assumptions which move the model

6. Top down validation and the PRA
Issue of major / minor assumptions and proportionality
Immediate steps - work with individual PRA actuary
Next steps - PRA / Industry need to develop the rules of the proportionality game.
Above all PRA and firm need to have confidence in each other

7. Questions / comments?