Sessional meeting by the Proxy Modelling Working Party: Consideration of the Proxy Modelling Validation Framework
Solvency II requires that firms with internal models derive the solvency capital requirement directly from the probability distribution forecast generated by the internal model. Several UK insurance undertakings do this via an internal model consisting of proxy models and a copula for aggregation. Since 2016 there have been a number of industry surveys on the application of these models. The 2019 PRA-led industry-wide thematic review identified several areas of enhancement. This concluded there was currently no uniform best practice. While there have been many competing priorities for insurers since 2019, the working party expects some firms to be in one of two scenarios. They will either have already made changes to their proxy modelling approach in light of the PRA survey, or will have plans to do so in the coming years. This paper takes the PRA feedback into account and explores potential approaches to calibration and validation. It considers the different heavy models used within the industry and relative materiality of business lines.