Date (Arial 16pt)

1. Internal models Title of the event – (Arial 28pt bold) Subtitle for event – (Arial 28pt) Gareth Truran Head of Department, London Markets General Insurance Division Date (Arial 16pt)

2. Agenda • Introductory remarks • Timeline • Lessons learned from pre-application • Moving from pre-application to formal application • Formal application • Other considerations

3. The PRA’s approach to internal model reviews • Context relevant not just for those firms in IMAP • Internal models and the standard formula • Internal models cannot be viewed in isolation from the broader suite of requirements within Solvency II • Internal model tests and standards set a high bar for good reason

4. Timeline Implementation 1 January 2016 Transposition 31 March 2015 CP23/14 published 15/10/14 details IMAP application process Ongoing evaluation of internal model appropriateness Other approvals granted or declined by the PRA Submission of formal application to PRA PRA pre-application review, assessment and feedback PRA formal review and assessment PRA decision making and feedback PRA communication to firms PRA decision/activity Firm activity

5. Lessons from the internal model pre-application phase Significant gaps that firms still have to close on internal models in order to meet the test and standards required by the Directive Key judgments and assumptions inherent in models are not always highlighted or justified appropriately by firms No appropriate escalation to senior decision makers for the most material assumptions Number of areas where the PRA continues to question the validity of firms’ underlying modelling assumptions Boards and senior management should be engaged to ensure the model meets the needs of the business and will be used in practice

6. Moving from pre-application to formal application The PRA has given clear feedback on areas where it believes further work needs to be done to address serious weaknesses • Between now and 1 April 2015, the PRA will review each firm’s IMAP submission • The PRA will give feedback on areas which need to be addressed before approval can be given The PRA will ask firms to delay an internal model application or revert to a simpler approach if too much work is required ahead of implementation

7. Planning for the formal application Firms should have a clear plan outlining the remaining work needed to meet the tests and standards • Firms need to monitor progress against plans • Important to provide us with clear and complete information • Be aware of the college dimension and the added complexity this brings to the process • The PRA has been actively engaging with the colleges and will be undertaking a similar process in the formal application phase

8. The format of the formal application process The EIOPA draft Implementing Technical Standard on internal model approval clarifies what should be included in a an internal model application • The PRA published CP 23/14 on Solvency II approvals which sets its expectations of the application process • For the formal application phase, the PRA will require firms to use the EIOPA Common Application Template (CAT) • Firms in the pre-application phase can continue to use the existing PRA SAT • The new CAT will be compulsory for all firms when making their formal application Internal model decisions will either be ‘approve’ or ‘reject’

9. Other approvals and how they impact the internal model • Consider the other approvals the firm intends to apply for during the same period • What dependencies exist between them? • How will this affect the order in which the firm submits the internal model application? Discuss plans with PRA supervisors when each approval application will be submitted

10. The importance of contingency planning If model approval cannot be granted in time for 1 January 2016, firms should consider: • Delaying the formal application until the tests and standards can be met • Partial internal model rather than a full model • Standard formula either with or without undertaking specific parameters Firms should also consider the impact on the internal model if permissions to use other approvals are not granted

11. Accepting applications and the decision making process – practical questions Series of practical questions relating to the application process that are very important to firms’ planning • How will equivalence decisions impact internal model decisions? • How should model changes between now and Solvency II implementation be handled? • What will happen following model approval?

12. Summary • Little time left to complete remaining development work for those firms that plan to seek model approval in time for implementation on 1 January 2016 • Important for a firm to take on board PRA feedback which may increase chance of model approval • The PRA will not approve internal models which do not adequately reflect the risks firms face • Firms should also consider the impact on the internal model if permissions to use other approvals are not granted • Boards need to be fully engaged to ensure overall Solvency II implementation plans are delivered on time and to the appropriate standards