Use of internal models in ICS 2.0

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Use of internal models in ICS 2.0

In recognition of the fact that a sound capital and supervisory framework for the insurance sector is essential for supporting financial stability and protecting policyholders, IAIS committed to develop a risk-based global Insurance Capital Standard (ICS). The CRO Forum welcomes the development of a risk-based global insurance standard as this would ultimately lead to a convergence of insurance frameworks around the globe, removing artificial discrepancies, facilitating efficient and effective supervision and – if broadly implemented – ensuring a level playing field.

This paper aims to encourage the development of the future global insurance capital standard, by presenting the perspective and experience to date with regard to the use of internal models by the insurance industry. The CRO Forum would like to demonstrate why in addition to the standard approach the use of internal models should be allowed as an important element and integral part of ICS Version 2.0. This paper outlines the options available to regulators for allowing the use of internal models and takes a detailed look at the advantages that internal models can bring. We argue that the best way to achieve optimum social and regulatory outcomes for policyholders is via a regulatory regime that allows insurers to use full or partial internal models subject to supervisory approval if they consider the standard approach inappropriate for their business and risk profile.

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