Aon Benfield lobbies for simplified Solvency II internal model approval process

Aon Benfield is lobbying for a simplified internal model approval process for natural catastrophe risk under Solvency II.
Under the current Solvency II formula, insurers have the option to use either a standardized scenario approach or develop a partial internal model for natural hazard risks.
The latter, suggests Aon Benfield, would allow re/insurers to benefit from higher-quality data used in the vendor models to calculate natural catastrophe exposures. But the cost of developing and having an internal model approval is expensive and onerous.
The current standard formula under Solvency II fails to account for catastrophe model improvements over the past 15 years – including greater location granularity and increased differentiation by occupancy or construction, according to Aon.
For example, CRESTA zone data is used in exposure calculations under the standard formula. While this was common 15 years ago, now most re/insurers use far more detailed data.
“The Solvency II standard formula does not recognize this evolution, so re/insurers receive a higher risk profile and more onerous capital requirements,” an Aon Benfield release says.
Aon Benfield is proposing a simplified approval process focused on data quality, data benchmarking and the internal process.
“Standardized documents from the model vendors, included in the overall approval submission, would outline how the design and parameterization of the natural catastrophe model meet the requirements of Solvency II,” the release says.
“This would allow insurance companies to focus purely on input data requirements and providing the regulator with information on how the chosen model is applicable to their business.”