PRA article discusses internal models and the calculation of appropriate capital requirements

Article summary

The Prudential Regulation Authority (PRA) has published an article explaining how it checks that insurance firms are ensuring their models continue to produce appropriate capital requirements. It discusses firms’ use of internal models and the concept of model drift, noting that for life insurers, and to a lesser extent general insurers, the observed increases in capital requirements calculated using internal models are significantly lower than the increases in other related measures, such as standard formula capital and best estimate liabilities.