The Solvency 2 Regulations 2015

Internal models and capital add-ons

20.—(1) Where group solvency is determined in accordance with method 1, the PRA must pay particular attention to the cases referred to in Article 37(1) of the Solvency 2 Directive for the imposition of a capital add-on when it determines whether the consolidated group solvency capital requirement appropriately reflects the risk profile of the group, in particular where—

(a) a specific risk existing at group level would not be sufficiently covered by the standard formula or the internal model used because it is difficult to quantify; or

(b) a capital add-on to the solvency capital requirement of the related insurance undertaking or reinsurance undertakings is imposed by the supervisory authorities concerned in accordance with Article 37 or 231(7) of the Solvency 2 Directive.

(2) Where group solvency is determined in accordance with method 2, the PRA must, when it determines whether the aggregated group solvency capital requirement appropriately reflects the risk profile of the group, pay particular attention to any specific risks existing at group level which would not be sufficiently covered because they are difficult to quantify.

(3) Where the PRA is a member of the college of supervisors and the PRA considers that the risk profile of an insurance undertaking or reinsurance undertaking belonging to a group deviates significantly from the assumptions underlying the internal model approved at group level, the PRA may—

(a) impose a capital add-on to the solvency capital requirement of the insurance undertaking or reinsurance undertaking;

(b) in exceptional circumstances where a capital add-on would not be appropriate, require the insurance undertaking or reinsurance undertaking to calculate its solvency capital requirement on the basis of the standard formula; or

(c) where the PRA has exercised its discretion under sub-paragraph (b) to require an insurance undertaking or reinsurance undertaking to calculate its solvency capital requirement on the basis of the standard formula, impose a capital add-on to the solvency capital requirement.

(4) Where the PRA—

(a) imposes a capital add-on on an insurance undertaking or reinsurance undertaking; or

(b) requires the insurance undertaking or reinsurance undertaking concerned to calculate its solvency capital requirement on the basis of the standard formula,

the PRA must explain its decision to the relevant insurance undertaking or reinsurance undertaking and the other members of the college of supervisors.

(5) Where the PRA is a member of a college of supervisors responsible for supervising a group, the PRA must adopt and apply the following decisions by the group supervisor on the basis of an internal model—

(a) the calculation of the group solvency capital requirement;

(b) the calculation of the solvency capital requirement of an insurance undertaking and reinsurance undertaking in the group;

(c) the calculation of the aggregated group solvency capital requirement.

(6) Where the PRA has imposed a capital add-on, it must review the capital add-on at least once a year.