0) Legal background, the goal and the main scope of the inspection

At the time being the only legal background is the L3 guidance about the pre-application process, because the framework directive (L1) has not been implemented yet at national level, and the level2 legal instrument is underway. Therefore, the pre-application process is not a legally binding process closed by a legal decision.

The Hungarian insurance market is dominated by the subsidiaries of international groups, which puts the HFSA in the position of the host supervisor. According to the L1 Art. 231, HFSA participates in the co- decision process during the model application of the international groups (regarding to Hungarian subsidiaries using the group internal model for solo purposes) as host supervisor. Among others, the host supervisor should be familiar with the internal model, to asses, if it measures and reflects appropriately the risk profile of the solo undertaking (L1 Art 37 and Art. 231 (7)).

There are three main goals of the pre-application process at national (solo) level:

• To give feedback to the solo company about their preparedness for the application of the internal model.

• To give feedback to the group supervisor about the preparedness for the application of the group internal model for solo purposes.

• To prepare for a main task as host supervisor: to asses, if the group internal model measures appropriately the solo (subsidiary`s) risk profile

According to these goals, the main focus points of our inspection on the solo implementation are:

1) The general overview of the internal model (including the model governance at solo level)

2) The specialties of the solo implementation

3) Statistical quality

4) Documentation (regarding to the point 2)

5) Use test

Expectedly, the scope of the solo inspection will cover the validation also (and other issues, required by the group supervisors). The concrete program of the pre-application on-site inspection will be flexible, according to the proportionality and the resource planning. The time schedules are tailored to our “ordinary” on- site inspections and the group supervisor`s plan.

The sources of the documents are the group supervisor and the host company. The documents asked from the solo entity might be written either in English or in Hungarian.

1) The general overview of the internal model (including the model governance at solo level)

One main element of the system is the Solvency II Balance Sheet, which has to be prepared at local level for solo purposes, and the Basic Own Fund, which is the basis for the eligible own fund considered during the solvency assessment of an entity. Technical Provision (TP) is the biggest part of the liability side of the balance sheet, and there is close connection between the TP and SCR for example via the risk margin. Upon these, according to the appendix of the L3, every supervisor should be familiar with the main characteristics of internal model (if it is used for solo purposes) and the model governance.

The main focus of our review

• SII balance sheet (general methodology) and P&L
• the methodology for the calculation of the technical provision
• the general overview of the internal model
• the evidence, that the internal model covers all material risks
• taking into account the diversification effect
• taking into account the risk mitigation techniques
• internal model governance

2) The specialties of the solo implementation

According to the L3 text, the local specialties (reflected in the internal model for solo purposes) should be reviewed by the local supervisor, and report the main findings to the group supervisor (L3 4.45-4.49, and the process chart at page 29).

The main focus of our review

• the specialties, which are considered during the implementation the internal model for solo purposes

• calculations of the different risk modules (solo/or group level)

• local specialties, which are not measured appropriately by the internal model

• vendor models/data for local purposes

3) Statistical quality

According to the L1 and L2 text, we make an overview, that the risk measures appropriate to the L2 Art 217. There is a main issue also, the source and quality of the data, which are used as a model input at local level.

The main focus of our review

• risk measures (calibration questions)
• data quality at solo level

4) Documentation standards

According to the L1 text, the supervisor overviews, how is documented the model used for solo purposes, and if there is a general documentation policy used at local level for model runs.

The main focus of our review

• the documentation of the solo specialties 
• general documentation policy 

5) Use test

According to the L1 and L2 text, the model should be used widely, and it shall be proofed for the supervisory authority. The usage for the different purposes shall be consistent.

The main focus of our review

• the appropriate knowledge about the internal model at the different level of the undertaking`s management and experts
• the evidence, that the model is used appropriately for business decisions
• the evidence, that the model is embedded in the risk management process