2
Monitoring model drift
2.1
The PRA has developed an approach to monitoring model drift - the risk that capital requirements calculated using an internal model may drift over time.
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2.2
The PRA’s approach includes the monitoring of the internal model SCR against certain objective measures of risk. The model drift ratios will be calculated at the point of model approval and re-based following a change in risk profile or major model change resulting in a material change in the SCR.
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2.3
These objective measures of risk, for which different measures may be used over time, include standard formula SCR, pre-corridor Minimum Capital Requirement (MCR), net written premium and best estimate liabilities.
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2.4
Monitoring model drift is one tool that the PRA uses to help ensure that capital requirements under Solvency II remain reflective of the risks to which firms are exposed, ensuring that the safety and soundness of firms is promoted and the appropriate degree of protection for policyholders is not weakened over time.
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2.5
This tool helps the PRA to monitor model drift at firm, sector and industry level.
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