Communication NBB_2016_35 / the 'pre-application' procedure for the use of internal models

NBB_2016_35 – 19 July 2016 Communication – Page 1/4 boulevard de Berlaimont 14 – BE-1000 Brussels tel. +32 2 221 38 12 – fax + 32 2 221 31 04 company number: 0203.201.340 RPM Brussels www.bnb.be

Communication
Brussels, 19 July 2016
Reference: NBB_2016_35 your contact:
Dieter Hendrickx / Jérôme Bourtembourg tel. +32 2 221 34 29 / 33 93 – fax +32 2 221 31 04 dieter.hendrickx@nbb.be / jerome.bourtembourg@nbb.be

Communication concerning the 'pre-application' procedure for the use of internal models

Scope
Belgian insurance or reinsurance undertakings.
Insurance or reinsurance undertakings that are part of a Belgian group within the meaning of Article 339, 2° of the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings.
Belgian undertakings that are part of a Belgian financial conglomerate within the meaning of Article 340, 1° of the aforementioned Law of 13 March 2016.
Branches of undertakings from third countries carrying on insurance [or reinsurance] activities in Belgium.
This communication applies to mutual insurance companies defined in Article 15, 79° of the aforementioned Law of 13 March 2016. For these undertakings, 'the Bank' should be replaced by 'the Office for the Supervision of Mutual Funds and National Unions of Mutual Funds' as defined in Article 15, 84° of the same Law. This communication does not apply to insurance undertakings referred to in Articles 275, 276 or 294 of the aforementioned Law of 13 March 2016.

Summary/Objectives
This communication aims to explain the 'pre-application' procedure for the use of internal models within the framework of Solvency II.

Legal References
The Law: the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings.
Regulation 2015/35: Delegated Regulation (EU) 2015/35 of the Commission of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).

Communication – Page 2/4 NBB_2016_35 – 19 July 2016

Circular NBB_2016_27: circular concerning guidelines on the use of internal models within the framework of Solvency II.
Implementing Regulation 2015/460: Implementing Regulation (EU) 2015/460 of the Commission of 19 March 2015 defining regulatory technical standards with regard to the procedure for the approval of an internal model, in accordance with Directive 2009/138/EC of the European Parliament and of the Council. Communication NBB_2016_36: Communication concerning the application file for the use of internal models.

Structure
I. 'Pre-application': general description
II. 'Pre-application' file
III. Procedure and deadlines

Madam, Sir,

Pursuant to Article 167, paragraph 1 of the Law, insurance or reinsurance undertakings may calculate their Solvency Capital Requirement (SCR) using a full or partial internal model approved by the Bank.
The approval application must contain at least the documentation proving that the internal model meets the requirements set out in Articles 174 to 187 of the Law as mentioned in Article 167, paragraph 3 of the Law and must comply with the requirements of Implementing Regulation 2015/460. Pursuant to Guideline 1 of Circular NBB_2016_27, in order to assess the progress of an insurance or reinsurance undertaking in its preparation for an application for the use of an internal model for calculating the SCR in accordance with the Law and its ability to meet the internal model requirements set in the Law, undertakings are strongly encouraged to participate in a 'pre-application' procedure.

I. 'Pre-application': general description
The 'pre-application' procedure is an informal process covering cases under Article 167 of the Law, and in particular cases where, a) the undertaking wishes to calculate its SCR for the first time using an internal model (1st application) or, b) the undertaking calculating its SCR using an internal model wishes to apply for major modifications to its internal model in accordance with the provisions of Article 169 of the Law (major model change) or, c) the undertaking calculating its SCR using an internal model wishes to introduce new elements into the internal model, such as additional risks or operational units not yet included in the scope of the internal model, as mentioned in Recital 3 of Implementing Regulation 2015/460. The 'pre-application' procedure aims to assess the extent to which an insurance undertaking is sufficiently prepared to commence the formal application procedure. It is therefore not a 'pre-approval' or 'pre-validation' of the model. The Bank strongly recommends that undertakings undergo the 'pre-application' exercise before any formal application for approval for the use of an internal model.

NBB_2016_35 – 19 July 2016 Communication – Page 3/4

II. 'Pre-application' file
The Bank has established the procedure to be followed by insurance and reinsurance undertakings wishing to participate in the 'pre-application' process. It is expected that the 'pre-application' file be constituted as for the application file, with the common application dossier as designed by EIOPA, as referred to in Communication NBB_2016_36. This file consists of:

1. a self-assessment form intended to inform the Bank of the extent to which the undertaking believes it meets the requirements for the use of an internal model and the extent to which it is able to demonstrate this level of compliance based on written documentation;
2. a documentation booklet, including all pieces and documents enabling the demonstration of the level of compliance with the aforementioned requirements. Although the 'pre-application' file should be as close as possible to the final application file, certain aspects may not be fully finalized.
   The common application file as well as the information note relating to it are available on the Bank's website and are included in the annex of this communication.
   In the event of a major change, the insurance undertaking may submit a reduced file, focusing on the documents concerned by the changes as indicated in Article 7 of Implementing Regulation 2015/460. The same applies to the introduction of new elements into the internal model as mentioned in Guideline 6 of Circular NBB_2016_27. Communication NBB_2016_36 specifies the elements that must be included in the documentation for an application for approval of a major change to the internal model. In the case of an insurance group, the 'pre-application' file relating to the model used to calculate the group SCR and possibly the SCR of part or all of the solo entities of this group must be submitted to the group supervisor (group supervisory authority). In this case, the final decision will be based on the opinions of the relevant supervisors within the supervisory college.

III. Procedure and deadlines
Prior consultation with the relevant supervisory authority on deadlines and the progress of work is highly recommended; it is specifically recommended that files planned for a given year be announced by 31 October of the preceding year.
Some presentations by the undertaking may precede the submission of a 'pre-application' file.
The Bank will examine the content of the 'pre-application' file to estimate its degree of completeness. If this is satisfactory, the Bank will confirm the insurance undertaking's participation in the 'pre-application' procedure. Otherwise, the Bank will notify the said insurance undertaking of the reasons why it cannot participate in this procedure. In the event of confirmation of participation in the 'pre-application' phase, the insurance undertaking will commit to providing the Bank with any additional information requested. Further information may also be provided spontaneously by the insurance undertaking and integrated into the file; for example, when new risks are modeled or when the undertaking believes that the progress it has made during the procedure justifies the introduction of this information. When it considers having the necessary information and being able to formulate an opinion, the Bank will communicate the conclusions of its assessment regarding the undertaking's ability to participate in the application phase.

Communication – Page 4/4 NBB_2016_35 – 19 July 2016

The duration of the 'pre-application' procedure will depend on the scope and complexity of the file. The provisional schedule will be set in consultation between the undertaking and the Bank to allow the Bank to conduct on-site missions, and for the undertaking to make necessary improvements. This procedure ends once the supervisory authority communicates the conclusions of the 'pre-application' to the undertaking. A copy of this communication is sent to the commissioner(s), approved auditor(s) of your undertaking. We ask you to accept, Madam, Sir, the expression of our distinguished sentiments.

Jan Smets
Governor

Annexes: 2 (available on the bank's website)