There has been much discussion recently across the European insurance industry about the need for external review and validation of internal models, in particular in the context of Solvency II and Swiss Solvency Test (SST).
However, in many cases, companies are not developing internal models and instead are opting for implementation of the ‘standard formula’ under both Solvency II and SST.
This paper highlights how full implementation of the standard formula is far from trivial. In fact, a fully-fledged standard formula approach may, in some cases, not be too distant from an internal model implementation. The challenge for insurers and regulators of the standard formula should therefore not be under-estimated.
Such challenges point to the need for review and validation of not only internal models, but also standard formula implementations.