EIOPA study on diversification between risks in internal models underlines the importance of continued supervisory attention

The European Insurance and Occupational Pensions Authority (EIOPA) published today a study on diversification modelling in the internal models used by insurers. This study follows the publication of a comparative study on non-life underwriting risk in internal models in January 2024. Both studies are part of EIOPA’s wider bid to efficiently compare outputs from internal models, further develop supervisory tools and foster common supervisory practices across Europe.

The study published today provides an overview of the current modelling approaches and equips National Competent Authorities with elements of a European sector-wide comparison as well as various diversification indicators that are intended to support and complement the work of national supervisors when monitoring the on-going compliance of internal models.

EIOPA’s analysis highlights that diversification in internal models is determined by at least four main factors: the delineation of the risks that are to be aggregated, the risk profile, the aggregation approach and the way that dependencies between risks are determined to set up the aggregation approach. EIOPA observed multiple approaches, in particular regarding aggregation methods and the way dependencies between risks are determined.

The study uses a variety of metrics and analyses, each with its strengths and weaknesses, to obtain a holistic view on diversification within internal models. In particular, it highlights that different models of aggregation of risks lead to a sizeable dispersion in the capital requirements even for undertakings with similar business profiles.

The overall findings confirm the need for continuous supervisory scrutiny both at the local and European levels. EIOPA will continue working with National Competent Authorities on this important topic.