Validation can be viewed as an extensive and independent 'check-challenge' process covering all dimensions of the model.

Validation is a critical step in the path to formal regulatory internal model approval.

It is also a vital step in determining that an insurer's model fits its business and financial management needs.

Organizations must ensure that their validation approach strikes the right balance between the conflicting requirements of rigor and practicality, building on the existing check and control process and incorporating effective independent challenge.

Under Article 124 of the Solvency II directive, internal models must be validated by the insurer in order to be regarded as acceptable by the regulator.

At a broad level, validation can be viewed as an extensive and independent 'check-challenge' process covering all dimensions of the model — and in particular, many aspects outside the boundaries of the calculation kernel.

Here we consider internal model validation from a senior management perspective.

Is the approach adequately designed to fit the requirements — business, management, regulatory or technical?

We pose five questions to help insurers gauge what is suitable:

• Is your validation policy scoped widely enough?
• Is it sufficiently rigorous to satisfy the regulator?
• Is there real independence in the challenge to model owners and developers?
• Will the validation approach help management understanding?
• Is the validation approach efficient?
  

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