Understanding of the internal model

1. The administrative, management or supervisory body of the insurance or reinsurance undertaking and the other persons who effectively run the undertaking shall be able to demonstrate upon request of the supervisory authorities an overall understanding of the internal model which comprises knowledge about all of the following:

(a) the structure of the internal model and the way the model fits to the business and is integrated in the risk-management system of the insurance or reinsurance undertaking;

(b) the scope and purposes of the internal model and the risks that are or are not covered by the internal model;

(c) the general methodology applied in the internal model calculations;

(d) the limitations of the internal model;

(e) the diversification effects taken into account in the internal model.

2. The persons who effectively run the undertaking shall be able to demonstrate a sufficiently detailed understanding of the parts of the internal model used in the area for which they are responsible.