Support of decision-making and integration with risk management

An internal model shall only be considered to be widely used in and to play an important role in the system of governance of an insurance or reinsurance undertaking where it meets all of the following conditions:

(a) the internal model supports the relevant decision-making processes in the undertaking, including the setting of the business strategy;

(b) the internal model and its results are regularly discussed and reviewed in the administrative, management or supervisory body of the insurance or reinsurance undertaking;

(c) all material quantifiable risks identified by the risk management system which are within the scope of the internal model are covered by the internal model;

(d) the undertaking uses the internal model to assess, where material, the impact on its risk profile of potential decisions, including the impact on expected profit or loss and the variability of the profit or loss resulting from those decisions;

(e) the outputs of the internal model, including the measurement of diversification effects, are taken into account in formulating risk strategies, including the development of risk tolerance limits and risk mitigation strategies;

(f) the relevant outputs of the internal model are covered by the internal reporting procedures of the risk management system;

(g) the quantifications of risks and the risk ranking produced by the internal model trigger risk management actions where relevant;

(h) the insurance or reinsurance undertaking is required to change the internal model in accordance with Article 115 of Directive 2009/138/EC as soon as possible where the results of the model validation process in accordance with Article 124 of that Directive show that the internal model does not comply with the requirements set out in Articles 101, 113, 120 to 125 of that Directive, to ensure compliance with those requirements;

(i) the policy for changing the internal model provides that the internal model is changed, where relevant, to reflect changes in the risk management system.