The standard model of the new solvency regime, under which the target capital level shall be set, is based on the following principles:
- the economic valuation of the commitments made will be based on best estimates of future cash flows (best estimate), without taking into account the safety margins, but including discounting
- the valuation of embedded options and guarantees should be based on market value of those risks.
These rules will have to be met both in the standard model, as well as the internal models. The standard model will be as simple as possible and as complex as far as it is necessary to properly reflect the significant risks of insurance companies. The rules for its construction are described in thematic groups, the so-called structural blocks (Building Blocks).
Detailed rules for the construction of the standard model and internal models