Partial Internal Models at Lloyd’s: what firms need to know now
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Lloyd’s is exploring whether syndicates could move away from full Internal Models and instead use Partial Internal Models.
While still at an early stage, this signals a potential shift towards greater proportionality in capital modelling under Solvency UK.
A Partial Internal Model typically focuses detailed stochastic modelling on the most material underwriting and reserving risks, while treating less material risks in a simpler way. The aim is not necessarily to reduce capital, but to reduce complexity, shorten model run times, and allow expert effort to focus where it adds most insight.
Lloyd’s has indicated that Partial Internal Models could be available for the 2028 capital setting cycle, with a pilot planned during 2026. Further guidance is expected as this work develops.
Firms that start thinking now about where modelling effort outweighs benefit may be better placed to respond as expectations become clearer.
Partial Internal Models offer an opportunity to reduce unnecessary complexity in capital modelling, not by weakening risk management, but by allowing firms to focus modelling and validation effort on the risks that genuinely drive capital outcomes.
Neil Gedalla Principal
What is Lloyd’s aiming to achieve?
- Better alignment with Solvency UK’s proportionality principle
- Reduced effort spent modelling risks that are complex but capital-light
- Lower barriers to entry, while maintaining strong risk management standards
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What we know so far
- PIMs could be available for the 2028 capital setting cycle
- Focus likely to be on less material risks
- Firms will still be expected to meet Lloyd’s Principles for model use and governance
- A pilot is planned during 2026, with further guidance expected thereafter
How PIMs Partial Internal Models typically operate work in practice
- A core stochastic model covering the main underwriting and reserving risks
- Less material risks assessed using scenarios or the Standard Formula
- Aggregation performed outside the core stochastic engine
Observed impacts
- Capital often increases slightly rather than decreases
- The main benefits are time, cost and operational simplicity
- Validation effort and senior challenge tend to reduce materially
Key uncertainties and next steps
What’s still unclear
- Scope: which risks Lloyd’s will allow to sit outside the Internal Model.
- Aggregation: how IM and non-IM components will be combined (and whether this will be standardised).
- Governance: how PIMs will interact with Lloyd’s Principles, maturity expectations and existing oversight.
- Transition: what the approval route will look like – ie full resubmission, MMC, or something more proportionate.
- Reporting: what will change for Lloyd’s capital reporting and setting, and internal metrics (eg LCRs / CPG / Lloyd’s Internal Model).
What firms can do now
- Map the effort: where do run time, validation and senior challenge really sit?
- Identify candidates: which low-materiality risks add disproportionate complexity (often operational, credit and/or market risk)?
- Sense-check impacts: what are the likely time savings, and what capital trade‐offs might follow?
- Think about aggregation: what practical, defendable approach could work for combining IM and non-IM components?
- Future-proof the approach: avoid designs that only work for today’s risk profile or current market conditions.
Rather than waiting for every detail of the final framework, firms should begin assessing where complexity, run time and validation effort outweigh insight, and develop pragmatic options they can refine as Lloyd’s guidance evolves. This is often easiest to start by focusing on areas that are complex to explain and validate, but capital-light in practice.
Cat Drummond Partner
Our view
Overall, this is a positive and pragmatic direction of travel for the Lloyd’s market.
Partial Internal Models have the potential to improve proportionality and efficiency, not by weakening risk management, but by allowing firms to focus modelling and validation effort where it adds the most value.
The main benefits are likely to be felt in time, energy and model manageability rather than capital reduction, and these need to be weighed carefully against potential increases in headline capital.
Firms that assess scope, aggregation, and governance now will be best placed to act quickly once Lloyd’s guidance is final.
