It is inherently a matter of expert judgement for an insurance company’s senior management and boards, not just its quants and risk team. It is right and proper that boards should be expected to challenge vigorously the amount of diversification benefit being claimed in internal models even if they don’t know the internal plumbing of copulas or correlation matrices.
Regulators should expect them to take a prudent and conservative approach and to ask challenging questions about how the models will hold up in times of stress. The third dimension of Solvency II I would like to mention briefly is the impact of the directive on business models or, more narrowly, corporate structures.