CEIOPS' Advice for Level 2 Implementing ... - EIOPA - Europa

above is likely to be both complex and time consuming. Especially the
calculation of future SCRs, and then primarily the Basic SCRs and the
adjustment for the loss absorbing capacity of the technical provisions,
seems to be challenging, as these calculations would require input information
that is not easily accessible at the point in time where the calculations
are supposed to be carried out (i.e. at t = 0). Accordingly, there
seems to be a considerable need for simplifying the risk margin calculations
(while at the same time trying to keep as much as possible of the
risk based approach).
3.267 In this context it may be referred to recital 59 of the Level 1 text which
states as follows:
In order to reflect the specific situation of small and medium-sized
undertakings, simplified approaches to the calculation of technical
provisions should be provided for.
3.268 However, it should also be noticed that the principle of proportionality
applies to all undertakings – a fact that should be kept in mind in the context
of all the simplifications discussed below.
3.269 Moreover, one of the lessons from the quantitative impact studies carried
out so far (especially QIS3 and QIS4) has been that a majority of the
insurance undertakings participating in these exercises has used the
simplifications provided for the risk margin calculations. Only a few of the
participating undertakings were able – or made the necessary effort – to
carry out a full calculation of the risk margin according to the general
approach sketched out in the paragraphs above.
3.270 Moreover, it may be noted that according to the QIS4 Report the ratio of
the estimated risk margin to the best estimate was less than 5 per cent for
more than 75 per cent of the participating life insurance undertakings. For
the participating non-life insurance undertakings this ratio was less than
10 per cent for 75 per cent of the participants. 70
3.3.2. Simplifications
Some general remarks
3.271 By definition the risk margin reflects the risks linked to the obligations.
The size of the risk margin depends inter alia on
• the line of business and the relevant underwriting sub-risks
• the length of the contracts
• the maturity and run-off pattern of the obligations
• the exposure to catastrophes
• the unavoidable market risk linked to the obligations
• the reinsurers' and SPVs' share of the obligations
• the quality of the reinsurers and the SPVs (credit standing)
70 On the other hand the stipulated risk margin may be relatively large compared to an undertaking’s solvency
capital requirement and/or available capital. This is especially the case for a number of life insurance undertakings.
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