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

A number of undertakings commented on the fact that the risk
margin depends to a large extent on the projected SCR so any limitations
in the standard formula would also impact on the risk margin.
A number of participants criticised the technical difficulty of the risk
margin calculation and the lack of more technical support.
Some undertakings stated that the calculation of the risk margin by
LoBs needs a breakdown of underwriting, counterparty and operational
risk SCR by LoBs that is difficult to apply.
[…]
Supervisors agree that more guidance is needed on the choice of the
various proposed simplifications, which differ in their degree of complexity
and risk-sensitivity.
[…]
Most undertakings used simplifications to project the SCR adopting
either the duration approach or the ratio of SCR to best estimate
approach. The simple risk margin proxy was also used by some nonlife
undertakings. Undertakings expressed concern at the variation of
results depending on the chosen simplification. […] Undertakings felt
that more guidance on the correct method was required.
3.291 It may be argued that the QIS4 technical specifications as well as the QIS4
report confirm the presumption made above that in the initial phase of
Solvency II a clear priority should be given to level no. 3 and 4 of the
hierarchy sketched in para 3.276.
3.292 Moreover, the approaches indicated as level no. 3 and 4 of the hierarchy
could be supplemented by even more simple approaches as e.g. the one
indicated as level no. 5 – given that this can be justified according to the
proportionality principle. Such further simplifications are relevant also for
the quarterly calculations.
Specific simplifications
3.293 This section contains some proposals for simplified calculation methods
that may be used at the various levels of the hierarchical structure referred
to in para 3.276 above. As already explained the main focus should be
on level no. 3 and 4 of this structure, i.e. on the so called proportional
method and duration method, respectively. A discussion of simplifications
to be used in calculations of the risk margin to be carried out during the
year (the quarterly calculations) is given in section 3.5.
3.294 The simplifications proposed in this section are described in the context of
the standard formula. CEIOPS considers that the application of
simplifications for cases where the SCR is calculated with internal models
should follow the general approach proposed in this paper with an
appropriate case-by-case assessment.
3.295 With respect to the standard formula, it may be argued that the main
focus should be on simplifications regarding the calculation of the Basic
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© CEIOPS 2010