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

SCR for the individual lines of business. A rationale for such an approach
could be as follows:
• The SCR for operational risk depends mainly on earned premiums and
technical provisions (best estimate) and information on these figures
should in general be available per line of business.
• The adjustment for the loss absorbing capacity of technical provisions
(which is first and foremost relevant for lines of business within life
insurance) should be determined – at least in principle – by some
scenario-based techniques.
3.296 However, while the scenario-based calculation of the loss absorbing capacity
of technical provisions in general will be a standard approach with
respect to the calculation of the present SCR, it is not obvious how to
establish the scenarios to be used for the future years. This will have an
impact on the applicability of an approach whereby the Basic SCR, the SCR
for operational risk and the adjustment for loss absorbing capacity of
technical provisions for future years are established separately, cf. e.g.
level no. 2 of the hierarchy sketched in para 3.276. 78
3.297 Moreover, with respect to the simplifications allowing for all future SCRs to
be estimated “at once” (the duration approach), it will be natural to
combine the calculations of the Basic SCR and the SCR related to operational
risk for the lines of business within non-life insurance. For the lines
of business within life insurance the comment made in the previous
paragraphs regarding the adjustment for the loss absorbing capacity of
technical provisions applies equally to simplifications based on the duration
approach.
3.298 Accordingly, in order to simplify the projections to be made if level no. 3 of
the hierarchy is applied, a practical solution could be to allow projections
of the future SCRs (per line of business) in one step, instead of making
separate projections for the basic SCR, the capital charge for operational
risk and the loss absorbing capacity of technical provisions (per line of
business), respectively.
3.299 It should also be stressed that in order to avoid circularity issues the best
estimate technical provisions (and not the sum of the best estimate and
the risk margin) should be applied when calculating the present and future
SCRs for operational risk (per line of business). This should be in line with
the advice given by CEIOPS in CP 53. 79
3.300 Finally, it should be mentioned that the simplifications allowed for when
calculating the SCR should in general carry over to the calculation of the
risk margin. Some examples of simplifications that may be considered in
this context are indicated in para 3.344-3.364 below, cf. also the CP on
simplified calculations in the standard formula for SCR.
Simplifications for the overall SCR for each future year
78
The problem of establishing reliable future scenarios for the loss absorbing capacity of technical provisions
applies for level no. 1 of the hierarchy as well.
79
Consultation Paper no. 53 on operational risk within the standard formula.
61/112
© CEIOPS 2010