Solvency of Insurance Undertakings (Mueller-Report) - Eiopa

- 50 -entirely ruled out, with the result that (residual) management risks cannot be offset bytightening up own funds requirements. Moreover, this sort of measure would penalise allproperly managed insurance undertakings (and if not all then at least the vast majority ofthem are properly managed) for the incompetence and irresponsibility of a minority.On this point, consideration has not yet been given to the high level of personnel costseven when management is poor, imposing a further burden on undertakings experiencingfinancial difficulties.It may be presumed that if management acts responsibly, sufficient account will be taken inthe day-to-day running of the business of the principal risks connected with observeddifficulties, making it possible to alleviate the negative repercussions of such risks. For thatreason, „ fit and proper“ management is essential if the statutory solvency ratio, even aftermodification, is to take appropriate account of residual risks in the future.Valuation risk for technical reservesThere is widespread agreement among the delegations that if provisions for technicalreserves are systematically underestimated, the resulting residual risk cannot be covered oreliminated by means of the solvency ratio. Such cases can be identified and eliminated onlybe appropriate methods for controlling liabilities.It should be remembered, however, that the rules for valuing mathematical reservesapplicable to life assurance significantly reduce the risk of undervaluing liabilities in thisbranch. Long-tail business (especially liability risk) in non-life insurance is identified as aparticular problem area, insofar as it is difficult to evaluate the necessary level of provisionbecause it takes so long to determine the final level of damages. The delegations felt thatfuture solvency regulations should take this particular problem into account.Investment riskMost of the delegations felt, with reference to past difficulties, that insufficient account hadbeen taken of investment risk hitherto. The shortcomings that still existed in this regardshould be rectified in the future.Cost/ growthOn the basis of past experience, the risk of excessive and uncoordinated growth linked to asignificant rise in overheads was generally regarded as significant. Discussion so farsuggests that as far as solvency is concerned this risk tends to compound other risks andshould therefore be treated in conjunction with solvency.