Answers to the European Commission on the ... - Eiopa - Europa

isk exposures. Subsequently, non-linear and reinsurance exposures
can be assessed through supplementary methods – for example, by
applying one or more simple stress tests.
10.96 As credit risk includes <strong>the</strong> loss of value arising from deterioration in <strong>the</strong>
market's perception of counterparty or issuer's creditworthiness, <strong>the</strong>
financial position’s market value (or marking <strong>to</strong> model when no market
value exists) may be a natural choice as volume measure for credit
risk. However, fur<strong>the</strong>r consideration would be necessary <strong>to</strong> avoid
'double counting' credit risk effects that may have already been
captured in <strong>the</strong> market risk assessment.
10.97 Different sources of information might be used for <strong>the</strong> calibration of <strong>the</strong>
fac<strong>to</strong>rs applicable <strong>to</strong> credit risk. The use of external ratings can
introduce a number of practical difficulties concerning recognition and
comparability, <strong>to</strong>ge<strong>the</strong>r with <strong>the</strong> treatment of unrated exposures. In
<strong>the</strong> CRD context, banking supervisors are required <strong>to</strong> recognise
individual ratings agencies and map <strong>the</strong>ir output on<strong>to</strong> standard credit
quality steps. CEIOPS could draw upon experience in <strong>the</strong> banking
sec<strong>to</strong>r (and <strong>the</strong> expertise of CEBS) if it concluded that external ratings
should play a role in Solvency II.
10.98 Credit spreads might also be used <strong>to</strong> reflect <strong>the</strong> market's perception of
credit quality. Higher credit spreads are his<strong>to</strong>rically more volatile and
<strong>the</strong>refore should result in a higher capital requirement. Although also
credit spreads may not be available for every exposure an undertaking
should be able <strong>to</strong> produce a reasonable proxy for <strong>the</strong> credit spread
(marking <strong>to</strong> model value).
10.99 CEIOPS would not envisage that insurers should develop, within <strong>the</strong>
context of <strong>the</strong> standard formula, credit rating models along <strong>the</strong> lines of
<strong>the</strong> CRD. However, <strong>the</strong> Internal Rating Based Approach (using
generalised assumptions about <strong>the</strong> input parameters) might be used <strong>to</strong>
calibrate <strong>the</strong> SCR standard formula.
10.100 If <strong>the</strong> chosen approach assumes well diversified portfolios, <strong>the</strong>n
supplementary treatments would be necessary for risk concentrations.
This might take <strong>the</strong> form of a pre-specified stress test, which
determines <strong>the</strong> effect of a certain event on <strong>the</strong> value of <strong>the</strong> available
capital.
Operational risk
10.101 Operational risk is defined as <strong>the</strong> danger of losses resulting from
inadequate or failed internal processes, people and systems, or from
external events. Internal failures include management incompetence,
fraud, criminal intentions and errors in systems and processes.
10.102 A scenario-based modelling approach <strong>to</strong> operational risk would require
<strong>the</strong> definition of a set of scenarios that adequately describe <strong>the</strong> internal
and external events which constitute operational risk. Given <strong>the</strong>
heterogeneity of <strong>the</strong>se events, <strong>the</strong> application of such an approach
does not seem feasible in <strong>the</strong> context of <strong>the</strong> standard formula.
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