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

10.103 A fac<strong>to</strong>r-based model may be less able <strong>to</strong> reflect <strong>the</strong> causes and predict
<strong>the</strong> impact of <strong>the</strong> extreme events associated with operational risk in
insurance. But in view of <strong>the</strong> secondary importance of operational risk
compared <strong>to</strong> market and credit risk and <strong>the</strong> current lack of reliable
actuarial data it may offer an appropriate and adequately simple
structure for <strong>the</strong> standard formula.
10.104 For a Solvency II standardised treatment of operational risk, <strong>the</strong> fac<strong>to</strong>rbased
structure of <strong>the</strong> banking approach could be retained. This would
require <strong>the</strong> determination of one or several volume measures (as a
proxy for <strong>the</strong> scale of an insurance undertaking’s operations, and
<strong>the</strong>refore <strong>the</strong> likely scale of operational risk exposure) and of a fixed
fac<strong>to</strong>r or a range of fixed fac<strong>to</strong>rs in different business lines.
10.105 A possible choice of a volume measure would be gross premiums (<strong>to</strong>
reflect current business activities) or technical provisions (<strong>to</strong> reflect
business in force thus also covering run-off situations). As regards
gross premiums, it could fur<strong>the</strong>r be envisaged <strong>to</strong> measure <strong>the</strong>ir level
not only for one year, but <strong>to</strong> take an average over several years.
However, this more backwards looking approach might lead <strong>to</strong>
problems with fast growing companies or in case of modifications <strong>to</strong> <strong>the</strong>
business plan, <strong>the</strong> operational risk being however particularly important
in <strong>the</strong>se types of circumstances.
10.106 Different fac<strong>to</strong>rs might be chosen for distinct business lines. To what
extent operational risk exposure should vary between different
business classes requires fur<strong>the</strong>r analysis.
Policy on solvency capital
10.107 CEIOPS is aware that Solvency II is going <strong>to</strong> be a risk-sensitive
approach. In consequence it is important <strong>to</strong> require undertakings <strong>to</strong>
develop and carry out active concrete policies specially focused on <strong>the</strong>
definition, follow-up and control of <strong>the</strong>ir solvency position. This is
equally valid for undertakings using a standard formula as well as
internal models. With regards <strong>to</strong> groups and ‘solo’ undertakings which
are part of a group, it is expected that <strong>the</strong>re will be a policy on
solvency capital in place at <strong>the</strong> group level, which would also elaborate
on <strong>the</strong> solvency capital needs of <strong>the</strong> constituent parts of <strong>the</strong> group.
10.108 However, <strong>the</strong> calculation/calibration of <strong>the</strong> SCR, despite being more
risk sensitive than <strong>the</strong> present method, may still not adequately
capture all of <strong>the</strong> risks that an insurer faces. In particular, it may not
be sufficiently forward-looking and take in<strong>to</strong> account <strong>the</strong> business
strategy, shareholder expectations, or economic environmental risks.
To mitigate any supervisory concerns over <strong>the</strong> adequacy of <strong>the</strong> future
SCR, supervisory authorities would <strong>the</strong>n review <strong>the</strong> insurance
undertaking's policy on solvency capital and adjust <strong>the</strong> SCR
requirement where <strong>the</strong> insurance undertaking's policy appears deficient
or exposes risks not captured in <strong>the</strong> SCR.
10.109 However, it would be important for supervisory authorities <strong>to</strong> take in<strong>to</strong>
account <strong>the</strong> fact that an insurance undertaking's capital policy may not
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