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

10.112 Assessing whe<strong>the</strong>r <strong>the</strong> capital requirements generated for an individual
insurer by <strong>the</strong> standard formula are sufficient <strong>to</strong> address its individual
risk profile (including <strong>the</strong> qualitative requirements) is unlikely <strong>to</strong> be an
exact science and not comparable <strong>to</strong> <strong>the</strong> deep analysis of an internal
model.
10.113 For example, it may be difficult <strong>to</strong> state (with any accuracy) that any
particular insurer's capital requirement is consistent with an overall
confidence level of, say, 95%. However, <strong>the</strong> individual risk profile of
<strong>the</strong> insurer can be assessed, as part of a qualitative test, against <strong>the</strong>
design criteria underlying <strong>the</strong> standard formula.
10.114 The outcome of <strong>the</strong> supervisory review of <strong>the</strong> insurer's risk profile and
management practices and <strong>the</strong> estimate of capital adequacy could
result in a three step approach. In a first step, <strong>the</strong> supervisory
authority should ensure that <strong>the</strong> real risks faced by <strong>the</strong> insurance
undertaking are not underestimated. The real risks could be
underestimated due <strong>to</strong> <strong>the</strong> following causes:
• Risks incurred by <strong>the</strong> insurance undertaking are not captured or
captured insufficiently by <strong>the</strong> Pillar I calculation.
• The insurance undertaking presents deficiencies and failures in
<strong>the</strong> systems or o<strong>the</strong>r risks, including in <strong>the</strong> internal control and/or
risk management systems, or in <strong>the</strong> governance and market
conduct qualitative requirements.
Therefore <strong>the</strong> outcome must be that CEIOPS develops a standard SCR
formula that is sufficiently sophisticated <strong>to</strong> deliver a reasonably
accurate (judged against <strong>the</strong> desired safety confidence level) capital
requirement for <strong>the</strong> vast majority of insurers in <strong>the</strong> scope of
application. In this way, it could be ensured that a Pillar II adjustment
of <strong>the</strong> Pillar I SCR estimate would only rarely be needed; for example,
this may be <strong>the</strong> case for insurance companies that are niche players,
and for which <strong>the</strong> product and liability maturity assumptions in <strong>the</strong>
standard SCR formula may not be sufficiently sensitive.
10.115 If <strong>the</strong> risks are underestimated due <strong>to</strong> <strong>the</strong> first cause, in a second step,
<strong>the</strong> supervisory authority should require a higher level of solvency
capital requirement <strong>to</strong> be calculated by <strong>the</strong> insurance undertaking, by
using an internal model or adjustments <strong>to</strong> <strong>the</strong> standard formula which
are <strong>to</strong> be approved by <strong>the</strong> supervisory authority.
10.116 If <strong>the</strong> risks are underestimated due <strong>to</strong> <strong>the</strong> second cause <strong>the</strong>
supervisory authority should, in a second step, report its summary of
deficiencies and failures, and demand that <strong>the</strong> undertaking remedies
<strong>the</strong> situation within an agreed timeframe. If <strong>the</strong> undertaking is not able
<strong>to</strong> adapt its economic situation and processes <strong>to</strong> fit its real risk profile
within <strong>the</strong> agreed timeframe, <strong>the</strong> supervisory authority should, in a
third step, specify a level of capital that <strong>the</strong> insurer should hold in order
<strong>to</strong> meet regula<strong>to</strong>ry concerns until <strong>the</strong> insurance undertaking has
complied with supervisory demands. This may be a different level of
capital (or a different quality of capital) from that calculated by <strong>the</strong>
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