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

consider how <strong>the</strong> SCR might be calibrated with a 99.5% confidence
level. However, it would be worthwhile <strong>to</strong> test a range of different
confidence levels (for example, 99.9%) <strong>to</strong> understand <strong>the</strong> sensitivity of
<strong>the</strong> proposed SCR. The range <strong>to</strong> be considered could be expressed in a
manner broadly consistent with, for example, secure financial strength
ratings.
10.127 As a working hypo<strong>the</strong>sis, <strong>the</strong> SCR should be based on a time horizon
of one year. This should generally include an allowance for risks arising
from continuing business activities within that time horizon. However,
a longer time horizon could also be considered for some longer-tail
risks.
10.128 As a working hypo<strong>the</strong>sis, CEIOPS notes that assets may generally be
accounted for at <strong>the</strong>ir market value for <strong>the</strong> SCR calculation. In cases
where <strong>the</strong>re is no readily-available market value, an alternative
approach should be adopted, but this should still be consistent with
any relevant market information. For tradable assets, this should be
an estimate of <strong>the</strong> realisable value.
10.129 As regards technical provisions, <strong>the</strong>ir valuation for <strong>the</strong> purposes of
calculating <strong>the</strong> SCR should be compatible with <strong>the</strong> rules on <strong>the</strong>
calculation of <strong>the</strong> technical provisions <strong>to</strong> be developed as part of <strong>the</strong>
future solvency framework (cf. CfAs 7 and 8 on technical provisions).
Risk classification
10.130 The SCR standard formula should include practical treatments for all
material, quantifiable risks <strong>to</strong> which an insurance undertaking is
exposed. The materiality of risks should be assessed within QIS. By
contrast, Pillar II should cover all risks.
10.131 The IAA risk classification should be seen as <strong>the</strong> starting point. At a
minimum, <strong>the</strong> SCR standard formula should address underwriting,
market, credit and operational risks. SCR internal models may adopt a
more granular risk classification.
10.132 As <strong>the</strong> IAA report notes, insurance undertakings may lack sufficient
data for an experience-based operational risk requirement. But a
standardised Pillar I requirement for operational risk (with <strong>the</strong> option
of graduating <strong>to</strong> a modelling approach) may provide incentives for
insurance undertakings <strong>to</strong> improve <strong>the</strong> identification, measurement,
moni<strong>to</strong>ring and control of this risk. CEIOPS <strong>the</strong>refore advises <strong>to</strong> include
quantification of operational risks in Pillar I and underlines <strong>the</strong>
importance of Pillar II <strong>to</strong> assess <strong>the</strong> risk management of operational
risks and <strong>to</strong> determine an appropriate supervisory response.
10.133 Quantifiable aspects of liquidity risks (such as, for life business, an
increase in lapse rates) may be considered as part of o<strong>the</strong>r risk
categories under Pillar I. Remaining aspects of liquidity risk should be
addressed in Pillar II.
10.134 The SCR standard formula should consider any ALM mismatch
106