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

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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
whenever its effects on <strong>the</strong> risk categories can be quantified. All o<strong>the</strong>r aspects of ALM systems and <strong>the</strong>ir role in risk management are left <strong>to</strong> supervisory attention in Pillar II. 10.135 Pillar II should verify <strong>the</strong> plausibility of <strong>the</strong> assumptions underlying an ALM system. It should check whe<strong>the</strong>r <strong>the</strong> ALM system is properly integrated with an undertaking's overall risk management and is used in <strong>the</strong> process of defining business strategies. Methodology for developing <strong>the</strong> standard formula 10.136 The modelling approaches described below provide an outline of possible risk treatments under a 'bot<strong>to</strong>m-up' methodology. The advice given reflects a set of working hypo<strong>the</strong>ses that will be used <strong>to</strong> develop a standard formula for testing under QIS. 10.137 In parallel, CEIOPS will perform '<strong>to</strong>p-down' analysis <strong>to</strong> test <strong>the</strong> adequacy of its working hypo<strong>the</strong>ses. The analysis will check that material risk drivers are not overlooked. It will also consider implicit assumptions that underlie <strong>the</strong> way in which risk capital components are aggregated in<strong>to</strong> an overall requirement. Modelling approaches <strong>to</strong> <strong>the</strong> main risk categories Risk dependencies 10.138 Fur<strong>the</strong>r analysis is required <strong>to</strong> assess whe<strong>the</strong>r linear correlation, <strong>to</strong>ge<strong>the</strong>r with a simplified form of tail correlation, may be a suitable technique <strong>to</strong> aggregate capital requirements for different risks. 10.139 However, if <strong>the</strong> concept of linear correlation were <strong>to</strong> be adopted within <strong>the</strong> standard formula, it would be important • <strong>to</strong> keep note of any dependencies that would not be addressed properly by this treatment; • <strong>to</strong> choose <strong>the</strong> correlation coefficients <strong>to</strong> adequately reflect potential dependencies in <strong>the</strong> tail of <strong>the</strong> distributions; • <strong>to</strong> assess <strong>the</strong> stability of any correlation assumptions under stress conditions; • <strong>to</strong> take account of <strong>the</strong> type of risk measure that is used <strong>to</strong> determine <strong>the</strong> SCR; and • <strong>to</strong> provide statistical evidence that diversification effects exist even for <strong>the</strong> tail-end events, and that such effects are not systematically underestimated by an approach based on linear correlation. In this context, it may be necessary <strong>to</strong> incorporate a cushion for model 107
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CEIOPS-DOC-07/05 Answers</s
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Style convention The following has
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• Safety measures (CfA 9); • So
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sole purpose is to
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Call for Advice No. 7 Technical pro
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one year). Therefore, capital requi
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perhaps through an explicit additio
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Discounting 7.22 The present value
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exposed to risk fr
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insurance liabilities set by refere
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Profit sharing In practice, for uni
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future cash flows will have <strong
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Explanatory text S
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always have resources to</s
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developed. They would help
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8.28 A fourth option could be envis
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In principle, "the
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8.48 Three alternatives can be cons
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essential part of the</stro
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statistical estimate (with a level
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8.77 It may be argued that
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to use more sophis
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consequence on the
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8.105 In some cases, the</s
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This shall be reviewed, at least an
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ut the exposure <s
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Explanatory text M
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components of the
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Background 14.1 Current insurance D
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14.12 In order to
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groups in its answer to</st
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affected; • Impose restrictions o
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14.43 Regarding the</strong
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off all contracts; • to</
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Call for Advice No. 15 Solvency con
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Minimum capital requirement (MCR) D
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adjusted SCR. From a purely technic
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to be implemented.
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capital
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absolute floor (expressed in euros
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Bolkestein agreed to</stron
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16.14 Generally speaking, complianc
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appoint an additional person <stron
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16.28 It should also be noted that
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Time of application 16.41 The asses
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of the individual
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Background 17.1 This document aims
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Review Panel would be a permanent g
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• the developmen
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asis for considering improvements <
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(I) Regulatory arb
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(II) Capital requirements at group
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into a SCR at grou
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18.31 Additionally, it must be deci
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Capital requirements 18.39 The Fram
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(III) Supervisory Review Process of
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18.60 In view of the</stron
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new structure would need to
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future Framework Directive. CEIOPS
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18.94 Model validation in t
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the assumptions us
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Annexes Annex A (Call for Advice No
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pursuing a strategy which t
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Specific principles for non-life in
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Conformity, suitability and suffici
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• existence of significant insuff
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A.64 In the tests
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the rules on <stro
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TVaR1-α for Tail Value-at-risk. In
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Degree of personalisation B.24 Tran
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B.34 There are two approaches <stro
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Segmentation B.44 In general terms,
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technical technical technical techn
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B.61 The second alternative was cho
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Dutch supervisory authority for <st
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Market risk Equity risk this altern
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B.95 In a scenario-based approach,
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B.106 As an alternative one could t
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where: KTSA = the
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Results from the a
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Solvency ratio prior to</st
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Number of instances Risk group Deta
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Conclusion In general, the<
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where: TP gross = technical provisi
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premium risk, the
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“While proportional reinsurance t
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contribute with any additional info
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E.29 Another way <
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programmes on the
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