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

one year). Therefore, capital requirements and amounts in technical
provisions are not fully interchangeable.
7.4 In its answer <strong>to</strong> CfA 10, CEIOPS takes <strong>the</strong> view that <strong>the</strong> solvency
capital requirement (SCR) should limit <strong>the</strong> risk that <strong>the</strong> level of
available capital deteriorates <strong>to</strong> an unacceptable level at any time
during <strong>the</strong> specified time horizon. The unacceptable level of capital is
defined as <strong>the</strong> point where assets no longer exceed technical provisions
(valued with a prudential risk margin, and compatible with <strong>the</strong>
principles laid out in CEIOPS’ answer <strong>to</strong> CfA’s 7 and 8) and o<strong>the</strong>r
liabilities. This general concept ensures that <strong>the</strong> two main building
blocks of <strong>the</strong> quantitative requirements under Solvency II - valuation
of technical liabilities and determination of capital requirements – are
part of a consistent overall framework. In a situation where a certain
type of risk (e.g., reserve risk in non-life insurance) affects both <strong>the</strong>
prudential risk margin in <strong>the</strong> provisions and <strong>the</strong> capital requirement,
<strong>the</strong> quantification of <strong>the</strong> capital requirement would take in<strong>to</strong> account
<strong>the</strong> partial unwinding of <strong>the</strong> prudential risk margin over <strong>the</strong> specified
time horizon, thus avoiding a potental ‘double counting’ of risks.
7.5 In setting an appropriate risk margin, CEIOPS recognises that <strong>the</strong>re are
a number of issues that need <strong>to</strong> be considered:
• any risk premium necessary <strong>to</strong> ensure <strong>the</strong> transferabilty of <strong>the</strong>
liabilties <strong>to</strong> a third party
• addressing uncertainty in <strong>the</strong> valuation of <strong>the</strong> ‘best estimate’
• achieving an appropriate level of policyholder protection over <strong>the</strong>
run-off period of <strong>the</strong> liabilities
• supporting harmonisation by setting a quantitative standard in an
explicit manner
7.6 CEIOPS is exploring which level of confidence can be used <strong>to</strong> meet
<strong>the</strong>se considerations. Alternative formulations, such as a pure ‘market
value margin approach’ might be difficult <strong>to</strong> apply in a consistent and
transparent way, especially as different margins might be appropriate
for different lines of business.
7.7 According <strong>to</strong> <strong>the</strong> IAA 11 , standards should be internationally consistent,
but <strong>the</strong>y must recognize important national characteristics of <strong>the</strong>
insurance industry. There are significant differences among Member
States in product design and in claims experience as well as in financial
markets, including <strong>the</strong> supply and quality of financial assets available
for insurance undertaking investment. Valuation principles should be
sufficiently broad <strong>to</strong> apply <strong>to</strong> different product structures.
11 IAA (2004) – A global framework for insurer solvency assessment.
11