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

Reflection in technical provisions
12.6 Conceptually, <strong>the</strong> SCR standard formula is underpinned by a definition
of ruin with a certain probability over some time horizon. Ruin is being
defined by reference <strong>to</strong> <strong>the</strong> relationship between assets and liabilities at
<strong>the</strong> end of <strong>the</strong> time horizon.
12.7 Generally, a reinsurance programme will have an impact on <strong>the</strong>
relationship between an insurance undertaking's assets in excess of
liabilities where <strong>the</strong>se are measured at, say, a 75 th percentile. In
principle, <strong>the</strong> impact of a reinsurance programme on <strong>the</strong> relationship
between assets and liabilities can only be determined by considering
<strong>the</strong> position of <strong>the</strong> whole of <strong>the</strong> undertaking's business.
12.8 The effects of reinsurance on <strong>the</strong> relationship between assets and
liabilities on this basis are complex and, in general, <strong>the</strong> value of assets
in excess of liabilities may be significantly different measured gross and
net of <strong>the</strong> effects of reinsurance. This is because of complex features
relating <strong>to</strong> risk dependencies and <strong>the</strong> consequences of blending
different risk distributions.
12.9 Despite this, a broad assumption is being made for <strong>the</strong> purpose of this
answer that <strong>the</strong> numerical value resulting from quantifying assets less
liabilities is <strong>the</strong> same net and gross of reinsurance. The materiality of
<strong>the</strong> error in this assumption in terms of <strong>the</strong> applicability of any
standard formula needs <strong>to</strong> be assessed.
Reflection in <strong>the</strong> MCR
12.10 According <strong>to</strong> CEIOPS' answer <strong>to</strong> CfA 9, <strong>the</strong> MCR reflects a level of
capital below which an insurance undertaking's operations present an
unacceptable risk <strong>to</strong> policyholders. Reinsurance (and o<strong>the</strong>r risk
mitigation techniques) can significantly change <strong>the</strong> risk profile of an
insurer and <strong>the</strong>rewith change <strong>the</strong> risk that <strong>the</strong> insurer's operations
present <strong>to</strong> policyholders. Hence, in principle, <strong>the</strong> MCR should take in<strong>to</strong>
account <strong>the</strong> impact of reinsurance and o<strong>the</strong>r risk mitigation techniques
(including both risks transferred and acquired).
12.11 CEIOPS' answer <strong>to</strong> CfA 9 outlines three options for <strong>the</strong> calculation of
<strong>the</strong> MCR for a method <strong>to</strong> be adopted after a transitional period:
• adopting essentially <strong>the</strong> existing Solvency I requirements;
• using <strong>the</strong> SCR standard formula as a reference;
• establishing a simple risk margin over and above liabilities.
Under all three options, it ought <strong>to</strong> be possible <strong>to</strong> make allowance for
reinsurance in <strong>the</strong> determination of <strong>the</strong> MCR. Fur<strong>the</strong>r analysis is
required as <strong>to</strong> how this might be achieved, once <strong>the</strong> form of <strong>the</strong> MCR is
chosen.
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