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

12.12 Under Solvency I, <strong>the</strong> adjustment in respect of reinsurance through
means of a reduction fac<strong>to</strong>r relies heavily on retrospective information
(particularly for non-life business), without proper regard <strong>to</strong> <strong>the</strong>
insurer's current or coming reinsurance arrangements. This may have
considerable shortcomings, not least that <strong>the</strong> undertaking's business
mix may have changed materially and its reinsurance programme may
have changed significantly. To appropriately incorporate reinsurance,
adjustments may be necessary <strong>to</strong> reflect a more prospective view.
12.13 Using <strong>the</strong> SCR as a reference point could implicitly include <strong>the</strong>
allowance for reinsurance in <strong>the</strong> MCR as <strong>the</strong> SCR includes an allowance
for reinsurance.
12.14 If <strong>the</strong> MCR is calculated as a risk margin over and above liabilities,
reinsurance could be incorporated by including net liabilities in <strong>the</strong>
formula.
Reflection in <strong>the</strong> SCR
12.15 The aim of <strong>the</strong> SCR is expressed as having regard <strong>to</strong> an undertaking's
overall risk profile. Reinsurance and o<strong>the</strong>r risk mitigation techniques
may affect <strong>the</strong> risk profile of an insurer in a manifold and complex way.
Accordingly, reinsurance (and o<strong>the</strong>r risk mitigation techniques) must be
taken in<strong>to</strong> account in <strong>the</strong> determination of <strong>the</strong> SCR. How <strong>the</strong>se aspects
are reflected in <strong>the</strong> SCR requires a trade-off between risk-sensitivity
and practicability.
12.16 Generally speaking, <strong>the</strong> two most significant elements <strong>to</strong> be considered
in <strong>the</strong> SCR standard formula when allowing for reinsurance are <strong>the</strong>
extent of transfer of underwriting risk and <strong>the</strong> assumption of credit
risk. Clearly, <strong>the</strong>se two elements need <strong>to</strong> be considered in concert.
12.17 Some forms of risk mitigation would require in-depth (case-by-case)
analysis of <strong>the</strong>ir impact on an insurance undertaking's capital needs. In
practice, this may rule out au<strong>to</strong>matic allowance for <strong>the</strong>ir effect in <strong>the</strong>
SCR standard formula.
12.18 Provided that <strong>the</strong> general requirements for SCR internal models are
satisfied, <strong>the</strong>re should be no fur<strong>the</strong>r restriction on allowing for <strong>the</strong>
impact of reinsurance (and o<strong>the</strong>r risk mitigation techniques) on capital
requirements. This would require reliable estimation of risks transferred
and acquired (including, for example, credit risk and basis risk).
12.19 Risk mitigation could have a material impact on an insurance
undertaking's capital requirements. This could be assessed by requiring
undertakings <strong>to</strong> provide an estimate of <strong>the</strong> SCR without allowance for
<strong>the</strong> impact of risk mitigation. Such an estimate could:
• give supervisors one possible measure of an undertaking's
dependence on reinsurance, which could be used as <strong>the</strong> basis for
determining an appropriate supervisory response;
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