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

Changes in <strong>the</strong> risk mitigation programme
12.44 Conceptually, <strong>the</strong> SCR needs <strong>to</strong> allow for risks associated with <strong>the</strong>
renewability of an undertaking's reinsurance programmes and for
changes which may occur during <strong>the</strong> time horizon of <strong>the</strong> SCR.
12.45 For reasons of practicability, <strong>the</strong> standard formula might be developed
on <strong>the</strong> assumption that an undertaking will renew on unchanged terms
<strong>the</strong> risk mitigation (reinsurance) programme in force on <strong>the</strong> date of its
determination <strong>to</strong> <strong>the</strong> extent it expires during <strong>the</strong> solvency assessment
time horizon. However, scenario-based approaches could potentially
include different assumptions on <strong>the</strong> renewability of <strong>the</strong> risk mitigation
programme.
12.46 CEIOPS should attempt <strong>to</strong> include in <strong>the</strong> standard formula an allowance
for <strong>the</strong> risks associated with material changes in <strong>the</strong> effect of <strong>the</strong> risk
mitigation (reinsurance) programme during <strong>the</strong> time horizon of <strong>the</strong> SCR
(including <strong>the</strong> impact of those changes on <strong>the</strong> distribution of assets
minus liabilities at <strong>the</strong> end of <strong>the</strong> time horizon of <strong>the</strong> SCR), but this will
of necessity be approximate and will need <strong>to</strong> be <strong>the</strong> subject of fur<strong>the</strong>r
analysis. 114 The main areas <strong>to</strong> be addressed would be:
• <strong>the</strong> impact of planned changes <strong>to</strong> <strong>the</strong> existing reinsurance
programme, possibly differentiating between signed agreements
and those agreed in principle; and
• future renewals and changes <strong>to</strong> <strong>the</strong> programme which will be
needed during <strong>the</strong> time horizon but which cannot yet be
determined with any certainty.
Should this prove impractical in <strong>the</strong> context of a Pillar I calculation,
<strong>the</strong>n this will fall wholly <strong>to</strong> <strong>the</strong> Pillar II assessment.
12.47 If <strong>the</strong> undertaking's risk mitigation changes during <strong>the</strong> time horizon,
<strong>the</strong> undertaking must moni<strong>to</strong>r <strong>the</strong> impact on its SCR <strong>to</strong> ensure that it
remains a sufficient reflection of its risk profile. If <strong>the</strong> changes might
reasonably be expected <strong>to</strong> have a material impact on <strong>the</strong> ongoing
relevance of <strong>the</strong> undertaking's SCR, a recalculation of <strong>the</strong> SCR will be
necessary. This should be a requirement under Pillar I and will also
have Pillar II implications.
Reinsurance risk management
12.48 Irrespective of <strong>the</strong> type of risk mitigation technique, CEIOPS does not
find that <strong>the</strong> insurance undertaking should be permitted <strong>to</strong> treat
contracts where <strong>the</strong>re is in fact little or no significant transfer of risk as
reducing capital required for <strong>the</strong> purposes of solvency, simply because
such contracts are titled reinsurance. In some cases, <strong>the</strong>se contracts
may be financing vehicles (where funds are effectively lent by <strong>the</strong>
114
Some CEIOPS members consider <strong>the</strong> additional complexity in <strong>the</strong> standard formula might not be justified
by <strong>the</strong> additional accuracy of risk measurement.
144