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

Call for Advice No. 15
Solvency control levels
Extract from <strong>the</strong> Call for Advice:
In Solvency II, 'solvency' is viewed in <strong>the</strong> widest sense, including not only <strong>the</strong>
available capital but also <strong>the</strong> coverage of liabilities by admissible assets and offbalance
sheet items. So, 'solvency' concerns <strong>the</strong> whole financial position and is
not merely restricted <strong>to</strong> <strong>the</strong> available capital. Supervisors safeguard <strong>the</strong> interests
of <strong>the</strong> policyholders and must <strong>the</strong>refore be aware when <strong>the</strong>re is a growing threat
<strong>to</strong> <strong>the</strong> insurer’s solvency. Effective supervisory action is enhanced by <strong>the</strong>
establishment of solvency control levels.
A crucial element in fixing <strong>the</strong> number and level of <strong>the</strong> control levels will be <strong>the</strong>
actions taken when <strong>the</strong>y are breached. The consequences of breaching a control
level will differ according <strong>to</strong> <strong>the</strong> gravity and speed of deterioration. Breaching <strong>the</strong>
highest capital control level could entail actions which are widely left <strong>to</strong> <strong>the</strong>
judgement of <strong>the</strong> supervisor (principles-based approach) while breaching <strong>the</strong>
MCR or <strong>the</strong> coverage control level should bring about prompt and severe
sanctions (rules-based approach). Note that <strong>the</strong> minimum guarantee fund will be
replaced by an absolute minimum requirement (i.e. <strong>the</strong> MCR will be calculated
according <strong>to</strong> a formula, with an absolute floor).
…
The <strong>Commission</strong> Services suggest considering additional control levels, playing
different roles:
- an early warning indication of <strong>the</strong> deterioration of <strong>the</strong> insurers’ financial
situation…
- a level calibrated on a longer time horizon than <strong>the</strong> one assumed in <strong>the</strong> SCR
calculation: its level would <strong>the</strong>n depend on a long-term plan and long-term
evaluations of <strong>the</strong> technical provisions.
- a countercyclical <strong>to</strong>ol: it would be set at a variable level, higher when
companies make profits and lower in bad times. This would limit <strong>the</strong>
procyclicality inherent <strong>to</strong> risk-based systems. A separate Call for Advice on
procyclicality will be issued at a later stage.
…
This advice should cover <strong>the</strong> number and definition of <strong>the</strong> control levels as well
as <strong>the</strong> consequences (actions and/or sanctions) triggered <strong>to</strong> each level.
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