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

Minimum capital requirement (MCR)
Definition
15.6 CEIOPS offers <strong>the</strong> following working definition of <strong>the</strong> MCR: ”The MCR
reflects a level of capital below which an insurance undertaking’s
operations present an unacceptable risk <strong>to</strong> policyholders. If an
undertaking’s available capital falls below <strong>the</strong> MCR, ultimate
supervisory action should be triggered.”
15.7 The MCR, as a simple calculation, may not represent a reliable indica<strong>to</strong>r
of <strong>the</strong> capital required <strong>to</strong> mitigate <strong>the</strong> insurer's risks with a given
confidence.
15.8 The MCR is above all a 'safeguard' (or safety net); it is set low enough
<strong>to</strong> ensure that failure <strong>to</strong> meet it represents a very strong indication of
under-capitalisation. For this reason, it may also constitute an absolute
minimum for internal models. Above all, it must be objective and
simple, so as <strong>to</strong> ensure a level playing field and a rapid response by <strong>the</strong>
supervisory authorities.
Intervention by supervisors
15.9 Given <strong>the</strong> safety net nature of <strong>the</strong> MCR, failure <strong>to</strong> comply with it should
trigger firm intervention by supervisory authorities (freezing of assets,
withdrawal of licence). In such cases, <strong>the</strong> capital threshold and <strong>the</strong> type
of action <strong>to</strong> be taken must be defined with a view <strong>to</strong> ensuring
maximum harmonisation.
15.10 It seems logical <strong>to</strong> associate a breach of <strong>the</strong> MCR with an au<strong>to</strong>matic
intervention by supervisory authorities and an obligation for
undertakings <strong>to</strong> rapidly res<strong>to</strong>re <strong>the</strong>ir financial situation. With this in
mind, <strong>the</strong> provisions in <strong>the</strong> Framework Directive on <strong>the</strong> "plan for <strong>the</strong>
res<strong>to</strong>ration of a sound financial position" could be fleshed out and
streng<strong>the</strong>ned. Supervisory actions following <strong>the</strong> breach of <strong>the</strong> MCR
should be subject <strong>to</strong> Level 3 guidance. The <strong>Commission</strong> Services’
proposal that if an undertaking’s capital falls below <strong>the</strong> MCR, principlesbased
intervention should be replaced by rules-based intervention
seems appropriate in order <strong>to</strong> protect <strong>the</strong> interests of policyholders, on
<strong>the</strong> assumption that <strong>the</strong> MCR level is calibrated <strong>to</strong> correspond <strong>to</strong> real
emergency situations.
15.11 CEIOPS suggests that <strong>the</strong> Solvency I requirements could be used <strong>to</strong>
calculate <strong>the</strong> MCR for a limited period of time <strong>to</strong> smooth <strong>the</strong> transition
<strong>to</strong> Solvency II and <strong>to</strong> be asked <strong>to</strong> review <strong>the</strong> MCR after this period <strong>to</strong>
find a standard that is possibly better aligned <strong>to</strong> <strong>the</strong> objectives set out
by <strong>the</strong> EU <strong>Commission</strong> and CEIOPS 121 . For such a transition period <strong>the</strong>
supervisory authority should have <strong>the</strong> power of discretion <strong>to</strong> decide if it
is appropriate <strong>to</strong> take ultimate action at a breach of <strong>the</strong> MCR. A
transitional period that could only end when a replacement formula had
been agreed would not be acceptable <strong>to</strong> CEIOPS.
121 See Answer <strong>to</strong> CfA 9 on safety measures, paras. 9.116 and 9.117.
173