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

Solvency Capital Requirement (SCR)
Definition
15.12 The working definition of <strong>the</strong> SCR in <strong>the</strong> Amended Framework for
Consultation for Pillar I purposes is as follows: The SCR should deliver a
level of capital that enables an insurance undertaking <strong>to</strong> absorb
significant unforeseen losses and gives reasonable assurance <strong>to</strong>
policyholders that payments will be made <strong>to</strong> <strong>the</strong>m as <strong>the</strong>y fall due. It
should reflect <strong>the</strong> amount of capital required <strong>to</strong> meet all obligations
over a specified time horizon <strong>to</strong> a defined confidence level. In doing so,
<strong>the</strong> SCR should limit <strong>the</strong> risk that <strong>the</strong> level of available capital
deteriorates <strong>to</strong> an unacceptable level at any time during <strong>the</strong> specified
time horizon. The SCR should take in<strong>to</strong> account all significant
quantifiable risks.
15.13 For Pillar II purposes, <strong>the</strong> Working Group has relied on <strong>the</strong> following
working definition: “The supervisory authority must assess <strong>the</strong> risk
profile of <strong>the</strong> undertaking in order <strong>to</strong> evaluate <strong>the</strong> level of <strong>the</strong> adequacy
of <strong>the</strong> solvency capital requirement. If <strong>the</strong> supervisory authority
concludes that <strong>the</strong> solvency capital requirement does not match <strong>the</strong>
risk profile of <strong>the</strong> undertaking, ei<strong>the</strong>r because <strong>the</strong>re are risks that are
not captured by <strong>the</strong> Pillar I calculation or because <strong>the</strong>y are captured
insufficiently, it should be able <strong>to</strong> require <strong>the</strong> undertaking <strong>to</strong> hold more
capital against its existing risks. The supervisory authority is also able
<strong>to</strong> require <strong>the</strong> undertaking <strong>to</strong> hold more capital if after <strong>the</strong> supervisory
review process it reach <strong>the</strong> conclusion that <strong>the</strong> qualitative requirements
on governance, internal control, risk management, market conduct, or
any o<strong>the</strong>r, are not adequate <strong>to</strong> <strong>the</strong> insurance company business, or <strong>to</strong>
<strong>the</strong>ir nature and scale. This would result in an adjusted SCR until <strong>the</strong>
insurance undertaking has complied with supervisory demands. The
obligation <strong>to</strong> hold more capital (add-on) does not indemnify <strong>the</strong>
insurance undertaking from finding a remedy for <strong>the</strong> deficiencies within
a reasonable timeframe.”
15.14 Where supervisory authorities conclude that an insurer has deficient
systems and controls of such nature and scale that <strong>the</strong>y fall below
minimum standards and where financial loss may result, <strong>the</strong> authorities
may adjust <strong>the</strong> SCR <strong>to</strong> reflect this increased risk while <strong>the</strong>se
deficiencies are being rectified or because <strong>the</strong> undertaking indicates
that, for commercial reasons, although it meets minimum standards of
control, it does not intend <strong>to</strong> improve controls <strong>to</strong> meet best practice. It
should be clearly recognised that <strong>the</strong> imposition of an adjustment in
<strong>the</strong>se circumstances is not a means of solving <strong>the</strong> issue, which must be
addressed via o<strong>the</strong>r supervisory <strong>to</strong>ols, but of covering <strong>the</strong> additional
risk in <strong>the</strong> meantime. Supervisory authorities must ensure that in an
agreed time frame insurance undertakings remedy <strong>the</strong> causes for <strong>the</strong>ir
additional risks, so that <strong>the</strong> adjustment can be diminished afterwards.
15.15 However, <strong>the</strong> disclosure of <strong>the</strong> adjusted SCR is still an open issue and
<strong>the</strong> existence of different consequences between a breach of <strong>the</strong>
'adjusted SCR' and a breach of <strong>the</strong> SCR estimated by <strong>the</strong> standard
formula will depend on <strong>the</strong> decision of <strong>the</strong> disclosure or not of <strong>the</strong>
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