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

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18.8 Ano<strong>the</strong>r area where differences may arise relates <strong>to</strong> <strong>the</strong> forms of capital that banks and insurers are required <strong>to</strong> hold <strong>to</strong> meet <strong>the</strong>ir liabilities. CEIOPS is taking account of work currently under way in <strong>the</strong> banking sec<strong>to</strong>r and will address this issue in its draft answer <strong>to</strong> CfA 19. CEIOPS’ Advice 18.9 CEIOPS finds that <strong>the</strong>re should be consistency between transparency requirements applicable <strong>to</strong> insurance supervisors in Member States and <strong>to</strong> supervisors of different financial sec<strong>to</strong>rs. (CEIOPS’ <strong>Answers</strong> on <strong>the</strong> first wave of Calls for Advice, para. 146). 18.10 In principle, solvency requirements should be consistent regardless of <strong>the</strong> nature of <strong>the</strong> financial institution and adhere <strong>to</strong> <strong>the</strong> principle 'same risk, same charge'. 18.11 CEIOPS advises that recognised assets or capital <strong>to</strong> cover solvency or capital adequacy requirements should be consistent across sec<strong>to</strong>rs. 18.12 CEIOPS advises that, although consistency across sec<strong>to</strong>rs is important, this does not imply that insurance regulation should necessarily follow <strong>the</strong> approach adopted in <strong>the</strong> regulation of banking or investment firms. The <strong>European</strong> <strong>Commission</strong> and <strong>the</strong> relevant Level 3 committees should work <strong>to</strong>ge<strong>the</strong>r <strong>to</strong> ensure that appropriate consistency is achieved and maintained. 204
(II) Capital requirements at group level Extract from <strong>the</strong> Call for Advice: CfA N°18 asks in particular <strong>to</strong> address <strong>the</strong> following: Should <strong>the</strong> IGD be applied both for <strong>the</strong> minimum capital requirement (MCR) and <strong>the</strong> Solvency capital requirement (SCR) or only for <strong>the</strong> SCR? Should also any Pillar 2 individual capital increases be taken in<strong>to</strong> account? A prerequisite for <strong>the</strong> proposal for a Directive is an analysis of how supervisory actions and respective solvency control levels are <strong>to</strong> be linked (i.e. what supervisory actions are needed at group level and how and when <strong>the</strong>y should be triggered by <strong>the</strong> control levels). Consequently <strong>the</strong> work carried out by <strong>the</strong> Pillar I groups regarding <strong>the</strong> "solo requirements" should be taken as a starting point for analysis. Should <strong>the</strong> solo SCR requirements (both <strong>the</strong> standard formula and <strong>the</strong> internal model method) be amended <strong>to</strong> take in<strong>to</strong> account group specificities and how? Are <strong>the</strong>re important differences in risk profiles at solo and group levels (exposure <strong>to</strong> o<strong>the</strong>r/new risks which are not relevant on a solo basis, i.e. 'diversification costs')? (See also separate Call for Advice on solvency control levels). Do 'diversification benefits' exist as a result of <strong>the</strong> fact that <strong>the</strong> insurer is part of an insurance group? Can <strong>the</strong>se costs and benefits be quantified appropriately? The scope of an internal or partial model: is it possible <strong>to</strong> allow <strong>the</strong> use of an internal model for <strong>the</strong> SCR for only a limited number of insurers in a group (and <strong>the</strong> standard formula for <strong>the</strong> o<strong>the</strong>rs), or should <strong>the</strong> internal model as a rule be required <strong>to</strong> be applied <strong>to</strong> all insurers in <strong>the</strong> same group? Could different (partial) internal models in <strong>the</strong> group be allowed (for practical reasons) provided <strong>the</strong>y are calibrated prudently enough? Does <strong>the</strong> IGD need amending because of possible changes in <strong>the</strong> elements eligible for <strong>the</strong> solvency margin (this will be addressed in a separate Call for Advice)? Explana<strong>to</strong>ry text Capital requirements (SCR and MCR) at group level 18.13 The <strong>Commission</strong>’s Amended Framework for Consultation states that in Pillar I <strong>the</strong> new solvency system will contain two capital requirements: <strong>the</strong> SCR and <strong>the</strong> MCR. The SCR may not be lower than <strong>the</strong> MCR (see CEIOPS’ answer <strong>to</strong> CfA 9). The <strong>European</strong> <strong>Commission</strong> has requested CEIOPS <strong>to</strong> advise on how <strong>the</strong>se concepts may be applied in a group context. 18.14 The SCR reflects a level of capital that enables an undertaking <strong>to</strong> absorb significant unforeseen losses and that gives reasonable assurance <strong>to</strong> policyholders. When an undertaking does not fulfil <strong>the</strong> SCR, supervisory action will be triggered for <strong>the</strong> undertaking <strong>to</strong> remedy <strong>the</strong> situation. The MCR reflects a level of capital below which immediate ultimate supervisory action is envisaged. The issue of solvency control 205
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CEIOPS-DOC-07/05 Answers</s
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Style convention The following has
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• Safety measures (CfA 9); • So
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sole purpose is to
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Call for Advice No. 7 Technical pro
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one year). Therefore, capital requi
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perhaps through an explicit additio
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Discounting 7.22 The present value
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exposed to risk fr
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insurance liabilities set by refere
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Profit sharing In practice, for uni
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future cash flows will have <strong
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Explanatory text S
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always have resources to</s
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developed. They would help
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8.28 A fourth option could be envis
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In principle, "the
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8.48 Three alternatives can be cons
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essential part of the</stro
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statistical estimate (with a level
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8.77 It may be argued that
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to use more sophis
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consequence on the
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8.105 In some cases, the</s
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This shall be reviewed, at least an
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ut the exposure <s
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Explanatory text M
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9.15 Solvency II could also employ
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9.28 The life formula yields itself
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underestimate them
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'Prudent person plus' approach 9.52
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Uniform or different rules for tech
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through a prescribed list. Lists ar
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addition a range of stresses so tha
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(including the Rei
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for review of the
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eligibility criteria, or principles
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should not lead to
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• the degree of
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9.156 The senior management shall r
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- going-concern aspects of business
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features. 81 TailVaR is an example
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10.17 The SCR should also reflect <
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10.26 The risk of asset liability m
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Naturally, the pra
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too few categories
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- Choice of volume measures 10.57 W
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Underwriting risk in non-life insur
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volatility of thei
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those insurers this possible increa
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10.103 A factor-ba
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10.112 Assessing whethe</st
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10.121 The SCR should deliver a lev
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whenever its effects on the
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scenario techniques to</str
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Operational risk just ratings infor
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Call for Advice No. 11 Solvency cap
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Costs and Benefits 11.6 It should b
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• Qualitative requirements for <s
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11.19 Risk management criteria set
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individual undertaking is exposed a
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• sensitivity analyses that have
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• visualizations of flows of prod
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Partial models and the</str
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11.58 There should be few descripti
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of the SCR estimat
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equirements to imp
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Call for Advice No. 12 Reinsurance
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Reflection in technical provisions
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• provide an estimate of an under
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particular reinsurer(s)’ aggregat
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they auto<
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einsurer to <stron
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should be a reduction in risk regar
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Call for Advice No. 13 Quantitative
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• the process of
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B.95 In a scenario-based approach,
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B.106 As an alternative one could t
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where: KTSA = the
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Results from the a
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Solvency ratio prior to</st
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Number of instances Risk group Deta
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Conclusion In general, the<
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where: TP gross = technical provisi
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premium risk, the
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“While proportional reinsurance t
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contribute with any additional info
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E.29 Another way <
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programmes on the
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