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

levels and supervisory instruments and action is addressed in more
detail in CEIOPS’ answer <strong>to</strong> CfA 15.
18.15 The IGD requires <strong>the</strong> supplementary calculation of <strong>the</strong> adjusted
solvency of insurance undertakings in an insurance group. There are no
analogous requirements at group level based on <strong>the</strong> currently required
guarantee fund. The calculation methods specified in <strong>the</strong> current IGD
are in essence based on calculating <strong>the</strong> sums of <strong>the</strong> required and
available solvency margins, adjusted for any multiple use of capital
elements and inappropriate intra-group creation of capital. The
Financial Conglomerates Directive (FCD) 132 takes a similar approach <strong>to</strong>
solvency within a financial group context.
18.16 CEIOPS notes that <strong>the</strong> calculation methods described in <strong>the</strong> IGD are
deemed equivalent. This notion of equivalence may well be related <strong>to</strong>
<strong>the</strong> fairly simple way in which <strong>the</strong> present solvency requirements are
determined: in essence a linear function of technical provisions, capital
at risk, premiums and/or claims. If <strong>the</strong> consolidated method is
interpreted as being a fully integrated approach, <strong>the</strong> linear nature of
<strong>the</strong> solo requirements would still imply an outcome which is equivalent
<strong>to</strong> that of <strong>the</strong> o<strong>the</strong>r methods.
18.17 Given <strong>the</strong> intended role of <strong>the</strong> MCR and SCR, CEIOPS advises that <strong>the</strong>
Framework Directive should include a SCR at group level. The
<strong>Commission</strong>’s Amended Framework for Consultation states that <strong>the</strong>
main focus of <strong>the</strong> Solvency II project is on capital requirements and
supervisory review at <strong>the</strong> level of <strong>the</strong> individual legal entity. CEIOPS
advises that within that context <strong>the</strong>re is no general need for <strong>the</strong>
imposition of a MCR at group level; please note, however, <strong>the</strong> role of a
group MCR as a ´floor´ <strong>to</strong> a group SCR discussed below.
18.18 The Framework for Consultation expresses <strong>the</strong> philosophy that <strong>the</strong>
solvency requirements, and in particular <strong>the</strong> SCR, should properly
reflect <strong>the</strong> risk profile of <strong>the</strong> insurer. The design and calibration of <strong>the</strong>
SCR will be based on <strong>the</strong> assumption of a diversified portfolio of both
(insurance) liabilities and assets. CEIOPS recognises that where an
insurer is part of a group, diversification benefits at group level may
occur. At <strong>the</strong> same time, certain additional risks, such as direct
contagion risk or more indirect reputation risk, may arise in a group
context. CEIOPS also notes that risks that occur in a group context 133 ,
such as reputation risk, may be difficult <strong>to</strong> quantify. It is envisaged that
<strong>the</strong> SCR may be determined via a standard formula, or through <strong>the</strong> use
of a validated internal model.
18.19 CEIOPS envisages that <strong>the</strong> SCR at solo level will be determined as a
function of a number of risk fac<strong>to</strong>rs. It is foreseeable that this function,
which aggregates <strong>the</strong> capital charges for <strong>the</strong> distinct risk fac<strong>to</strong>rs at solo
level, will not be of a fully linear nature. This approach would have a
number of implications for <strong>the</strong> determination of SCR at group level.
Most notably, <strong>the</strong> order and way in which risk fac<strong>to</strong>rs are aggregated
132 Directive 2002/87/EC.
133
Please see <strong>the</strong> parts relating <strong>to</strong> insurance groups in Freshfields Bruckhaus Derringer, Study on financial
conglomerates and legal firewalls, 2003.
206