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a robust floor <strong>to</strong> <strong>the</strong> SCR in a group context. Given <strong>the</strong> requirement of robustness, CEIOPS advises <strong>to</strong> determine such a floor based on <strong>the</strong> addition of <strong>the</strong> relevant solo MCRs. 18.26 If <strong>the</strong> SCR at group level is determined via a standard formula allowing for diversification benefits, <strong>the</strong>n it is conceivable that <strong>the</strong> group SCR could also be lower than <strong>the</strong> sum of <strong>the</strong> solo MCRs. In this context, CEIOPS would advise that <strong>the</strong> same principle should apply as described in para. 18.25 concerning internal models. 18.27 It should be noted that were <strong>the</strong> solo MCR determined in a simple linear way, comparable <strong>to</strong> <strong>the</strong> determination of <strong>the</strong> presently required solvency margin, <strong>the</strong>n <strong>the</strong> group MCR would be determined directly at group level in <strong>the</strong> form of a sum of solo MCRs. This ´floor´ group MCR would thus not allow for any diversification benefits, just as <strong>the</strong> solo MCR is less risk sensitive than <strong>the</strong> solo SCR 135 . 18.28 The method for determining and calibrating <strong>the</strong> MCR and SCR is still being discussed and CEIOPS notes that it might need <strong>to</strong> amend its advice at a later stage in <strong>the</strong> light of <strong>the</strong> outcome of that particular discussion. 18.29 CEIOPS also notes that financial groups may include entities with activities (financial or non-financial) which do not require authorisation, but which may never<strong>the</strong>less impact on <strong>the</strong> risk profile of <strong>the</strong> group. Fur<strong>the</strong>r analysis is required <strong>to</strong> determine <strong>to</strong> what extent a notional capital requirement may usefully be calculated and integrated in<strong>to</strong> <strong>the</strong> group capital requirement and <strong>to</strong> what extent qualitative requirements and supervisory instruments may be defined <strong>to</strong> deal with <strong>the</strong> risk resulting from such companies being part of <strong>the</strong> group. 18.30 CEIOPS notes in particular that risk fac<strong>to</strong>rs that may lead <strong>to</strong> a diversification benefit at group level may be easier <strong>to</strong> quantify than o<strong>the</strong>r risks, such as legal, operational or reputation risk, that result from an insurer being part of a group. CEIOPS cautions that <strong>the</strong>re may thus appear a bias <strong>to</strong>wards <strong>the</strong> granting or seeking of a diversification benefit, ra<strong>the</strong>r than an increase of SCR at solo or group level. Hence CEIOPS stresses that <strong>the</strong> supervisory review process should pay particular attention <strong>to</strong> whe<strong>the</strong>r any such risks arising at group level may lead <strong>to</strong> a possible increase of SCR at solo or group level. CEIOPS foresees that, on a case-by-case basis, groups would be required <strong>to</strong> demonstrate clearly <strong>to</strong> <strong>the</strong>ir supervisors that <strong>the</strong>ir risk exposure and risk management would allow for a diversification benefits. CEIOPS envisages that this may well lead <strong>to</strong> <strong>the</strong> requirement that this be demonstrated through a validated internal model and <strong>the</strong> evidence of sufficiently sophisticated risk management. Such a model would need <strong>to</strong> quantify <strong>the</strong> risks that occur within a group context, both under average and stressed situations. Any supervisory assessment should take in<strong>to</strong> account modelling uncertainty, which may offset any perceived diversification benefits. 135 The method for determining <strong>the</strong> MCR is still being discussed and CEIOPS notes that <strong>the</strong> outcome of that particular discussion might alter this particular line of thought. 208
18.31 Additionally, it must be decided if any reduction of solo requirements should be allowed due <strong>to</strong> demonstrated diversification benefits at group level. CEIOPS supports <strong>the</strong> underlying philosophy of Solvency II that solvency requirements, and in particular <strong>the</strong> SCR, should properly reflect <strong>the</strong> risk profile of <strong>the</strong> insurer. For a majority of CEIOPS members, this implies that <strong>the</strong> solo SCR should not be reduced <strong>to</strong> reflect any diversification benefits at group level which are not evident at solo level, although an alternative view has also been presented 136 . CEIOPS will develop this question fur<strong>the</strong>r in its answer <strong>to</strong> CfA 19 (Eligible elements <strong>to</strong> cover <strong>the</strong> capital requirements). Any risks that appear at solo level as a consequence of being part of a group should be reflected in <strong>the</strong> solo SCR, <strong>to</strong> be assessed in <strong>the</strong> supervisory review process. CEIOPS also refers here <strong>to</strong> <strong>the</strong> remarks below on <strong>the</strong> effectiveness of <strong>the</strong> transferability of capital. Qualitative requirements at group level 18.32 Quantitative capital requirements should be supported by and embedded in robust qualitative requirements. CEIOPS advises that this is particularly important in a group context, since a number of risks may occur within a group context that are often difficult <strong>to</strong> quantify with sufficient precision and robustness <strong>to</strong> lead <strong>to</strong> fur<strong>the</strong>r or adjusted capital requirements at solo or group level. Such risks may arise from, inter alia, direct financial intra-group exposures, internal outsourcing or centralisation of functions, legal liability or more indirect reputation effects. The IGD provisions only partially address such risks. CEIOPS advises <strong>the</strong> <strong>Commission</strong> Services that, instead, <strong>the</strong> FCD would appear <strong>to</strong> offer a better basis for <strong>the</strong> drafting of <strong>the</strong> relevant provisions covering qualitative requirements in <strong>the</strong> Framework Directive. Comparability also in this field with <strong>the</strong> FCD would fur<strong>the</strong>r support <strong>the</strong> aim of a level playing field in financial services. CEIOPS would in particular support <strong>the</strong> inclusion of more demanding provisions on capital adequacy policies (Art. 6 FCD), risk concentration (Art. 7) and internal control mechanisms and risk management processes (Art. 9). 18.33 In particular, <strong>the</strong> FCD explicitly requires (Art. 6) <strong>to</strong> have in place adequate capital adequacy policies at <strong>the</strong> level of <strong>the</strong> financial conglomerate. CEIOPS supports this. Supervisors should satisfy <strong>the</strong>mselves that such policies are indeed in place, and that <strong>the</strong> elements eligible for <strong>the</strong> SCR are adequately distributed between <strong>the</strong> undertakings in <strong>the</strong> group. Fur<strong>the</strong>rmore, given <strong>the</strong> objectives of <strong>the</strong> capital adequacy rules (please also see FCD, Annex I), due regard must also be given <strong>to</strong> <strong>the</strong> effectiveness of <strong>the</strong> transferability and availability of <strong>the</strong> own funds across <strong>the</strong> different legal entities in <strong>the</strong> group. A thorough supervisory review of adherence <strong>to</strong> <strong>the</strong> quantitative requirements of MCR and SCR at solo level and of group SCR, and of <strong>the</strong> aforementioned qualitative requirements should obviate <strong>the</strong> need for a fur<strong>the</strong>r MCR requirement at group level, o<strong>the</strong>r than for <strong>the</strong> calculation of an appropriate ´floor´ at group level. 136 Ano<strong>the</strong>r view is that, in principle, groups should be allowed <strong>to</strong> reflect group level diversification benefits back <strong>to</strong> <strong>the</strong>ir ‘solo’ entities SCR, provided <strong>the</strong>y meet a certain eligibility test. 209
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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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• handling questions from insuran
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member countries and in the
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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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