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Call for Advice No. 9 Safety measures Extract from <strong>the</strong> Call for Advice: The <strong>Commission</strong> Services seek CEIOPS’ advice on <strong>the</strong> safety measures that would be appropriate in <strong>the</strong> new solvency framework. The goal is a simple and consistent framework where <strong>the</strong> main focus is on effective risk management instead of copious prescriptive limits. The analysis and proposals should include: • Review of <strong>the</strong> MCR (Article 28). … • Authorised categories of assets covering technical provisions (Article 23) have be revised in line with <strong>the</strong> new solvency methodology while also taking in<strong>to</strong> account financial market developments. … • Some quantitative limits for asset diversification for supervisory purposes with a view <strong>to</strong> maximum harmonisation (Article 14). However, <strong>the</strong> prudent man approach and <strong>the</strong> asset-liability requirement will lead <strong>to</strong> more stringent limitations than those safety measures, in most cases. In addition, <strong>the</strong> proposals should take <strong>the</strong> following aspects in<strong>to</strong> account: - investment risks (including currency risk, Article 26) should be <strong>the</strong> primary focus of <strong>the</strong> SCR calculation; - some classes of authorised assets should be subject <strong>to</strong> restrictions (e.g. real estate, unsecured loans, and unquoted securities). Moreover <strong>the</strong> available solvency margin (Article 27) should be modified <strong>to</strong> take in<strong>to</strong> account <strong>the</strong> new prudential levels of <strong>the</strong> solvency system and international compatibility (IASB rules and IAIS, IAA and Basle II developments), and where appropriate, financial market developments (e.g. new innovative forms of capital or capital substitute). This area of work will be addressed later in more detail in a Specific Call for Advice. Background 9.1 This specific CfA concerns Articles 23-24 and 26-31 in <strong>the</strong> Recast Life Directive and equivalent articles in <strong>the</strong> Non-Life Directives. The <strong>Commission</strong> Services presented no draft wording as <strong>the</strong>y wish <strong>to</strong> receive <strong>the</strong> advice from CEIOPS. 52
Explana<strong>to</strong>ry text Minimum Capital Requirement Purpose 9.2 The <strong>Commission</strong>’s Amended Framework for Consultation 59 envisages two main capital requirements under Pillar I: <strong>the</strong> Solvency Capital Requirement (SCR) and <strong>the</strong> Minimum Capital Requirement (MCR). The MCR is intended <strong>to</strong> provide a safety net. This means that, on an ongoing basis, <strong>the</strong> MCR does not necessarily represent an adequate level of capital. But a level of capital below <strong>the</strong> MCR is clearly unacceptable, even over <strong>the</strong> short term. While temporary breaches of <strong>the</strong> SCR might be <strong>to</strong>lerated – subject <strong>to</strong> <strong>the</strong> prospect of res<strong>to</strong>rative action – a breach of <strong>the</strong> MCR could not be <strong>to</strong>lerated. Design priorities 9.3 The <strong>Commission</strong>’s Amended Framework for Consultation and CfA 9 set <strong>the</strong> following design priorities for <strong>the</strong> MCR: • simple and straightforward calculation; • robustness; • objectivity; • smooth transition. 9.4 As <strong>the</strong> MCR will trigger <strong>the</strong> most serious supervisory intervention, its calculation needs <strong>to</strong> be simple, robust and objective. 9.5 While a combination of fac<strong>to</strong>r-based and scenario approaches are feasible for <strong>the</strong> calculation of <strong>the</strong> SCR, a fac<strong>to</strong>r-based approach is more suitable for <strong>the</strong> purposes of <strong>the</strong> MCR, since <strong>the</strong> advantages of fac<strong>to</strong>rbased approaches are consistent with <strong>the</strong> above priorities. 9.6 The MCR should not be a volatile measure. Some undertakings may seek <strong>to</strong> maintain large capital buffers over and above <strong>the</strong> requirement <strong>to</strong> mitigate <strong>the</strong> risk of serious supervisory intervention arising from <strong>the</strong> breach. 9.7 To provide an effective safety net, internal models would not be allowed <strong>to</strong> replace, or affect, <strong>the</strong> calculation of <strong>the</strong> MCR. 9.8 For smooth transition, <strong>the</strong> presumption might be <strong>to</strong>wards <strong>the</strong> retention of existing requirements, unless an alternative could be shown <strong>to</strong> be demonstrably preferable. In <strong>the</strong> case of <strong>the</strong> adoption of an alternative approach, <strong>the</strong> existing requirements may be retained for a transitional period. 59 MARKT/2506/04 (2005) – Amended Framework for Consultation on Solvency II. 53
Page 1 and 2: CEIOPS-DOC-07/05 Answers</s
Page 3 and 4: Style convention The following has
Page 5 and 6: • Safety measures (CfA 9); • So
Page 7 and 8: sole purpose is to
Page 9 and 10: Call for Advice No. 7 Technical pro
Page 11 and 12: one year). Therefore, capital requi
Page 13 and 14: perhaps through an explicit additio
Page 15 and 16: Discounting 7.22 The present value
Page 17 and 18: exposed to risk fr
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Page 21 and 22: Profit sharing In practice, for uni
Page 23 and 24: future cash flows will have <strong
Page 25 and 26: Explanatory text S
Page 27 and 28: always have resources to</s
Page 29 and 30: developed. They would help
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Page 39 and 40: statistical estimate (with a level
Page 41 and 42: 8.77 It may be argued that
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Page 47 and 48: 8.105 In some cases, the</s
Page 49 and 50: This shall be reviewed, at least an
Page 51: ut the exposure <s
Page 55 and 56: 9.15 Solvency II could also employ
Page 57 and 58: 9.28 The life formula yields itself
Page 59 and 60: underestimate them
Page 61 and 62: 'Prudent person plus' approach 9.52
Page 63 and 64: Uniform or different rules for tech
Page 65 and 66: through a prescribed list. Lists ar
Page 67 and 68: addition a range of stresses so tha
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Page 75 and 76: should not lead to
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Page 79 and 80: 9.156 The senior management shall r
Page 81 and 82: - going-concern aspects of business
Page 83 and 84: features. 81 TailVaR is an example
Page 85 and 86: 10.17 The SCR should also reflect <
Page 87 and 88: 10.26 The risk of asset liability m
Page 89 and 90: Naturally, the pra
Page 91 and 92: too few categories
Page 93 and 94: - Choice of volume measures 10.57 W
Page 95 and 96: Underwriting risk in non-life insur
Page 97 and 98: volatility of thei
Page 99 and 100: those insurers this possible increa
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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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components of the
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Background 14.1 Current insurance D
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14.12 In order to
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groups in its answer to</st
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affected; • Impose restrictions o
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14.43 Regarding the</strong
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off all contracts; • to</
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Call for Advice No. 15 Solvency con
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Minimum capital requirement (MCR) D
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adjusted SCR. From a purely technic
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to be implemented.
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capital
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absolute floor (expressed in euros
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Bolkestein agreed to</stron
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16.14 Generally speaking, complianc
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appoint an additional person <stron
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16.28 It should also be noted that
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Time of application 16.41 The asses
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of the individual
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Background 17.1 This document aims
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Review Panel would be a permanent g
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• the developmen
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asis for considering improvements <
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(I) Regulatory arb
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(II) Capital requirements at group
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into a SCR at grou
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18.31 Additionally, it must be deci
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Capital requirements 18.39 The Fram
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(III) Supervisory Review Process of
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18.60 In view of the</stron
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new structure would need to
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future Framework Directive. CEIOPS
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18.94 Model validation in t
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the assumptions us
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Annexes Annex A (Call for Advice No
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pursuing a strategy which t
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Specific principles for non-life in
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Conformity, suitability and suffici
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• existence of significant insuff
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A.64 In the tests
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the rules on <stro
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TVaR1-α for Tail Value-at-risk. In
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Degree of personalisation B.24 Tran
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B.34 There are two approaches <stro
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Segmentation B.44 In general terms,
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technical technical technical techn
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B.61 The second alternative was cho
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Dutch supervisory authority for <st
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Market risk Equity risk this altern
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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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