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

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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.
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