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

9.15 Solvency II could also employ a dynamic approach: retaining <strong>the</strong>
existing requirements for a transitional period before adopting one of
<strong>the</strong> alternatives.
- A formula based on <strong>the</strong> existing Solvency I
9.16 A formula based on <strong>the</strong> existing requirement has <strong>the</strong> advantage of
continuity with <strong>the</strong> existing regime, which also reduces <strong>the</strong> risk of
modelling error associated with <strong>the</strong> innovative and yet unproven SCR.
Transitional costs for undertakings, as well as <strong>the</strong> expenses of
developing and testing a formula would also be minimised.
9.17 Against this, an MCR based on Solvency I would import <strong>the</strong>
disadvantages of <strong>the</strong> existing requirements in<strong>to</strong> Solvency II. It is
difficult <strong>to</strong> identify an underlying <strong>the</strong>oretical basis for <strong>the</strong> present
requirements, so it would also be difficult <strong>to</strong> demonstrate how <strong>the</strong> MCR
achieved <strong>the</strong> purpose set out in CEIOPS’ working definition. Even if
additional risk categories were added, <strong>the</strong>re would be a lack of
consistency with <strong>the</strong> treatment of underwriting risk under <strong>the</strong> SCR.
However, it may not be essential for <strong>the</strong> MCR <strong>to</strong> measure risks
precisely in order <strong>to</strong> provide an effective safety net. Although <strong>the</strong>
<strong>the</strong>oretical basis of <strong>the</strong> current formula may have been forgotten,
several working groups of supervisors have recognised that <strong>the</strong>
solvency margin worked well, at least as a safety net.
9.18 Since <strong>the</strong> definition of <strong>the</strong> technical provisions is going <strong>to</strong> change (and,
for some Member States, changes in asset valuation will impact <strong>the</strong>
level of available capital), even when <strong>the</strong> existing Solvency I
calculations are retained, <strong>the</strong> combined requirement of technical
provisions plus <strong>the</strong> MCR is going <strong>to</strong> change. This also means that, even
if <strong>the</strong> existing calculations are adopted, a review of <strong>the</strong> fac<strong>to</strong>rs via QIS
will be necessary.
9.19 Assuming that <strong>the</strong> existing formula is retained without major changes,
<strong>the</strong> following adjustments need <strong>to</strong> be/might be considered:
• adjustments <strong>to</strong> ensure IASB compatibility;
• adjustments aimed <strong>to</strong> correct minor anomalies without added
complexity; and
• shortcuts aiming for more simplicity, where this can be done
without significant loss of risk sensitivity; considering also that
<strong>the</strong> SCR will be able <strong>to</strong> capture risks more elaborately.
9.20 The use of some approximations could be allowed <strong>to</strong> facilitate interim
calculations. However, if <strong>the</strong> existing formulae are retained for a
transitional period only, it is suggested <strong>to</strong> keep adjustments <strong>to</strong> <strong>the</strong>
absolute minimum necessary, since marginal improvements would not
justify <strong>the</strong> additional costs of a double reform.
9.21 In its present form, <strong>the</strong> non-life formula captures mainly underwriting
risk. While <strong>the</strong> core formula uses balance sheet and profit-and-loss
items, <strong>the</strong> differentiation of <strong>the</strong> fac<strong>to</strong>rs according <strong>to</strong> business lines
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