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

9.36 A precondition for a MCR calculated as a margin over liabilities is <strong>the</strong>
harmonisation of technical provisions. In this approach, <strong>the</strong> main
concern is <strong>the</strong> ability of <strong>the</strong> insurer <strong>to</strong> meet its liabilities in a run-off
situation. Risks associated with new business are not reflected,
assuming that an insurer that fails <strong>to</strong> meet <strong>the</strong> MCR will not be
permitted <strong>to</strong> write new business.
9.37 However, <strong>the</strong> MCR is relevant not only for those undertakings that
already breached it, but also for <strong>the</strong> undertakings that meet <strong>the</strong> MCR.
There is a concern that <strong>the</strong> liabilities basis alone will not adequately
reflect <strong>the</strong> true risk e.g. in <strong>the</strong> case of short term business with a low
amount of provisions, or in <strong>the</strong> case of new/rapidly growing
undertakings. If field testing shows that this is a serious shortcoming, a
combination of <strong>the</strong> liabilities result with ano<strong>the</strong>r volume measure (like
<strong>the</strong> premiums for example), or with two volume measures (premiums
and claims, as in <strong>the</strong> current solvency margin) might address this
problem, although at <strong>the</strong> cost of some added complexity. Consideration
needs <strong>to</strong> be given whe<strong>the</strong>r a maximum approach (as in <strong>the</strong> current
solvency margin) would appear preferable <strong>to</strong> any additive approach.
9.38 For short-term claims business, <strong>the</strong> level of <strong>the</strong> overall liabilities would
be driven mainly by <strong>the</strong> provision for unearned premiums. This may
lead <strong>to</strong> undesirable effects in cases where <strong>the</strong> level of unearned
premiums fluctuates significantly throughout <strong>the</strong> year (e.g. where a
large proportion of <strong>the</strong> insurer’s business consists of contracts with
similar periods of cover).
9.39 Operational risk is hard <strong>to</strong> quantify and for <strong>the</strong> purpose of <strong>the</strong> MCR only
a rough and ready allowance can be made. The amount of <strong>the</strong> liabilities
might be a suitable proxy for <strong>the</strong> potential exposure. This allows
operational risk <strong>to</strong> be covered by a loading <strong>to</strong> <strong>the</strong> fac<strong>to</strong>rs that are
applied <strong>to</strong> <strong>the</strong> liabilities for <strong>the</strong> purpose of calculating <strong>the</strong> liability risk.
Alternatively, a measure based on premiums could be developed.
9.40 Issues for a MCR based on liabilities include:
• How should <strong>the</strong> liabilities be verified?
• Should different fac<strong>to</strong>rs be used for different types of liability?
• What allowance should be given for diversification, between
different lines of business and between different claims within a
line?
• How should reinsured liabilities be treated <strong>to</strong> appropriately reflect
and encourage a transfer of risk?
• Calibration (having regard <strong>to</strong> <strong>the</strong> basis used <strong>to</strong> estimate <strong>the</strong>
liabilities).
9.41 If <strong>the</strong> liabilities are underestimated so will be <strong>the</strong> MCR. While this is
only a second order effect, it is still important that <strong>the</strong> liabilities are
estimated as accurately as possible and that <strong>the</strong> insurer does not
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