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

underestimate <strong>the</strong>m, deliberately or o<strong>the</strong>rwise. This should be
considered as part of <strong>the</strong> SRP.
9.42 It would be possible <strong>to</strong> elaborate <strong>the</strong> formula by applying different
fac<strong>to</strong>rs <strong>to</strong> different lines of business or different types of provision.
Additional fac<strong>to</strong>rs should only be introduced if it was clear that this
significantly increased <strong>the</strong> accuracy of <strong>the</strong> MCR.
9.43 Regarding diversification, while an additive approach may be preferable
for reasons of simplicity, some consideration should never<strong>the</strong>less be
given <strong>to</strong> <strong>the</strong> possibility of allowing for some diversification benefit if a
simple adjustment could be devised, and that adjustment was
significantly better at representing <strong>the</strong> risk.
Investment risk in <strong>the</strong> MCR
9.44 Under all approaches, <strong>the</strong>re is an issue whe<strong>the</strong>r <strong>the</strong> MCR should include
an allowance for investment risk 61 . To provide advice on this point, <strong>the</strong>
following should be considered:
• whe<strong>the</strong>r <strong>the</strong> investment risk is sufficiently material for those
undertakings that have breached <strong>the</strong> SCR, taking account of <strong>the</strong>
potentially shorter time horizon of supervisory intervention, <strong>to</strong>
justify <strong>the</strong> increased complexity;
• whe<strong>the</strong>r it is possible <strong>to</strong> properly reflect investment risk by way of
a simple fac<strong>to</strong>r-based calculation (e.g. indirectly by applying a
ratio on liabilities); and
• <strong>the</strong> extent <strong>to</strong> which o<strong>the</strong>r safety nets (e.g. investment rules)
reduce <strong>the</strong> need <strong>to</strong> reflect investment risk in <strong>the</strong> MCR.
9.45 It may be argued that an insurer that fails <strong>to</strong> meet its MCR cannot
afford <strong>to</strong> take any risks with its investments. Any insurer that fails <strong>to</strong>
meet its SCR will be expected <strong>to</strong> take action <strong>to</strong> res<strong>to</strong>re its position and
one of <strong>the</strong> actions it might decide <strong>to</strong> take is <strong>to</strong> rearrange its
investments <strong>to</strong> reduce risks and so <strong>the</strong> SCR. If this 'de-risking'
response can be generally anticipated, and <strong>the</strong> extent of 'de-risking'
increases as available capital nears <strong>the</strong> MCR, <strong>the</strong> risks associated with
investments should reduce and <strong>the</strong>re is no need for <strong>the</strong> MCR itself <strong>to</strong>
reflect investment risks.
9.46 Conversely, such a 'de-risking' response might not be generally
anticipated for a life insurer carrying on with-profits insurance because
of commitments <strong>to</strong> policyholders. Such an insurer may choose o<strong>the</strong>r
remedial actions <strong>to</strong> res<strong>to</strong>re its financial resources which do not reduce
<strong>the</strong> risks associated with its investments. Thus an MCR for life
insurance may need <strong>to</strong> reflect some investment risks. 62
61 Note that in an ALM context investment risk relates <strong>to</strong> both assets and liabilities.
62 One member notes that as a consequence of considering market risk and credit risk in an ALM context <strong>the</strong>
de-risking argument may still be valid for a life insurer carrying on with-profits insurance. However,
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