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

Review of <strong>the</strong> fac<strong>to</strong>rs
9.47 The future regime should enable <strong>the</strong> review of <strong>the</strong> fac<strong>to</strong>rs of <strong>the</strong> MCR
formula <strong>to</strong> follow market developments over <strong>the</strong> long term. At <strong>the</strong>
same time, <strong>the</strong> review cycle should avoid hectic changes <strong>to</strong> <strong>the</strong> fac<strong>to</strong>rs,
and <strong>the</strong> industry needs <strong>to</strong> be given adequate time for preparation
whenever <strong>the</strong> fac<strong>to</strong>rs are adjusted.
Interplay with <strong>the</strong> SCR
9.48 At any time, <strong>the</strong> MCR will be a floor for <strong>the</strong> SCR. In some cases <strong>the</strong>
result suggested by <strong>the</strong> SCR calculation (although not <strong>the</strong> requirement
itself) will be lower than <strong>the</strong> MCR, in o<strong>the</strong>r cases <strong>the</strong> SCR might be
above, but very close <strong>to</strong>, <strong>the</strong> MCR.
9.49 Only field testing will reveal how frequently this happens. While
adjusting <strong>the</strong> fac<strong>to</strong>rs in <strong>the</strong> formulae may reduce <strong>the</strong> number of such
situations, it is unlikely that <strong>the</strong>y can be avoided entirely. Even if <strong>the</strong>
MCR formula was based on <strong>the</strong> standard SCR, <strong>the</strong> SCR estimate
suggested by an internal model (although not <strong>the</strong> requirement itself)
may fall below <strong>the</strong> MCR.
9.50 The future regime, on <strong>the</strong> o<strong>the</strong>r hand, would need <strong>to</strong> avoid abrupt
shifts from <strong>the</strong> 'no intervention' control level <strong>to</strong> <strong>the</strong> level of 'ultimate
intervention': <strong>the</strong> relative levels of <strong>the</strong> SCR and <strong>the</strong> MCR should be
calibrated so that <strong>the</strong> SCR represents a meaningful margin over <strong>the</strong>
MCR for most insurers.
9.51 Possible approaches <strong>to</strong> deal with this problem are
• setting a floor <strong>to</strong> <strong>the</strong> SCR equal <strong>to</strong> MCR × j (where j ≥ 1);
• basing <strong>the</strong> MCR on <strong>the</strong> SCR (ei<strong>the</strong>r as a fixed percentage of <strong>the</strong>
SCR, or by omitting some of its components); or
• changing <strong>the</strong> definition of ruin under <strong>the</strong> SCR so that it is based
on having sufficient capital at <strong>the</strong> end of <strong>the</strong> time horizon <strong>to</strong>
cover both <strong>the</strong> technical provisions and <strong>the</strong> prospective MCR
calculated at that time. 63
The special case of <strong>the</strong> SCR coinciding with <strong>the</strong> MCR is also discussed in
para. 15.19. The solution may be left entirely <strong>to</strong> Pillar II, leaving it <strong>to</strong>
<strong>the</strong> supervisor <strong>to</strong> decide (subject <strong>to</strong> level 3 guidance on supervisory
convergence) what <strong>to</strong> do in cases when <strong>the</strong> SCR and <strong>the</strong> MCR are close
<strong>to</strong> each o<strong>the</strong>r. In effect, having <strong>the</strong> SCR and <strong>the</strong> MCR close <strong>to</strong> each
o<strong>the</strong>r could simply mean that <strong>the</strong> MCR is overstating <strong>the</strong> risk.
ano<strong>the</strong>r member argues that <strong>the</strong> limited availability of appropriate assets, particularly outside <strong>the</strong>
eurozone, may be a practical limitation <strong>to</strong> this.
63 Note that <strong>the</strong> advice under CfA 10 does not envisage this definition of ruin.
60