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

'Prudent person plus' approach
9.52 In response <strong>to</strong> <strong>the</strong> first wave of CfAs 64 CEIOPS supported <strong>the</strong> inclusion
of high-level general requirements for insurance undertakings <strong>to</strong>
manage <strong>the</strong>ir assets and liabilities appropriately.
9.53 Prudent management would be supported by risk-sensitive capital
requirements, which would take in<strong>to</strong> account asset and liability risks
and <strong>the</strong> degree of an insurance undertaking's asset liability mismatch.
The SCR should <strong>the</strong>refore serve as an important <strong>to</strong>ol in addressing <strong>the</strong>
risk <strong>to</strong> which an undertaking is exposed, and encourage good risk
management and internal control.
9.54 The SCR should be a risk-sensitive capital requirement. But any
formulaic requirement will understate risk in some cases (and overstate
it in o<strong>the</strong>rs). Within <strong>the</strong> context of <strong>the</strong> standard formula, some risks will
be <strong>to</strong>o complex <strong>to</strong> address in a simple, mechanistic way - for example,
concentration risk. Internal models may address this problem <strong>to</strong> some
extent, but model error will always be present.
9.55 As a result, <strong>the</strong> SCR will need <strong>to</strong> be supported by a safety net,
consisting of rules on <strong>the</strong> eligibility of assets and limits on risk
concentrations. This safety net would be necessary, irrespective of
whe<strong>the</strong>r <strong>the</strong> SCR is calculated using <strong>the</strong> standard formula, partial
internal models or full internal models.
9.56 CEIOPS recognises <strong>the</strong> need <strong>to</strong> set out clear criteria for <strong>the</strong> scope of
rules on assets and eligibility and limits on risk concentrations <strong>to</strong> avoid
duplicative treatment of risks that are already treated adequately by
<strong>the</strong> SCR. This does not mean that risks included in <strong>the</strong> SCR will not also
need a ‘safety net’. But <strong>the</strong> intention is that saftey nets should not
interfere with situations where <strong>the</strong> SCR is able <strong>to</strong> assess risks in a
proper way. This will be addressed in CEIOPS’ fur<strong>the</strong>r technical work.
9.57 The combination of quantitative and qualitative rules was <strong>the</strong>n termed
<strong>the</strong> 'prudent person plus' approach. These elements are described
fur<strong>the</strong>r in this answer.
Quantitative investment rules
9.58 The current system of investment rules, set up in <strong>the</strong> Recast Life
Directive and <strong>the</strong> Non-Life Directives, is a combination of a
principles-based and a rules-based approach.
9.59 In Article 20 of <strong>the</strong> Third Non-Life Directive and Article 22 of <strong>the</strong> Recast
Life Directive, <strong>the</strong> principles of prudent investments are stated. The
assets shall secure <strong>the</strong> safety, yield and marketability of investments.
The undertaking shall ensure that assets are diversified and spread and
investments in more risky or non-liquid assets have <strong>to</strong> be restricted <strong>to</strong>
a prudent level.
64 CEIOPS-DOC-03/05, available at CEIOPS’ website: www.ceiops.org.
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