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

(including <strong>the</strong> Reinsurance Directive 72 and Solvency II) will impose
equivalent standards of supervision on direct insurers and reinsurers –
including solvency requirements.
9.103 On balance, it seems that a Pillar I rule limiting exposure <strong>to</strong> reinsurers
may not be practical. A situation where an insurer’s solvency is
dependant on a single reinsurer should of course be taken seriously.
However, a Pillar II approach might be better: such an approach might
require insurers <strong>to</strong> notify <strong>the</strong>ir regula<strong>to</strong>r when <strong>the</strong>ir actual or potential
exposure <strong>to</strong> a reinsurer exceeds or approaches <strong>the</strong>ir actual capital, <strong>to</strong>
explain how that exposure is managed and mitigated, and <strong>to</strong>
demonstrate why that exposure should be regarded as prudent.
Possible rules relating <strong>to</strong> liquidity
9.104 Illiquid assets will take time <strong>to</strong> be realised and <strong>the</strong> value which can be
obtained is usually uncertain and may be severely reduced as a result
of a forced sale.
9.105 One possibility <strong>to</strong> address liquidity risk would be a requirement that an
insurer has sufficient liquid assets <strong>to</strong> cover <strong>the</strong> expected outgo (claims
and expenses) over <strong>the</strong> next 12 months. This safety net would mean
that it would not be reliant on fur<strong>the</strong>r premiums from new or renewal
business (or, for life insurance, from continuing contracts) <strong>to</strong> pay
claims.
Limits on exposures <strong>to</strong> individual asset classes
9.106 CEIOPS considers that <strong>the</strong> starting point for quantitative limits on
investments could be <strong>the</strong> existing limits defined by <strong>the</strong> current
Directives. These could be formulated as:
• 'hard' limits such that <strong>the</strong> portion of any asset holding which
exceeds <strong>the</strong> limit is not permitted <strong>to</strong> cover <strong>the</strong> technical
provisions, <strong>the</strong> MCR or <strong>the</strong> SCR;
• a 'softer' variant of <strong>the</strong> first type of limit, where excess holdings
may be recognised partially for <strong>the</strong> purposes of covering technical
provisions, <strong>the</strong> MCR or <strong>the</strong> SCR;
• 'prior approval' limits: breaches of such limits are allowed with
prior consent of <strong>the</strong> supervisory authority.
For example, 'prior approval' limits may be used for particular asset
classes which show high levels of risk. For <strong>the</strong>se limits, clear qualitative
preconditions would have <strong>to</strong> be set <strong>to</strong> define circumstances where a
breach of such limits could be accepted. For example, it may be
required that an insurer uses an investment policy based on an efficient
ALM system.
72 COM(2004)273 (2004) - Proposal for a Directive on Reinsurance, amending Council Directives 73/239/EEC,
92/49/EEC, and Directives 98/78/EC and 2002/83/EC.
69