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

should not lead <strong>to</strong> undue complexity. CEIOPS notes that <strong>the</strong>
supervisory review process could also be used (with appropriate
level 3 guidance) <strong>to</strong> judge whe<strong>the</strong>r adequate asset diversification had
been achieved.
9.140 CEIOPS suggests that, in combination, concentration limits and capital
requirements should at least seek <strong>to</strong> prevent <strong>the</strong> potential for an
insurer’s assets <strong>to</strong> fall below its liabilities as <strong>the</strong> result of significant
exposures <strong>to</strong> individual counterparties. CEIOPS considers a rule that
<strong>the</strong> <strong>to</strong>tal exposure of <strong>the</strong> insurer <strong>to</strong> any single counterparty or group of
closely related counterparties (such as all <strong>the</strong> companies in a group)
should not exceed a proportion of <strong>the</strong> insurer's available capital (single
counterparty restriction) – e.g. 25% or 50%. The exposure is <strong>the</strong>
amount by which <strong>the</strong> insurer’s capital would fall if <strong>the</strong> counterparty
became insolvent and could not meet any part of its liabilities. It
includes indirect exposure arising from <strong>the</strong> effect on <strong>the</strong> value of o<strong>the</strong>r
investments. The practicalities of this approach would need <strong>to</strong> be
considered fur<strong>the</strong>r.
9.141 In practice, some exceptions <strong>to</strong> <strong>the</strong> single counterparty restriction –
or, in <strong>the</strong> case of limits, different proportions of available capital -
could be considered, for example:
• exposure <strong>to</strong> subsidiaries, if on a look through basis, <strong>the</strong> assets
and liabilities of <strong>the</strong> subsidiary are consolidated with <strong>the</strong> assets
and liabilities of its parent and <strong>the</strong> single counterparty restriction
is <strong>the</strong>n applied <strong>to</strong> <strong>the</strong> resulting <strong>to</strong>tal assets and liabilities; 79
• government bonds, and o<strong>the</strong>r loans <strong>to</strong> governments or
guaranteed by <strong>the</strong>m;
• short term bank deposits; and
• reinsurance, on <strong>the</strong> grounds of practicality given concentrations
in <strong>the</strong> reinsurance market – although some CEIOPS members do
not consider that such an exception would be justified.
9.142 Having regard <strong>to</strong> <strong>the</strong> expected cash flow of <strong>the</strong> liabilities and that
liquidity risk is difficult <strong>to</strong> measure, <strong>the</strong> portfolio should also be
selected in such a way, that <strong>the</strong> liquidity risk is adequately managed.
CEIOPS is considering requirements on insurers <strong>to</strong> have sufficient
liquid assets <strong>to</strong> cover <strong>the</strong> expected outgo (claims and expenses) over a
set period of time.
Qualitative Requirements on <strong>the</strong> Management of Assets and Liablilities
Qualitative investment rules
9.143 The insurer must take in<strong>to</strong> account <strong>the</strong> volatility of investments
covering technical provisions, <strong>the</strong> SCR and MCR.
9.144 The level of security, quality, liquidity and profitability of investments
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