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Confidence level 10.12 The level of prudence, or confidence, for <strong>the</strong> SCR will be used <strong>to</strong> calibrate <strong>the</strong> standard formula. It may also be a required design feature of internal models. The choice of such a level of confidence will have <strong>to</strong> reflect <strong>the</strong> overall prudential objectives of Pillar I requirements on insurers. 10.13 The impact of <strong>the</strong> chosen confidence level will need <strong>to</strong> be assessed using quantitative analysis. Capital requirements are unlikely <strong>to</strong> increase in a linear manner as <strong>the</strong> confidence level is raised. Raising <strong>the</strong> absolute level of <strong>the</strong> survival ratio from 99.5% <strong>to</strong> 99.9% could potentially lead <strong>to</strong> a much greater marginal increase in capital requirements than a move from 95% <strong>to</strong> 99.5% 10.14 Choosing <strong>to</strong> calibrate <strong>the</strong> SCR <strong>to</strong> a defined ruin probability will not necessarily lead <strong>to</strong> smooth or predictable results. For example, a confidence level of 99.5% (i.e. a ruin probability of 0.5%) does not imply that a ruin event will occur once in every 200 years, or that, on an annual basis, 1 in every 200 undertakings will fail. The causes of ruin in one undertaking may have a wider impact, leading <strong>to</strong> clusters of insurer failures. Time horizon 10.15 The time horizon for <strong>the</strong> SCR should reflect: • <strong>the</strong> frequency with which results are produced; • <strong>the</strong> ability of undertakings <strong>to</strong> take timely and effective management action; and • <strong>the</strong> ability of supervisors <strong>to</strong> respond <strong>to</strong> a breach of <strong>the</strong> requirement. Given periodic reporting cycles, it seems sensible that, generally, a time horizon of one year should be applied <strong>to</strong> <strong>the</strong> SCR calculation. However, CEIOPS notes that a longer time horizon or a degree of variation within <strong>the</strong> time horizon might be necessary <strong>to</strong> enable any formula or internal model <strong>to</strong> describe more realistically how quickly <strong>the</strong> insurer or its supervisor would be able <strong>to</strong> react. Unacceptable level of capital 10.16 The unacceptable level capital is <strong>the</strong> 'ruin' situation that <strong>the</strong> SCR is designed <strong>to</strong> 'avoid' (<strong>to</strong>, e.g., a 99.5% confidence level). Traditionally, ruin might be characterised as <strong>the</strong> point at which assets no longer exceed liabilities. However, an undertaking's liabilities may extend beyond <strong>the</strong> one-year time horizon for <strong>the</strong> SCR. At <strong>the</strong> end of <strong>the</strong> time horizon (and <strong>the</strong> beginning of <strong>the</strong> new one), assets may still exceed liabilities, but capital could represent a much lower confidence level. 84
10.17 The SCR should also reflect <strong>the</strong> capital required at <strong>the</strong> end of <strong>the</strong> time horizon <strong>to</strong> properly address <strong>the</strong> run-off of an undertaking's liabilities. This does not mean that available capital should be sufficient <strong>to</strong> cover <strong>the</strong> full run-off period of <strong>the</strong> liabilities. But <strong>the</strong> liabilities should be transferable <strong>to</strong> a third party at <strong>the</strong> end of <strong>the</strong> time horizon, or policyholders should have reasonable assurance that <strong>the</strong>ir claims would be covered. 10.18 The risk margin in technical provisions provides a reasonable proxy for <strong>the</strong>se aims. The SCR should <strong>the</strong>refore deliver <strong>the</strong> amount of capital necessary <strong>to</strong> ensure, with a 99.5% confidence level, that assets will exceed technical provisions (and o<strong>the</strong>r liabilities) as estimated over <strong>the</strong> period <strong>to</strong> <strong>the</strong> end of <strong>the</strong> specified time horizon. Going concern vs. run-off / winding up assumptions 10.19 The purpose of regula<strong>to</strong>ry capital requirements for solvency purposes is twofold. On <strong>the</strong> one hand, it aims at ensuring that <strong>the</strong> insurer is sufficiently capitalised during <strong>the</strong> defined time horizon as a going concern. On <strong>the</strong> o<strong>the</strong>r, regula<strong>to</strong>ry capital should also provide for a successful run-off of an insurance undertaking in a ruin situation. Therefore, regula<strong>to</strong>ry capital has aspects of both <strong>the</strong> going-concern and run-off situations. 10.20 Over <strong>the</strong> one-year time horizon, new business may change <strong>the</strong> risk profile of an insurance undertaking. As <strong>the</strong> undertaking should be regarded as a going concern until an insolvency event, capital requirements should generally reflect new business. Additional legal considerations should be studied, especially for those Member States where law requires precise and clear definitions for imposing higher individual solvency requirements <strong>to</strong> address projections of future business. 10.21 In a ruin situation, <strong>the</strong> issue of costs specifically linked with <strong>the</strong> run-off of <strong>the</strong> insurers’ business arises. However, <strong>to</strong> some extent, it could be argued that some costs associated with run-off are already reflected in technical provisions. O<strong>the</strong>r run-off costs might be addressed when determining <strong>the</strong> level of confidence in <strong>the</strong> SCR calculation. 10.22 CEIOPS notes that <strong>the</strong> valuation principles for assets and liabilities underlying <strong>the</strong> calculation of <strong>the</strong> SCR should be compatible with IFRS <strong>to</strong> <strong>the</strong> greatest possible extent. 85
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CEIOPS-DOC-07/05 Answers</s
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Style convention The following has
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• Safety measures (CfA 9); • So
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sole purpose is to
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Call for Advice No. 7 Technical pro
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one year). Therefore, capital requi
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perhaps through an explicit additio
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Discounting 7.22 The present value
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exposed to risk fr
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insurance liabilities set by refere
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Profit sharing In practice, for uni
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future cash flows will have <strong
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Explanatory text S
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always have resources to</s
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developed. They would help
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8.28 A fourth option could be envis
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Call for Advice No. 12 Reinsurance
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Reflection in technical provisions
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• provide an estimate of an under
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particular reinsurer(s)’ aggregat
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they auto<
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einsurer to <stron
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should be a reduction in risk regar
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Call for Advice No. 13 Quantitative
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• the process of
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• handling questions from insuran
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member countries and in the
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components of the
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Background 14.1 Current insurance D
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14.12 In order to
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groups in its answer to</st
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affected; • Impose restrictions o
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14.43 Regarding the</strong
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off all contracts; • to</
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Call for Advice No. 15 Solvency con
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Minimum capital requirement (MCR) D
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adjusted SCR. From a purely technic
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to be implemented.
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capital
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absolute floor (expressed in euros
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Bolkestein agreed to</stron
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16.14 Generally speaking, complianc
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appoint an additional person <stron
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16.28 It should also be noted that
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Time of application 16.41 The asses
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of the individual
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Background 17.1 This document aims
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Review Panel would be a permanent g
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• the developmen
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asis for considering improvements <
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(I) Regulatory arb
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(II) Capital requirements at group
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into a SCR at grou
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18.31 Additionally, it must be deci
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Capital requirements 18.39 The Fram
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(III) Supervisory Review Process of
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18.60 In view of the</stron
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new structure would need to
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future Framework Directive. CEIOPS
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18.94 Model validation in t
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the assumptions us
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Annexes Annex A (Call for Advice No
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pursuing a strategy which t
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Specific principles for non-life in
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Conformity, suitability and suffici
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• existence of significant insuff
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A.64 In the tests
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the rules on <stro
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TVaR1-α for Tail Value-at-risk. In
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Degree of personalisation B.24 Tran
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B.34 There are two approaches <stro
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Segmentation B.44 In general terms,
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technical technical technical techn
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B.61 The second alternative was cho
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Dutch supervisory authority for <st
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Market risk Equity risk this altern
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B.95 In a scenario-based approach,
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B.106 As an alternative one could t
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where: KTSA = the
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Results from the a
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Solvency ratio prior to</st
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Number of instances Risk group Deta
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Conclusion In general, the<
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where: TP gross = technical provisi
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premium risk, the
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“While proportional reinsurance t
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contribute with any additional info
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E.29 Another way <
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programmes on the
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