EIOPA published a supervisory statement on the application of proportionality principle in the supervision of the Solvency Capital Requirement (SCR) calculated in accordance with the standard formula. EIOPA identified potential divergence in practices on the supervision of the calculation of immaterial SCR sub-modules.
EIOPA agrees that in the supervisory review process in case of immaterial SCR sub-modules the principle of proportionality applies; however, it stresses the importance of supervisory convergence, as divergent approaches lead to supervisory arbitrage. EIOPA believes that consistent implementation of the proportionality principle is a key element to ensure supervisory convergence for the supervision of SCR. For this purpose, the following key areas should be considered:
- Proportionate approach. Supervisory authorities may allow undertakings, when calculating SCR at the individual undertaking level, to adopt a proportionate approach toward immaterial SCR sub-modules subject that the undertaking is able to demonstrate required facts to the satisfaction of the supervisory authority. For the calculation of SCR at group level, this approach does not apply.
- Prudent calculation. An SCR sub-module should be considered immaterial for SCR calculation when its amount is not relevant for the decision-making process, or the judgment of the undertaking or the supervisory authorities. For immaterial sub-modules, SCR sub-module should be calculated using prudently estimated inputs, leading to prudent outcomes at the time of the decision to adopt a proportionate approach and subject to the consent of the supervisory authority. In this case, supervisory authorities may allow undertakings not to perform full recalculation of such a sub-module annually, taking into consideration the complexity and burden that such a calculation would represent when compared to the result of the calculation.
- Risk management system and Own Risk and Solvency Assessment (ORSA). The proper monitoring of any evolution of the risk, either triggered by internal sources (such as a change in the business model or business strategy) or by an external source (such as an exceptional event that could affect the materiality of a certain sub-module) should be ensured. Such a monitoring should include the setting of qualitative and quantitative early warning indicators defined by the undertaking and embedded in the ORSA processes.
- Supervisory reporting and public disclosure. Undertakings should include information on risk management system in the ORSA Report. Undertakings should also include structured information on the sub-modules for which a proportionate approach is applied in the Regular Supervisory Reporting and in the Solvency and Financial Condition Report, under the section “E.2 Capital Management - Solvency Capital Requirement and Minimum Capital Requirement.”
- Supervisory review process. In context of the ongoing supervisory dialog, the supervisory authority should be satisfied, should agree with the approach followed by the undertaking, and should be kept informed in case of any material change. Vice versa, the supervisory authority should inform the undertaking in case there is any concern.
Keywords: Europe, EU, Insurance, Solvency II, SCR, Proportionality, Supervisor of SCR, ORSA, SCR Sub-Modules, SFCR, EIOPA
APRA is consulting on the reporting standard for credit risk management (ARS 220.0).
FCA and PRA in the UK, FED in the US, and the authorities in Singapore have fined Goldman Sachs for risk management failures in connection with the 1Malaysia Development Berhad (1MDB).
ISDA launched the IBOR Fallbacks Supplement and the IBOR Fallbacks Protocol, with both becoming effective on January 25, 2021.
BCBS announced that OSFI and the Bank of Canada hosted the 21st International Conference of Banking Supervisors (ICBS) virtually on October 19-22, 2020.
FCA proposed guidance on how firms should continue to seek to help customers who hold insurance and premium finance products and may be in financial difficulty because of COVID-19, after October 31, 2020.
EBA issued an opinion on prudential treatment of the legacy instruments as the grandfathering period nears an end on December 31, 2021.
ESRB published the fifth issue of the EU Non-bank Financial Intermediation Risk Monitor 2020 (NBFI Monitor).
HM Treasury announced that the new Financial Services Bill has been introduced in the Parliament.
APRA announced that it has increased the minimum liquidity requirement of Bendigo and Adelaide Bank for failing to comply with the prudential standard on liquidity.
Ambassadors of EU member states agreed on the mandate of European Council on the Capital Markets Recovery Package, to support economic recovery from the COVID-19 crisis.