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
PRA published a set of questions and answers (Q&A) covering common queries regarding residential and commercial property valuations, for the purpose of the Capital Requirements Regulation (CRR), during the period of disruption caused by COVID-19 pandemic.
EBA published guidelines on loan origination and monitoring, which bring together prudential standards and consumer protection obligations, along with the anti-money laundering and the Environmental, Social, and Governance (ESG) considerations.
EBA published a consultation paper on the draft amended regulatory technical standards on own funds and eligible liabilities.
EBA published a report on convergence of supervisory practices in 2019.
IOSCO proposed updates to its principles for regulated entities that outsource tasks to service providers.
MAS announced that the first phase of the Veritas initiative will commence with the development of fairness metrics in credit risk scoring and customer marketing.
BoE published the Statistical Notice 2020/4 to update the buy-to-let (BTL) Phase 2 and Phase 3 definitions for the Interest Rate Type data item.
FSI published a brief note that examines challenges facing the banking sector as a result of the payment deferral programs put in place to support borrowers affected by the COVID-19 pandemic.
RBNZ published the financial stability report for May 2020. This review of the financial system in the country highlights that the economic disruption associated with COVID-19 will present challenges to the financial system.
PRA published the policy statement PS14/20, which contains the supervisory statement SS1/20 and the feedback to responses to the consultation paper CP22/19 on expectations for investment by firms in accordance with the Prudent Person Principle, or PPP, as set out in the Investments Part of the PRA Rulebook.