EIOPA published the annual report on the use of capital add-ons by the national competent authorities under Solvency II. The objective of the capital add-on measure is to ensure that the regulatory capital requirements reflect the risk profile of the undertaking or of the group. The analysis in this report is based on the 2018 year-end Solvency II quantitative reporting templates (QRTs) submitted by solo undertakings or groups from the 31 member states of the European Economic Area to their national competent authorities. The analysis also draws on a survey that entailed both qualitative and quantitative questions on the use of capital add-ons.
During 2018, eight national competent authorities set capital add-ons to 21 solo undertakings, out of the 2,819 (re)insurance undertakings under the Solvency II Directive in the European Economic Area. These include 10 non-life undertakings, eight life undertakings, two reinsurers, and one composite undertaking. However, in 2017, six national competent authorities had set capital add-ons for a total of 23 solo undertakings. Although the overall number of capital add-ons is extremely low and has decreased slightly from 2017 to 2018, two more authorities made use of this tool in 2018.
The amount of capital add-ons imposed on undertakings using the standard formula remains very low overall in 2018, accounting for 1% of the total Solvency Capital Requirement (SCR). However, the amount of capital add-on is not insignificant when considering the amount at the individual level. In sum, as of year-end 2018, the weight of the capital add-on increased to 32% (30% in 2017) when looking at the amount of capital add-ons as a percentage of the total SCR for the undertakings using the standard formula with capital add-ons. The distribution of the capital add-ons as a percentage of the total SCR in 2018 for undertakings that imposed capital add-ons varied substantially once more. In 2018, the largest percentage was 80% (83% in 2017) whereas the smallest percentage rounded close to 0% (1% in 2017).
The Solvency II Directive states that the capital add-on should be reviewed at least once a year by the supervisory authority and be removed when the undertaking has remedied the deficiencies that led to its imposition. According to the regulatory framework, capital add-ons are to be used as a measure of last resort, when they are exceptional and transitory and should be considered only when other supervisory measures have failed, are unlikely to succeed, or are not feasible. This context contributed to the current limited use of this tool, with national competent authorities recognizing that additional capital add-ons should have been set from a prudential point of view but that they had not done so because of the complexity of the process. Thus, a streamlining or simplification of the process for setting capital add-ons would allow a better use of this tool.
Keywords: Europe, EU, Insurance, Solvency II, Capital Add-Ons, Quantitative Reporting Templates, SCR, EIOPA
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