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    EIOPA Consults on Supervisory Practices in Case of Breach of SCR

    November 25, 2020

    EIOPA published a consultation on the statement on supervisory practices and expectations in case of breach of the Solvency Capital Requirement or SCR. The statement is intended to promote supervisory convergence in the application of the supervisory ladder, in particular addressing the recovery plan required in case of breach of the SCR. The statement outlines supervisory practices and expectations with respect to the observation of non-compliance, request of a recovery plan, causes of non-compliance, assumptions and scenarios of the recovery plan, recovery measures, recovery period, and monitoring and non-compliance at the end of the recovery period. The deadline for submission of feedback is February 17, 2021. Post which, EIOPA will develop impact assessment, publish final report on the consultation, and submit the supervisory statement for adoption by its Board of Supervisors.

    The ongoing uncertainty due to the COVID-19 pandemic can lead to breaches of SCR in the future, in which case the Solvency II supervisory ladder of intervention allows supervisory authorities to take early actions, which include the approval of a recovery plan. Considering the current environment and the potential increase of non-compliance cases, it is important to ensure consistency in the way the recovery plans are developed, assessed, and approved. The following are the key messages of the statement under consultation:

    • Insurance and reinsurance undertakings are required to submit to the supervisory authorities a realistic recovery plan within two months, upon the observation of a breach of the SCR.
    • Supervisory authorities should request from insurance and reinsurance undertakings, as part of the recovery plan, an analysis of the causes of non-compliance and of any shortcomings in their risk management system, including possible inadequacy of internal risk appetite, quantitative or qualitative indicators, risk tolerance limits, stress test framework, and monitoring process.
    • Insurance and reinsurance undertakings should take into account certain assumptions and scenarios when preparing their recovery plan in accordance with Article 142 of Solvency II, considering the proportionality principle, the level of non-compliance with the SCR, and the possible duration of the deterioration of the undertaking’s financial conditions. When preparing recovery plans in the context of the COVID-19 pandemic, undertakings should take into account certain additional assumptions and scenarios.
    • Insurance and reinsurance undertakings should detail the realistic and timely recovery measures to restore their solvency position and sustain it in a medium to long-term period, also considering the internal risk of tolerance limits established in the undertakings’ risk appetite framework.
    • The recovery plan should document the feasibility of the recovery measures, including foreseeable and probable relevant adverse events. The recovery plan should also explain the impact on the undertaking’s solvency and liquidity; timeline for implementation and expected time needed to observe the benefit of the measure; and where applicable, past experience, interconnectedness’ implications, changes to the business model and to the risk profile. 
    • Insurance and reinsurance undertakings can foresee in the recovery plan a period longer than six and up to nine months to restore compliance, explaining the reason why six months would not be enough.
    • After a recovery plan has been submitted, insurance and reinsurance undertakings should notify supervisory authorities of any significant change in the extent of the solvency or liquidity shortfall.

     

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    Comment Due Date: February 17, 2021

    Keywords: Europe, EU, Insurance, Reinsurance, Solvency II, SCR, COVID-19, Recovery Plan, Solvency Capital Requirement, EIOPA

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