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October 30, 2017

EIOPA recommended simplifications and improvements to the calculation of Solvency Capital Requirement (SCR) standard formula. With this, EIOPA submitted its first set of Advice to EC on the review of specific items in the Solvency II Delegated Regulation. EIOPA aims to ensure a proportionate and technically robust, risk-sensitive and consistent supervisory regime for the insurance sector.

SCR standard formula is a key requirement of Solvency II and it aims to capture the material quantifiable risks faced by most undertakings. To reduce over-reliance of insurance undertakings on external credit ratings in the calculation of SCR, EIOPA recommends applying simplified calculations by nominating only one credit rating agency and calculating capital requirements for the remaining non-complex assets only subject to credit quality step 3 (that is, BBB rating). EIOPA advises on creation of a new asset class for non-listed guarantees issued by regional governments and local authorities, to align insurance with the banking framework and to ensure improved risk-sensitivity of the calculations. Furthermore, the Advice identifies the need for extension of application of the look-through approach to related undertakings that invest on behalf of the insurer. It also includes a proposal for the use of undertaking-specific parameters for reinsurance stop-loss treaties, to allow for better reflection of the risk profile. With respect to risk mitigation techniques, EIOPA recommends to better recognize strategies to hedge financial risks for which the exposure changes frequently.

This Advice follows-up on the first request received from EC. The second set of advice will focus on the analysis of items such as the cost of capital in the calculation of the risk margin and the calculation of non-life and life underwriting risks, catastrophe risks, unrated debt, and unlisted equity. EIOPA plans to submit the second set of advice to EC by February 2018. Gabriel Bernardino, Chairman of EIOPA, said: “This first set of Advice covers key aspects of the standard formula to reduce its complexity while at the same time retaining a proportionate, technically robust, risk-sensitive and consistent supervisory regime for the insurance sector. This Advice, based on evidence, is a first important step in the review of the Solvency II framework.”

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Keywords: Europe, EU, Insurance, Solvency II, SCR, EC, Advice, EIOPA

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