EIOPA Consults on Use of Risk Mitigation Techniques Under Solvency II
EIOPA is consulting on a supervisory statement on the use of risk mitigation techniques by insurance and reinsurance undertakings. Supervisory authorities are recommended to also apply this Supervisory Statement to insurance and reinsurance undertakings that make use of an internal model to calculate the Solvency Capital Requirement (SCR). During the consultation period, EIOPA will additionally assess potential "group issues" and "internal reinsurance." The deadline for submission of feedback to this consultation is November 24, 2020.
This Supervisory Statement is the result of analyses on the use of reinsurance structures by insurance and reinsurance undertakings that optimize the use of capital under the Solvency II framework,
when the Solvency Capital Requirement (SCR) is calculated with the standard formula. The use of risk mitigation techniques can have a significant impact on the SCR. For non-life insurance, it impacts the "premium and reserve risk" and the "catastrophe risk." For life insurance, due to the newly developed structures, reinsurance contracts or other contracts that are structured as reinsurance contracts can also impact other risk modules—for example, lapse risk, longevity risk, or even expense risk. The overall impact can significantly reduce the SCR of an insurance and reinsurance undertaking and, therefore, supervisory authorities are recommended to give appropriate attention to this subject.
Independently from the eligibility criteria for recognizing risk mitigation techniques for solvency purposes, insurance and reinsurance undertakings are expected to ensure that risk mitigation is commensurate with the relief in the SCR calculation when introducing new techniques. Undertakings are required, as part of the general governance requirements, to manage risk prudently. Although the use of risk mitigation techniques in general is a good tool to mitigate the (insurance) risk, it should be recognized that the transfer of risk might introduce other risks—that is, a possible increase in counterparty default risk, basis risk and depending on the structure, concentration risk.
This Supervisory Statement should be read in conjunction with the Solvency II Directive (2009/138/EC), the Commission Delegated Regulation 2015/35, EIOPA guidelines on system of governance, and EIOPA guidelines on basis risk. The statement is intended to promote supervisory convergence on the assessment of the use of risk mitigation techniques under Solvency II, as it is recognized that potential divergent practices or potential supervisory arbitrage in this area could contribute to an unlevel playing field.
Related Links
Comment Due Date: November 24, 2020
Featured Experts
Adam Koursaris
Asset and liability management expert; capable modeler; risk and capital specialist
Cassandra Hannibal
Life insurance actuary; risk management and economic capital specialist
Paul McCarney
Insurance product strategist; insurance domain expert; extensive experience developing risk assessment frameworks for insurers
Previous Article
HKMA Report Examines Financial Stability of Banking SectorRelated Articles
EBA Publishes Final Regulatory Standards on STS Securitizations
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.
ECB Further Reviews Costs and Benefits Associated with IReF
The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.
EBA Publishes Funding Plans Report, Receives EMAS Certification
The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).
MAS Launches SaaS Solution to Simplify Listed Entity ESG Disclosures
The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.
BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules
The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.
IOSCO Welcomes Work on Sustainability-Related Corporate Reporting
The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)
BoE Allows One-Day Delay in Statistical Data Submissions by Banks
The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.
ACPR Amends Reporting Module Timelines Under EBA Framework 3.2
The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.
ECB Paper Discusses Disclosure of Climate Risks by Credit Agencies
The European Central Bank (ECB) published a paper that examines how credit rating agencies accepted by the Eurosystem, as part of the Eurosystem Credit Assessment Framework (ECAF)
APRA to Modernize Prudential Architecture, Reduces Liquidity Facility
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.
