Featured Product

    EIOPA Consults on Use of Risk Mitigation Techniques Under Solvency II

    September 29, 2020

    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

    Keywords: Europe, EU, Insurance, Solvency II, Reinsurance, Solvency Capital Requirement, Concentration Risk, Catastrophe Risk, EIOPA

    Featured Experts
    Related Articles
    News

    APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness

    APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).

    December 02, 2021 WebPage Regulatory News
    News

    EC to Review Macro-Prudential Rules while ESRB Assesses Policy Stance

    The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).

    December 01, 2021 WebPage Regulatory News
    News

    FSB Sets Out Good Practices for Crisis Management Groups

    The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.

    November 30, 2021 WebPage Regulatory News
    News

    APRA Penalizes Heritage Bank for Incorrect Reporting of Capital

    The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Releases Annual Report 2021-2022

    The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Updates Timeline for Implementation of Certain Basel Rules

    Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.

    November 29, 2021 WebPage Regulatory News
    News

    EC Defers Adoption of Regulatory Standards for Disclosures Under SFDR

    EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.

    November 29, 2021 WebPage Regulatory News
    News

    FCA Releases MIFIDPRU Application Forms and Third Set of Rules on IFPR

    The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.

    November 29, 2021 WebPage Regulatory News
    News

    APRA Finalizes Capital Adequacy Standards for Banks

    The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.

    November 29, 2021 WebPage Regulatory News
    News

    CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.

    November 29, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7751