The European Insurance and Occupational Pensions Authority (EIOPA) published a statement on supervisory practices and expectations in case of a breach of the Solvency Capital Requirement (SCR). In addition, EIOPA published an Opinion that addresses the use of Solvency II risk mitigation techniques by insurers and includes a set of recommendations addressed to the national competent authorities to ensure convergent supervision. Also published was an article that considers the role of insurance in mitigating the impact of catastrophes and focuses on the interplay between climate change and insurance coverage. The article first develops a theoretical model of insurance, climate change, catastrophes, and the macroeconomy, using predictions from this model to empirically test and explore how insurance has mitigated the impact of catastrophes in the past; the results are then used to explore the potential impact of catastrophes using a range of climate-change scenarios.
The supervisory statement on expectations on the breach of SCR aims to foster supervisory convergence and states that, in cases of breach, supervisory practices need to be flexible and should consider the specific situation of the insurance or reinsurance undertaking. However, it is important that when certain triggers are reached, such as non-compliance with the SCR, convergent approaches are applied to ensure a similar protection of policyholders and beneficiaries across Europe. The ongoing uncertainty could lead to breaches of SCR in the future. Solvency II allows supervisory authorities to take early actions, therefore acting promptly to ensure supervisory convergence in this area is needed. EIOPA has finalized this statement post a consultation and the statement accompanies the resolution of comments from the public consultation, the feedback statement to stakeholders, and the impact assessment developed based on the input provided during the consultation period.
The Opinion on use of risk mitigation techniques by insurance undertakings includes a set of recommendations addressed to national competent authorities to ensure convergent supervision. The Opinion raises awareness about the importance of having a proper balance between the risk effectively transferred and the capital relief in SCR. The transfer of risk might also create basis risk and introduce other risks such as a possible increase in counterparty default risk and, depending on the structure, concentration risk. This balance is to be assessed following a case-by-case analysis to consider the particularities of each reinsurance structure and its specific interaction with the risk profile of the undertaking. The national competent authorities are expected to coordinate and cooperate in the assessment of such structures, going beyond a single member state to ensure a convergent approach. The Opinion on the use of risk mitigation techniques by insurance undertakings is accompanied by an impact assessment and the feedback statement addressing the comments received during the public consultation.
- News Release on Supervisory Statement
- Supervisory Statement (PDF)
- News Release on Opinion on Risk Mitigation
- Opinion on Risk Mitigation (PDF)
- Notification on Climate Change Article
- Article on Climate Change (PDF)
Keywords: Europe, EU, Insurance, SCR, Regulatory Capital, Climate Change Risk, ESG, Solvency II, Solvency Capital Requirement, Catastrophe Risk, Climate Change Scenarios, EIOPA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.