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    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.

     

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    Comment Due Date: November 24, 2020

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

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