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

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    News

    BIS Hub and Central Banks Conduct CBDC and DeFI Pilots

    The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.

    November 03, 2022 WebPage Regulatory News
    News

    ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations

    The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.

    November 02, 2022 WebPage Regulatory News
    News

    ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector

    Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)

    October 31, 2022 WebPage Regulatory News
    News

    EC Adopts Final Rules Under CRR, BRRD, and Crowdfunding Regulation

    The European Commission (EC) recently adopted regulations with respect to the calculation of own funds requirements for market risk, the prudential treatment of global systemically important institutions (G-SIIs)

    October 26, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8582