30 October 2017

EIOPA recommends simplifications to the calculation of capital requirements

The European Insurance and Occupational Pensions Authority (EIOPA) submitted its first set of Advice to the European Commission on the review of specific items in the Solvency II Delegated Regulation. The Advice proposes simplified calculations of the capital requirements in the Solvency Capital Requirement (SCR) standard formula.

The changes foresee simplifications to the calculation of risks such as lapse and mortality. To reduce over-reliance of insurance undertakings on external credit ratings in the calculation of the SCR, EIOPA recommends applying simplified calculations by nominating only one credit rating agency and calculating capital requirements for the remaining non-complex assets only subject to credit quality step 3 (i.e. BBB rating). 

EIOPA advises to create a new asset class for non-listed guarantees issued by regional governments and local authorities to align insurance with the banking framework and by that to ensure improved risk-sensitivity of the calculations.

Furthermore, the Advice identifies the need for the extension of the application of the look-through approach to related undertakings that invest on behalf of the insurer.

It also includes the proposal for the use of undertaking specific parameters for reinsurance stop-loss treaties to allow for better reflection of the risk profile. With respect to risk mitigation techniques, EIOPA recommends to better recognise strategies to hedge financial risks where the exposure is changing frequently. 

Finally, EIOPA carried out an analysis of the loss-absorbing capacity of deferred taxes (LAC DT) across the European Economic Area including supervisory and industry practices. The results of the analysis show that the national supervisory authorities use similar supervisory practices with respect to 75% of the 100 billion euros of LAC DT. On the convergence of the supervisory practices for the remaining 25% of LAC DT EIOPA will provide further elements in February 2018.

Press release

Advice

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