28 February 2018

EIOPA recommends further simplifications to the calculation of insurers’ capital requirements

The European Insurance and Occupational Pensions Authority submitted its second and final set of Advice to the European Commission. Previously, EIOPA submitted a first set of Advice to the European Commission in October 2017.

Reflecting developments in the insurance sector and in the wider environment, EIOPA recommends a mixture of revised calibrations, simplifications and, where needed, proposals to achieve greater supervisory convergence. 

The availability of more recent data requires revised calibrations in a number of areas such as natural catastrophe risks, assistance and medical expenses, as well as legal expenses risks.

EIOPA advises to further simplify calculations for natural, man-made and health catastrophes, in particular fire risk and mass accident. Other simplifications include the treatment of look-through to underlying investments.

With respect to the treatment of unrated debt and unlisted equity, EIOPA outlines circumstances and recommends objective criteria, such as financial ratios, when these important asset classes can be given the same treatment as rated debt and listed equity. 

In the area of the calculation of interest rate risk, where the current approach does not cater for negative interest rates and is not effective when interest rates are low, EIOPA recommends new calibrations that take recent evidence such as negative rates into account. In some areas the analyses of recent developments do not provide for sufficient reason to change the calibrations. That is the case for mortality and longevity risks, but also for the cost-of-capital, the latter one of the key elements of the risk margin. Other elements of the risk margin should be assessed in the upcoming overall review of the Solvency II regime due in 2021.

As a follow-up to its analysis of the loss-absorbing capacity of deferred taxes (LAC DT), which showed divergent supervisory practices of 25% of LAC DT, EIOPA has developed a set of key principles to strike a reasonable balance between flexibility and to foster greater supervisory convergence. For example these principles specify the assumptions for projecting future profits after a loss based on credible evidence.

Press release

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