The assessment of the significance with which the risk profile of an insurance or reinsurance undertaking (“undertaking”) or group deviates from the assumptions underlying the SCR calculation, is an important process which undertakings and groups are required to perform starting from 2015. It should ensure that the undertaking or group understands the assumptions underlying its SCR calculation and considers whether the relevant assumptions are appropriate for the undertaking or group. To do so, the undertaking or group will have to compare those assumptions with its risk profile. The purpose of the assessment is not to review the appropriateness or calibration of the standard formula. 

 

The standard formula for Solvency Capital Requirement (SCR) aims to capture the material quantifiable risks that most undertakings are exposed to. The standard formula might however not cover all material risks a specific undertaking is exposed to. A standard formula is, by its very nature and design, a standardised calculation method, and is therefore not tailored to the individual risk profile of a specific undertaking. For this reason, in some cases, the standard formula might not reflect the risk profile of a specific undertaking and consequently the level of 

own funds it needs. 

 

The document at hand covers all risk modules of the standard formula, addressing the assumptions related to the risks covered by the respective modules as well as the assumptions for the correlation between the modules. It does not address why some risks are not explicitly formulated in the standard formula. However, this does not mean that these risks do not need to be considered for the purpose of the assessment of the significance of the deviation. The fact that the document does not specifically refer to every assumption underlying the standard formula should also not automatically lead an undertaking or group to assume that it does not need to consider whether the application of the standard formula in those parts, where no underlying assumptions are specified, results in adequate capital requirements for the risks it is exposed to. 

 

The document is divided between the assumptions per se, which are given in the boxes at the start of the chapters, and background information. The text in the boxes is information about the assumptions underlying the standard formula that EIOPA would expect the administrative, management or supervisory body (AMSB) of the undertaking to be aware of in order to perform its role in the FLAOR/ORSA process. The background information is intended to assist persons performing the assessment of the significance of the deviation. 

 

In line with the general approach that the assessment of the significance of the deviation itself is left to the undertaking or group, the document does not seek to prescribe explicitly the circumstances under which it would be appropriate for an undertaking or group to consider possible deviations of its risk profile from the  assumptions on which the SCR standard formula calculation is based, or what exactly the undertaking or group should take into account in the assessment. 

 

This document provides background information to the technical analysis carried out for the calibration of key parameters of the SCR standard formula, thus serving as a reference background document for undertakings in performing their FLAOR/ORSA. Moreover, this document tries to point out the main underlying assumptions in the standard formula design. It is however not intended to give an exhaustive description of all underlying assumptions of the standard formula nor does it aim to list all risks that are not explicitly formulated in the standard formula calculation. Where simplified calculations are available, they have been developed based on the same assumptions as for the standard calculation. In most cases, more assumptions were made in order to derive the simplified calculation. Where applicable, the additional underlying assumptions for the simplified calculations of the standard formula are also reflected in this document. 

 

In accordance with Article 45(6) of Directive 2009/138/EC the undertaking will have to give information on the significance of the deviation of its risk profile from the assumptions underlying the SCR calculation to the supervisory authority in the FLAOR/ORSA supervisory report. This will require either an indication of why the deviation is significant or an explanation of and evidence why any deviations singly or taken together are not considered to be significant. As stated in the Explanatory Text to FLAOR Guideline 16 (respectively Guideline 12 of the ORSA consultation paper issued June 2014), the undertaking should consider possible consequences deriving from the significant deviation and if and how it intends to address this issue. Such a significant deviation also requires closer scrutiny from the supervisory authority which has to assess whether it agrees that there is a significant deviation and if so, has to consider which steps to take to address this issue from a supervisory perspective. 

 

The document was informally consulted upon with stakeholders in spring 2014 and revised following the comments received. The document may be further amended as supervisory authorities and undertakings and groups gain experience with the use of the standard formula and the way undertakings and groups assess the significance of the deviation of the risk profile from the assumptions underlying the standard formula. 

 

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