Solvency Capital Requirement

European Commission Publishes Report on Group Supervision Provisions Under Solvency II Directive

 

On June 27, the European Commission published a report (COM(2019) 292 final) on the group supervision and capital management provisions under the Solvency II Directive (2009/138/EC).

In the report, addressed to the European Parliament and the Council of the EU, the Commission assesses the benefit of enhancing the Solvency II Directive provisions on group supervision and capital management within a group.

The Commission considers that some areas of the prudential group supervision framework may not ensure harmonized implementation of the rules by groups and national supervisors. This has the potential to have an impact on both the level playing field and capital management strategies.

The Commission has identified some legal uncertainties and diverging supervisory practices that can have a significant impact on group solvency. They concern group own funds, the group solvency capital requirement (SCR) and the group minimum capital requirement (MCR). The use of group internal models may raise additional issues. The Commission has also found a wide variety of interpretations of the group governance provisions.

The Commission has found that diverging implementation of the group supervision provisions may be detrimental to policyholder protection, depending on how national supervisors determine the scope of supervision, and exercise supervision at the level of parent holding companies. In addition, in light of the wide differences between the supervisory powers of different national supervisors, the Commission believes it is necessary to assess the appropriateness of the early intervention powers embedded in the Solvency II regime.

The Commission recognizes that it has identified a number of important issues that may need to be addressed, possibly including by way of legislative changes. However, further analysis is needed on the impact of the potential changes on the existing requirements. Therefore, the Commission deems it appropriate to include group supervision in the scope of its 2020 general review of the Solvency II Directive. As part of the 2020 review, the Commission has invited the European Insurance and Occupational Pensions Authority (EIOPA) to provide technical advice on the issues identified in the report, as well as other related issues that may be detrimental to policyholder protection.

EIOPA Final Report on First Set of Technical Advice on Solvency II Delegated Regulation

On October 31, 2017, EIOPA published a document containing the first set of advice to the European Commission on specific items in the Solvency II Delegated Regulation ((EU) 2015/35) (EIOPAA-BoS-17/280).

The advice covers the following areas:

  • Simplified calculations of capital requirements in the Solvency Capital Requirement (“SCR“) standard formula.
  • Reducing reliance on external credit ratings in the calculation of the SCR.
  • Exposures guaranteed and exposures to regional governments and local authorities (“RGLA“).
  • Risk-mitigation techniques.
  • Undertaking specific parameters.
  • Look-through for investment related undertakings.
  • Loss-absorbing capacity of deferred taxes (“LAC DT“). The advice contains factual information only; this issue will be addressed further in EIOPA’s second set of advice to the Commission.

EIOPA published a consultation paper on the advice in July 2017 (EIOPA-CP-17/004), which followed on from a discussion paper published in December 2016 (EIOPA-CP-16/008). EIOPA has also published a final report that contains details of the feedback that it received on EIOPA-CP-16/008 and EIOPA-CP-17/004, as well as the final text of the advice and a summary of comments received to EIOPA-CP-17/004.

EIOPA is providing its advice in two sets. It will send the second set of advice to the Commission by the end of February 2018. EIOPA issued a call for evidence relating to this second tranche of advice in April 2017. This will address issues such as policy proposals on LAC DT to increase supervisory convergence, risk margin, catastrophe risks, non-life and life underwriting risks, non-proportional reinsurance covers, unrated debt and unlisted equity and own funds. EIOPA plans to consult on these issues before the end of 2017.