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Published 30 April 2010
Contents
Solvency II – Final CEIOPS level 2 advice on underwriting risk calibration
Solvency II – First CEIOPS level 3 advice on the pre-application process for internal model approval
CEIOPS issues advice for assessing 3rd country equivalence
Solvency II – Final CEIOPS level 2 advice on underwriting risk calibration
As previously reported in the February Moore Stephens Insurance regulatory alert, the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) has, at the behest of respondents, been collecting further data from it’s members to finalise the advice, as well as holding discussions with respondents and stakeholders to find solutions to the concerns raised.
Following this process CEIOPS has now finalised their advice on the calibration of non-life and health underwriting risk for the solvency capital requirement (SCR) as well as the calibration of the minimum capital requirement (MCR).
The full range of percentages applicable within the standard formula for SCR and MCR can be found in the final CEIOPS advice at: www.ceiops.eu/index.php?option=content&task=view&id=706
CEIOPS has also confirmed that they will recalibrate these risk charges once more, when further market data is available, for example following the completion of the fifth quantitative impact study (QIS 5).
sandip.johal@moorestephens.com
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Solvency II – First CEIOPS level 3 advice on the pre-application process for internal model approval
CEIOPS has published their first level 3 advice, which relates to the pre-application (also known as the “dry-run”) process for internal model approval. The dry-run process is open to entities who wish to engage with their supervisor prior to seeking full model approval, such that the supervisor may guide and assist them by making an early assessment of their readiness. CEIOPS has highlighted a number of key areas of consideration which the supervisors could use to assess whether an entity is ready for pre-application, crucially including:
i) “The undertaking has conducted an assessment of its own risks” – a mature and developed risk management framework will allow an entity to demonstrate this.
ii) “The undertaking has conducted a self-assessment against the Solvency II internal model requirements” – a detailed gap analysis of the requirements of an internal model against the actual model in place will thus be required, including being able to justify why the internal model developed is more representative of the entity’s risk profile than the standard formula, again pointing back to the requirement for risk management to drive the model.
iii) “The undertaking has detailed plans for the general Solvency II implementation” – CEIOPS here make it clear that merely being prepared for the internal model is not sufficient for the dry-run, overall demonstration of readiness, or a plan towards readiness, for Solvency II is critical. The whole “Solvency II project” will be assessed, including project reporting, the detailed implementation plans and the reporting against milestones in that plan.
The dry-run is NOT a pre-approval process, as reconfirmed by CEIOPS in this advice, as such there is no guarantee of internal model approval following participation in the dry-run, and ominously CEIOPS have advised entities to prepare for the eventuality that they may in fact need to apply for a standard formula if their model is not approved.
This is a critical point to note, as entities whose internal model calibration is such that it has a significantly lower SCR than the standard formula may find it necessary to use the standard formula after all if their model is not approved.
Similarly, entities who do not participate in the dry-run process are not then prohibited from submitting an application for internal model approval. Of course non-participation may not be an option for some, such as those in the Lloyd’s market, who have ordained that all syndicates must participate in the dry-run.
Whether participating or not, for any entity wishing to apply for approval for a full or partial internal model, this CEIOPS guidance offers a crucial insight into the requirements supervisors such as the FSA will be applying prior to even considering the approval of an internal model.
sandip.johal@moorestephens.com
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CEIOPS issues advice for assessing 3rd country equivalence
CEIOPS has issued its final advice on Level 2 implementing measures for the general criteria to be used to assess 3rd country equivalence under the Solvency II Directive. Specific provisions covered are those relating to the reinsurance undertaking supervisory regime (Article 172), group supervision regime (Article 260) and use of local requirements in group calculation (Article 227). The draft advice was published in November 2009 for a 10 week consultation period during which 900 comments were received from 38 stakeholders. CEIOPS also considered comments resulting from a meeting, with representatives of major EU and 3rd country stakeholders, held in January 2010.
As a result CEIOPS has set out a number of overarching principles for equivalence assessments including:
• The 3rd country supervisory system must ensure a similar level of policyholder protection as the one provided in the EEA in order to be considered equivalent.
• It is proposed that the equivalence assessments analyse the ability of the 3rd country supervisory system to meet each of the key Solvency II supervisory principles and objectives. The indicators proposed should only be seen as factors providing guidance, without the necessity for every indicator to be fulfilled.
• Consideration should be given to the adequacy of 3rd country practice in applying the proportionality principle. The existence of a proportionality principle should not in itself, be an obstacle or prerequisite to the recognition of equivalence.
• CEIOPS considers professional secrecy to be fundamental to all supervisory cooperation among EU and 3rd country supervisors and the advice therefore includes a harmonised text on principles, objectives and indicators for the assessment of professional secrecy equivalence. The principle of proportionality should not apply in relation to professional secrecy.
• The default method for calculation of group solvency (Article 230) requires consolidation applying the Solvency II rules. The equivalence assessment applies solely with respect to the deduction and aggregation method (the alternative method under Article 233).
• CEIOPS has emphasised that it sees equivalence assessment as an iterative process, in which dialogue and exchange with 3rd country supervisors will be crucial.
carole.skinner@moorestephens.com
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