On 6 November 2017 the European Insurance and Occupational Pensions Authority (EIOPA) released a consultation paper on its second set of advice to the European Commission on the Solvency II review. This follows on from an earlier consultation paper and subsequent report released by EIOPA in July and October, respectively, on its first set of advice on the Solvency II review.
The second consultation paper is very detailed and sets out EIOPA’s proposed advice on a number of areas including various Solvency Capital Requirement (SCR) risk modules (premium and reserve risk, mortality and longevity risk, catastrophe risk, market risk, counterparty default risk), the risk margin, own funds and the look-though approach.
We are currently reviewing the consultation paper in detail and plan to publish a briefing note outlining EIOPA’s proposals for each of the topics covered in the consultation paper in the coming weeks.
However in advance of that, we have highlighted a few key proposals in this blog post:
• EIOPA is proposing that the calibration of the standard formula mortality risk capital charge should increase from 15% to 25% (as set out in section 3 of the consultation paper).
• EIOPA is proposing changes to the methodology underlying the interest rate risk capital charge to take account of the low interest rate environment. Two options are proposed in the consultation paper (see section 7).
• EIOPA is proposing simplifications to the application of the ‘look through’ approach for the purposes of the SCR calculation (as set out in section 15).
• EIOPA is proposing to keep the cost of capital rate used in the calculation of the risk margin unchanged at 6% (as set out in section 18).
• EIOPA is proposing changes to the standard formula factors for the standard deviation of premium and reserve risk for some non-life lines of business, including medical expense insurance (see section 1). For medical expense insurance EIOPA is proposing to increase the factors for standard deviation of premium risk from 5.0% to 6.0% and for reserve risk from 5.0% to 6.6%.
The deadline for responses to the consultation is 5 January 2018. EIOPA is expected to provide final advice to the European Commission on the proposed changes on 28 February 2018.
Have you ever wondered what options would be available to your company should it get into financial difficulty? Does your company have a ‘plan B’ and how practical and realistic is it? These are questions (re)insurance companies may soon need to answer. Recovery and Resolution Plans (RRPs) have already been introduced in the banking industry. In this blog I outline a few insights the insurance industry can learn from the recovery and resolution planning process which the banking industry has already commenced. (Re)insurance companies may find this useful particularly in light of the European Insurance and Occupational Pensions Authority (EIOPA) opinion issued last month recommending a harmonised recovery and resolution framework for all insurers across the EU.
Based on the feedback from the banking industry, it would appear that there is more to recovery and resolution planning than meets the eye. In the banking industry, recovery plans, for example, are intended to be living documents which demonstrate that the recovery strategies presented can be implemented in reality—and that is not an easy task.
The following diagram illustrates the embeddedness of recovery plans within banks as well as some of the key considerations which I will expand upon in this blog.
Recovery plans can span hundreds of pages as the practicalities of recovery strategies are explored in great detail in order to have a plan of action in place that is realistic, achievable and capable of being put into action straight away. Regulators expect a short timeframe for implementation of a recovery plan, with the recovery strategies presented typically required to be fully executable within a 12-month period. In addition, it is expected that the recovery strategies take account of the particular scenarios the company may find itself in. For example, the recovery strategies may vary depending on whether an idiosyncratic or a systemic risk has materialised, given that the options a company could take when it alone is in financial difficulty compared to when many companies are in the same boat may well be different.
On 11 July 2017, the European Insurance and Occupational Pensions Authority (EIOPA) issued principles on the supervisory approach to relocations from the United Kingdom.
The opinion published by EIOPA sets out principles to foster supervisory convergence in Europe and to ensure consistency in the authorisation process. These principles and strong statements from EIOPA have been published to a backdrop of claims that differing standards are being applied by regulators in member states, particularly in relation to matters such as head-count, retention of risk and corporate substance.
Some of the key points from the opinion are:
– EIOPA calls on all supervisors to have a sound authorisation process, and to increase resourcing if required to deal with the level of extra applications.
– No automatic recognition of existing authorisations should be granted.
– An appropriate level of corporate substance should be required of authorisations and companies should not display characteristics of an empty shell. The supervisors are instructed to scrutinise any transfer of risk carefully and require a minimum retention of risk from the authorised undertaking. An indicative minimum retention figure of 10% is mentioned.
– Outsourcing arrangements should not impair the governance and risk management of the company, and ultimate responsibility remains with the Board of Directors, irrespective of any outsourcing in place.
– EIOPA advises supervisory authorities to monitor companies post-authorisation and to conduct specific reviews in the first few years following authorisation to ensure consistency with the initial business model.
The full opinion and principles can be found on the EIOPA website here.
For more information on selecting locations and the authorisation process see our recent briefing note here.
The European Insurance and Occupational Pensions Authority (EIOPA) has launched a review of specific items in the Solvency II Delegated Regulation with a particular focus on the standard formula Solvency Capital Requirement (SCR). In this briefing note, Milliman consultants Aisling Barrett, Gillian Tucker, and John Mulvihill summarise the discussion paper EIOPA has published in order to engage with stakeholders on the topic.
On December 2, the European Insurance and Occupational Pensions Authority (EIOPA) issued a discussion paper on “Potential Harmonisation of Recovery and Resolution Frameworks for Insurers.” The paper sets out a number of considerations for the development of a harmonized European framework in the recovery and resolution planning space. It is open to comments from stakeholders until February 28, 2017.
Recovery and resolution planning is a very topical subject at present and there are numerous examples of requirements for financial services companies and regulatory authorities to develop recovery and resolution plans and frameworks. For example, larger financial institutions that are classified as globally systemically important financial institutions (G-SIFIs) and globally systemically important insurers (G-SIIs) are required to undertake recovery and resolution planning under the Financial Stability Board’s “Key Attributes of Effective Resolution Regimes for Financial Institutions” and similar requirements adopted by the International Association of Insurance Supervisors. This is also an area of focus for European regulators. In Ireland, for example, Sylvia Cronin, Director of Insurance Supervision at the Central Bank, noted at the European Insurance Forum in March that recovery and resolution for insurers is an area of particular interest for the Central Bank.