Tag Archives: EIOPA

EIOPA’s Insurance Stress Test Exercise 2018

In May, the European Insurance and Occupational Pensions Authority (EIOPA) launched its fourth stress test exercise for the 42 largest insurance groups in the European insurance sector. The 2018 EIOPA stress test exercise aims to assess the vulnerability of the EU insurance sector and comprises three specific hypothetical adverse scenarios which are informed by current market conditions, the risk climate, and their potential impact on the insurance sector.

This paper by Ian Humphries and Fred Vosvenieks looks into the three stress scenarios, the calculation methodology requirements, reporting timeframes, and disclosure requirements, whilst highlighting why non-participating insurers may find the exercise and the subsequent results of interest.

EIOPA’s 2018 stress tests: Cyber risk questionnaire

As part of its fourth insurance stress testing exercise launched on 14 May 2018, the European Insurance and Occupational Pensions Authority (EIOPA) has included for the first time a ‘cyber questionnaire’ for its target group of participants to complete. This briefing note by Milliman’s Claire Booth and Jonathan Lim highlights the information firms have been asked to disclose. It also explains how firms outside of EIOPA’s target group should consider using the questionnaire.

EIOPA provides feedback on SFCRs

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

The European Insurance and Occupational Pensions Authority (EIOPA) has recently provided feedback to the industry on the first batch of published Solvency and Financial Condition Reports (SFCRs). The findings are based on observations from a sample of the 2016 group SFCRs and also from similar reviews of solo SFCRs by various national supervisors.

In order to support the industry in preparing future SFCRs, EIOPA has published a Supervisory Statement with its findings. It should be noted, however, that the findings are nonbinding on companies. Nonetheless it is reasonable to expect that supervisors might expect the industry to at least consider these findings when drafting their next reports.

This blog post outlines some of the highlights from the supervisor’s feedback:

• Where a reporting item is not applicable, it is important to have a clear indication that the information is not applicable. Examples would include pointing out that an internal model, the matching adjustment or the volatility adjustment are not applicable for a given company.

• Companies should take care in setting the content and language styles of the reports, particularly the Summary section. Policyholders should be the main addressees of the Summary, and EIOPA has outlined the minimum content it expects to see in this section of the report. The remaining sections can be addressed to analysts and investors, so it is not expected that legislative definitions or detailed requirements need to be explained in the main body of the SFCR.

• While it is good practice to include Quantitative Reporting Templates (QRTs) in the Appendix to the SFCR, it should not prevent companies from including quantitative information in the body of the report. If appropriate, parts of the QRTs should be repeated or complemented by the narrative information in the SFCR.

• It is expected that the sensitivity to different scenarios or stresses is disclosed in a structured format. Within the chapter on Risk Profile, information on the overall impact should be provided under each risk section.

• EIOPA would like to see more undertaking-specific information regarding valuation of investments, valuation of deferred tax assets and liabilities and valuation of technical provisions.

• Within the section on Valuation of Technical Provisions, the SFCR should provide a description of the level of uncertainty in the calculations. The degree of uncertainty should be at least linked to the assumptions underlying the calculation, such as economic and noneconomic assumptions, future management actions and future policyholder behaviour.

• Undertakings should also include comparative information against the previous year’s submission in certain areas of their 2017 SFCRs. EIOPA recommends that companies provide comparative information in table format as much as possible. Qualitative information on material differences between two reporting years is also expected to be included in the report.

Companies should, where possible, bear this feedback in mind when preparing their next SFCRs.

EIOPA consultation on second set of advice on its Solvency II review

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.

Recovery and Resolution Plans: More to it than meets the eye

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.

Continue reading

EIOPA issues opinion on relocations from the UK

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.