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Summary of CEIOPS Releases
CEIOPS Consultation Papers
papers 20,19,18,17Consultation Paper No. 20 - Draft Advice to the European Commission in the Framework of the Solvency II Project on Pillar I Issues - Further Advice
A comprehensive and important discussion of pillar 1 issues, focusing on the findings from all QISs to date and pulling together a summary of many of the key practical concerns that have been raised since the formation of the first draft of Solvency II legislation and modelling specifications.
Topics Covered:
- Adequacy of financial resources - briefly describes the high-level objectives for the different elements of Pillar 1 and their interaction, to be addressed in more detail later.
- Valuation Standards - a detailed section encompassing thorough treatments of the approach for valuing assets (market value), the approach for estimating technical provisions (best estimate plus risk margin), the impact of other liabilities in a solvency 2 context. This includes substantial discussion on approaches for deriving risk margins and best estimates, and factors to consider
- Capital - the three tier system of categorisation, limitations, composition of capital for the MCR, future work needed
- Solvency Capital Requirement: Standard Formula - drawing heavily on the findings of QIS2 regarding the standard model, describes a modular structure for the standard model based on risk types, and discusses aggregation methods to be used with this approach, before going into details of the calculations in each risk module. Also addresses the incorporation of risk mitigation measures, such as reinsurance. The format for each of these sections is an in-depth discussion followed by lessons from QIS2 and changes to implement before QIS3.
- Solvency Capital Requirement: Full Internal Models - benefits of their usage, conceptual framework for internal models, practical implications and comparability, use test requirements, the approval process, use of capital add-on
- Solvency Capital Requirement: Partial Use of Internal Models - outlines their uses as being easing transition to full internal model, encourage specialisation in certain areas, deal with exceptional cases, discusses the conceptual framework, restrictions imposed and use tests in a similar way to the internal model section
- Minimum Capital Requirement - gives a brief outline of progress and developments in the MCR to date, followed by a section on the revised modular proposed formula. An alternative 'compact' proposal is also discussed, further simplified from the modular approach, and suggested by some as suitable for testing in QIS3 in order to achieve a better 'hierarchy' of solvency measures. The introduction of a temporary transitional MCR at the start of the Solvency 2 regime's implementation is raised as a possibility. Further advice is being prepared...
- Safety Measures - The role and form of safety measures is discussed. Note that this issue is also given its own treatment in Consultation Paper 19
- Special Treatments - this section covers reinsurance business (all modelling issues discussed apply, in theory, to reinsurers just as much as to direct insurers), small undertakings (a brief note on simplified requirements and proportionality). Some special types of business are discussed, but these are all related to health rather than general insurance.
Consultation Paper No.19 - Draft Advice to the European Commission in the Framework of the Solvency II Project on Safety Measures (Limits on Assets) Addressing the issues of what restrictions should be placed on how insurance entities may hold their solvency capital, whether these should be principle-based or fixed, and how reinsurers should be treated given that they do not have the same direct responsibility to policyholders.
- Background - definition of the 'prudent person' rule and the 'prudent person plus' approach
- Cross Sectoral Comparisons - finding similarities with regulation in other financial sectors in an effort to predict and avoid problems
- Limits on Assets - arguments for and against quantitative limits vs pure reliance on prudent principles,
- What could the 'plus' Comprise for Direct Insurers? - a discussion of risks not adequately captured by the SCR (concentration risk, liquidity risk, complex risk relationships, undertaking-specific risks, non-linearity)
- How should Reinsurers be Treated? - brief section on the current differences between limitations on direct insurers and reinsurers, recognition of the different natures of their operations under solvency II and how this translates to limitations on assets
Consultation Paper No.18 - Draft Advice to the European Commission in the Framework of the Solvency II Project on Supervisory powers – Further Advice
Following on from previous CEIOPS publications, this paper refines the advice and opinion of how supervisory bodies should operate, focusing on harmonisation across member states.
Topics Covered:
- Background - introduces key questions surrounding why harmonisation across supervisory bodies is necessary and how this can be achieved within the varying wider legal frameworks of different countries
- Supervisory Review in a Solo Context - formulates a list of powers that supervisory bodies should be granted by member states in order to facilitate the implementation of the Solvency II regime
- Supervisory Review in a Group Context - explains briefly how supervision should apply to groups, based on the notion of a 'group supervisor' defined in previous CEIOPS documents
- Current Supervisory Powers and levels of Harmonisation - details in a table the powers currently available to supervisory bodies across different EU member states,
Consultation Paper No.17 - Draft Advice to the European Commission in the Framework of the Solvency II Project on Pillar II Capital Add-ons for Solo and Group Undertakings
Covers how capital add-ons will be determined in the supervisory review process, and what information will be required for this.
Topics Covered:
- Aim of Capital Add-ons - definition of an add-on, reasons for their existence, uses of capital add-ons, circumstances where their use is appropriate
- Scope of Internal Risk and Capital Assessment (IRCA) - the purpose of the IRCA, links to SCR and capital add-on, what should be included in this, multi-year perspective
- Harmonised Steps on Potential Implementing Measures - a clear step-by-step approach for the consideration and categorisation of capital add-ons; essentially a list of key questions
- Transparency Issues - a very brief section on disclosure (to be covered in more detail under Pillar III discussions)
- Capital Add-on in a Group Context - in principle, the aim, definition and calculation of the capital add-on for groups is identical, but further work is needed into the assessment of diversification benefits