The European Commission is required to “review the methods, assumptions and standard parameters used when calculating the Solvency Capital Requirement (SCR) with the standard formula” before December 2018 as per Recital 150 of the Solvency II Delegated Regulation (noting that a further assessment is planned before December 2020 as per article 111 of the Solvency II Directive).
A formal request for technical advice was sent by the European Commission to EIOPA in July 2016 and since then EIOPA has been working to review the SCR, with two consultations having been conducted to date.
The review of the SCR has three key areas of focus:
- Simplifications and proportionality;
- The removal of technical inconsistencies; and
- The removal of unjustified constraints to financing.
In addition to the research on possible changes and two consultations, EIOPA has carried out impact assessments on the proposed changes. On 30 October 2017, EIOPA provided its first set of advice to the European Commission. This was followed by the provision of the second set of advice on 28 February 2018.
The advice provided by EIOPA include a mixture of revised calibrations, simplifications, technical corrections, and, in certain cases, proposals for achieving greater supervisory convergence. Some of the key proposed changes include:
- Allowing companies to apply lapse shocks at homogeneous risk group level rather than policy by policy where appropriate;
- Changes to the use of external credit ratings and guidance on internal credit assessments;
- Changes to the application of risk mitigating techniques within capital requirement calculations;
- Changes to look through for “investment related undertakings”;
- Changes to the requirements for undertaking specific parameters;
- Developing “key principles” to help bring about convergence on the treatment of the loss absorbing capacity of deferred taxes (LACDT) demonstrated by future profits;
- Providing revised calibrations in a number of areas (such as natural catastrophe risks and assistance and medical expenses) arising due to the availability of more recent data
- Providing a new methodology for deriving the stressed interest rates to be phased in over the next three years.
- Changes to criteria to determine when unrated debt and unlisted equity can be given the same treatment as rated debt and listed equity
It is also worth noting that EIOPA conducted detailed analysis and reviewed several other areas of interest, where no changes were proposed. This includes areas such as the calibration of the longevity and mortality stresses or the 6% rate for cost-of-capital used in the risk margin calculation.
It is anticipated that the European Commission will review EIOPA’s advice and will decide before the end of the year what changes will be made and when these will apply, with some degree of uncertainty surrounding some of the proposed changes, for example changes to the interest rate stresses.
To read more detailed summaries of the contents of the EIOPA consultation papers and final advice see these two briefing notes: Set 1, Set 2. Alternatively, you can read full details of the changes in the EIOPA advice to the European Commission here: Set 1, Set 2 (137 and 611 pages respectively).
Patrick Meghen is a Consulting Actuary with Milliman and a member of the SAI’s Enterprise Risk Management Committee
The views of this article do not necessarily reflect the views of the Society of Actuaries in Ireland, the Enterprise Risk Management Committee, or the author’s employer. The article was edited by the Communications Subgroup of the Enterprise Risk Management Committee.