The European Insurance and Occupational Pensions Authority (EIOPA) has launched a consultation on a draft supervisory statement that seeks to promote supervisory convergence in relation to the assessment and use of risk-mitigation technique in insurance. EIOPA has concerns that divergent practices or supervisory arbitrage in this area could create an un-level playing field. The supervisory statement is designed to be applied alongside the Solvency II Directive (2009/138/EC), the Solvency II Delegated Regulation ((EU) 2015/35) and guidelines on systems of governance and basis risk.
While EIOPA recognises that market participants use risk mitigation techniques to optimise their capital position under Solvency II, new reinsurance structures can be complex and hard to assess. Where these structures provide a genuine reduction in risk, capital relief should be available. However, certain structures may be result in an imbalance between risk reduction and capital reduction.
The use of risk-mitigation techniques can have a significant impact on firms’ Solvency Capital Requirement (SCR). Insurers are expected to ensure that risk mitigation is commensurate with the relief in the SCR calculation when introducing new techniques. Apart from the eligibility criteria for recognising risk mitigation techniques for solvency purposes, insurance and reinsurance undertakings are expected to ensure that risk mitigation is commensurate with the relief in the SCR calculation when introducing new techniques.
The consultation identifies a number of areas where EIOPA has found a need for reinforced supervisory dialogue. The examples include proportional quota share with deep sliding scale commissions and high override commissions, mass lapse reinsurance, contract boundary reinsurance and bifurcated cover for long tail business.
The deadline for comments is 24 November 2020.