In our blog post from last year, we summarised what to expect from the Solvency II regulatory framework review to be performed by the European Insurance and Occupational Pensions Authority (EIOPA). Now, EIOPA has released their final report containing their second set of advice regarding this review. 

Advice from EIOPA

The report is extensive and the final advice consists of, but is not limited to, possible areas of simplification, technical corrections and calibrations to be revised. Below, we will outline a small selection of interesting highlights from the report.

  • EIOPA suggests on revised calibrations within the calculations of e.g. non-life premium risk and reserve risk
  • The existing model for estimating interest rate risk in the Standard Formula underestimates risks in an environment with negative interest rates. Therefore, EIOPA proposes implementation of a relative shift-approach to the modelling of interest rate risk. According to tests performed by EIOPA this change would affect a life undertaking with a drop in solvency ratio of 14 percentage points.
  • A harmonisation of the treatment of own-funds items between Solvency II and the banking frameworks is proposed. For example, this proposal includes permission of partial write-down of restricted tier 1 capital instruments when the 75% SCR and MCR breaches have not been triggered
  • A number of simplifications are proposed, including
    • removal of the "disability that lasts 10 years" scenario to simplify the standard formula within mass-accident risk
    • simplified calculations with regards to man-made fire risk
    • simplified calculations of the counterparty default risk, regarding e.g. risk mitigation techniques, calculation of the loss-given default and calculations of type 1 exposures.