Question ID: 1360
Regulation Reference: Guidelines on application of outwards reinsurance
Article: 133
Status: Final
Date of submission: 28 Mar 2018
Question
Could you please provide an example of how to follow the steps described in the Guideline 7 (paragraph 1.15, letters (a) to (d)).
Let's imagine the value n(i) (i being the relevant liability risk group) as defined in Article 133(3) of Delegated Regulation 2015/35 equals 2. Furthermore let's imagine that within this liability risk group i following two larges limits were identified (according to Guideline 7, par. 1.15, letter (a)):
First largest limit = 300 m CZK
Second largest = 200 m CZK
Additionaly, the value L(i) (as defined in Article 133(2) of Delegated Regulation 2015/35) amounts to 350 m CZK.
Could you please provide me with the explanation how to proceed and determine size of both losses in relation to liability risk group i?
EIOPA answer
We will try to explain using your example.
The calculated SCR before reinsurance is 350 L(i)
Ni = 2, the two largest possible claims are 300 and 200
We need to go through the whole exercise, not to calculate the gross SCR, that is relatively simple, the difficulty is the Net SCR, after reinsurance, so how to apply reinsurance to this example.
According to the DR and the Guideline (GL 7 / 1.15(b) ) on application of reinsurance you need to multiply the Ni-largest claims with 1.15
N1 = 200 * 1,15 = 230
N2 = 300 * 1,15 = 345
Next step is to deduct the two claims from the L(i)
350 minus 575 = -225 (this amount should be allocated, proportionally) to the limits of the Ni-claims.
-225 * 200/500 = -90
-225 * 300/500 = -135
Next step is to add these amounts to the 1.15-adjusted limits of the Ni-claims (such to ensure you end up with a limit total for the Ni claims that is equal to the SCR-gross)
230 minus 90 = 140
345 minus 135 = 210
The amount 140 and 210 should be used to calculate the mitigating effect of the reinsurance structure in place.
So the SCR Liability after reinsurance (net) = 350 minus impact of reinsurance calculated on the basis of two claims (140 and 210).