Question ID: 1848
Regulation Reference: (EU) No 2009/138 - Solvency II Directive (Insurance and Reinsurance)
Topic: Solvency Capital Requirement (SCR)
Article: 38 and 114
Status: Final
Date of submission: 05 Feb 2019
Question
We have a question related to the calculation of the SCR for the “reference undertaking” in relation to non-life insurance, in particular, the appropriate premium volume measures to include in the premium and reserve risk sub-module of the standard formula.
Given that:
• As per Article 38 of the Delegated Regulation, the reference undertaking is assumed to:
- “not have any insurance or reinsurance obligations or own funds before the transfer takes place”; and
- after the transfer, the reference undertaking does not assume any new insurance or reinsurance obligations; and
• As per Article 116(3), the standard formula volume measure for premium risk takes, among other items, the larger of:
o premiums to be earned in the next 12 months, Ps; and
o the premiums earned during the last 12 months, P(last,s)
Are we correct in assuming that, for the purposes of the reference undertaking SCR calculation:
• the premiums earned during the last 12 months will be zero as the reference undertaking did not have any prior earnings; and
• the premiums to be earned in the next 12 months will be equal to the unearned premiums of the original undertaking at the valuation date
Background of the question
Articles 38 and 116 of the Delegated Regulation
Risk Margin
EIOPA answer
Please confer also answer to question no. 1925. The risk margin is based on the assumption that the liabilities are transferred to another undertaking. To ensure, that the risk margin only covers the risks that are strictly related to the liabilities transferred the delegated regulation includes provisions on a hypothetical reference undertaking in Article 38. Article 38 Para 1 (i) of the Delegate Regulation explicitly asks the underwriting risks to be covered by the risk margin. This includes premium risk.
This, however, necessitates to also reflect the premiums of the business in the premium risk calculation for the purpose of the risk margin where this is calculated by the standard formula. This because the premium volume is meant to reflect the volume of the liabilities that is necessary to determine the premium risk (the premium risk in the standard formula is a formula based calculation).
Therefore, the premiums should not simply be assumed to be zero for the purpose of the risk margin. Instead, the premiums earned by the original undertaking and relating to the business transferred should be considered in the determination of the premium risk for the purpose of the risk margin.