Question ID: 1862
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Reinsurance
Article: 107
Status: Final
Date of submission: 17 Aug 2021
Question
Unfortunately the draft amendment of Delegated Regulation 2015/35 has not clarified to me how to calculate the hypothetical capital requirement for the purposes of calculation of risk mitigation effect.
Article 107 states that the risk mitigating effect on underwriting risk is the difference between the following capital requirements:
(a) the hypothetical capital requirement for underwriting risk of the insurance or reinsurance undertaking if none of the reinsurance arrangements and securitisations exist;
(b) the capital requirements for underwriting risk of the insurance or reinsurance undertaking.
Could you please clarify how (I am primarily concerned whether to apply correlations or not, and whether to take into account also sub-modules not affected by reinsurance arrangements) to calculate “hypothetical capital requirement for underwriting risk” in the following cases (by “aggregate” I mean aggregation using correlations set up by standard formula):
i) Reinsurance arrangements affect only one sub-module within non-life UW risk, e.g. natural catastrophe risk. -> Am I supposed to calculate capital requirement (CR) for nat cat risk without taking into account the reinsurance arrangements and then aggregate it with the rest of the sub-modules even though they are not affected by reinsurance arrangement (man-made, other cat,..) thus calculate CR for non-life catastrophe risk. Then aggregate CR for CAT, CR for premium and reserve risk and CR for lapse risk and obtain CR for non-life UW risk? Should I aggregate it further with life and health UW risks or not?
ii) Reinsurance arrangements affect various submodules within life, non-life and health UW risks. -> The question is same as in the point (i). Should I calculate CR for UW risks (life, heath and non-life UW risk) and then aggregate them or use simple sum?
EIOPA answer
We note that Article 107 of Commission Delegated Regulation (EU) 2015/35 (Delegated Regulation) is a simplification - which is intended to be used where the full calculation is disproportionate. In the instance that only one sub-module is impacted by reinsurance, as per case (i), it seems likely to be proportionate to do the calculation set out in Article 196.
We further note that Article 196 is similar to Article 107 in referring to "underwriting risk" rather than one of the UW risk modules or submodules.
This response is therefore intended to cover both Articles 107 and 196 of the Delegated Regulation.
We consider that the absence of any direction to calculate the risk-mitigating effect at a lower level than "underwriting risk", means that an undertaking would be most compliant if they were to calculate the risk-mitigating effect at the level of every UW risk sub-module, then aggregated those sub-modules to give UW risk modules, and then aggregating those UW risk modules to give an overall capital amount for "underwriting risk".
This response is indifferent to whether the situation is as per case (i) or case (ii).