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European Insurance and Occupational Pensions Authority

2064

Q&A

Question ID: 2064

Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)

Topic: Solvency Capital Requirement (SCR)

Article: 209, 210

Status: Final

Date of submission: 15 Nov 2019

Question

Would an option-based rolling hedging strategy for Type 1 equity exposures, which envisages contractual replacements with similar arrangements every three months, allow for a full recognition of the risk mitigating effect within the Solvency Capital Requirement, pursuant to Article 209 of Delegated Regulation (EU) 2015/35?

EIOPA answer

The answer to this question is provided by the European Commission.

Where a risk-mitigation technique will be in force for a period of 3 months and the insurer intends to replace that technique at the time of its expiry with a “similar” arrangement (following a three months strategy of hedging based on financial options), the risk-mitigating effect expected over 12 months can be taken into account in the calculation of the Solvency Capital Requirement, provided that the criteria set out in Article 209(3) of the Delegated Regulation (EU) 2015/35 are met.

In addition, pursuant to Article 210(2) of Delegated Regulation (EU) 2015/35, the contractual arrangements governing a risk mitigation technique must not result in material basis risk or in the creation of new risks, unless these are reflected in the calculation of the Solvency Capital Requirement.

However, when the rolling strategy provides that the strike is fixed with regard to the spot price at the replacement date, the potential loss over the 12 months can be higher than the initial loss which would be reflected in the Solvency Capital Requirement with the full recognition of the risk mitigating effect.

Therefore, this type of strategy cannot allow for a full recognition of the risk mitigating effect within the Solvency Capital Requirement expected over 12 months.

 

Disclaimer provided by the European Commission:

The answers clarify provisions already contained in the applicable legislation. They do not extend in any way the rights and obligations deriving from such legislation nor do they introduce any additional requirements for the concerned operators and competent authorities. The answers are merely intended to assist natural or legal persons, including competent authorities and Union institutions and bodies, in clarifying the application or implementation of the relevant legal provisions. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law. The views expressed in the internal Commission Decision cannot prejudge the position that the European Commission might take before the Union and national courts.