Question ID: 2081
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Technical Provisions (TPs)
Article: Article 42 of the Delegated Regulation; Article 81 of the SII Directive
Status: Revised
Date of submission: 03 Dec 2019
Question
Should the counterparty default adjustment for the valuation of recoverables from reinsurance contracts and special purpose vehicles, as referred to in Article 42 of the Regulation and Article 81 of the Directive, be based on the market consistent expected losses or on the best estimate expected losses?
EIOPA answer
The counterparty default adjustment for the valuation of recoverables from reinsurance contracts and special purpose vehicles, as referred to in Article 42 of the Regulation and Article 81 of the Directive, can be based both on the market consistent expected losses or on the best estimate expected losses.
However, where there is evidence that the credit quality of the reinsurer has evolved quickly, PD should be estimated using a methodology sensitive enough to capture this movement, which might require using market consistent expected losses.