Question ID: 2136
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: 127(All and Annex III)
Status: Rejected
Date of submission: 20 Apr 2020
Question
There is a question as to whether paragraph 5 of Annex III is also applicable when calculating “DIVnpproperty” (as per Article 127) which directs it is “calculated in accordance with Annex III”. Given, the formula included in article 127 has clearly been constructed to allow for a diversification factor, and given this sub-module is only relevant for non-proportional property reinsurance, was it intended that paragraph 5 of Annex III would apply in this context and the diversification factor would be set to 1? If a diversification factor of 1 was required, the formula for article 127 could simply have been defined as: Lnpproperty = 2,5 * Pnpproperty And there would be no need to define a diversification factor “DIVnpproperty”. The instruction in Article 127 that the “DIVnpproperty” factor be “calculated in accordance with Annex III, but based on the premiums earned by the insurance and reinsurance undertaking in line of business 28 as set out in Annex I” could be implying that the premiums should in fact be used for the calculation rather than then subsequently reverting to a factor of 1 as prescribed by paragraph 5 of Annex III. Our logical assessment here is a) The main text of the delegated regulations was drafted to allow for diversification in this sub-module b) Using Annex III to define the method for calculating this factor created an unintended consequence of introducing an additional constraint on the value of the diversification factor to 1. This is not intended. Can you please confirm this interpretation is correct?
Background of the question
Article 127 of the Delegated Regulations sets out the standard formula capital calculation for non-proportional property reinsurance. This formula is as follows: Lnpproperty = 2,5 * ( 0,5 * DIVnpproperty + 0,5 ) · Pnpproperty Article 127 is drafted specifically for non-proportional property reinsurance, and the formula includes a diversification factor “DIVnpproperty”. A diversification factor can take a value between 0 (full diversification benefit) and 1 (no diversification benefit). The instructions included within Article 127 on how to calculate “DIVnpproperty” say it is "calculated in accordance with Annex III, but based on the premiums earned by the insurance and reinsurance undertaking in line of business 28 as set out in Annex I, other than non-proportional reinsurance obligations relating to insurance obligations included in lines of business 9 and 21 as set out in Annex I;" Annex III of the Delegated Regulations is entitled “FACTOR FOR GEOGRAPHICAL DIVERSIFICATION OF PREMIUM AND RESERVE RISK”. Annex III was drafted for the calculation of the non-life (and NSLT) premium and reserve SCR sub-modules. These modules cover all non-life (and NSLT) lines of business and not just specifically non-proportional property reinsurance. On reading through Annex III, the method for calculating the diversification factor for premium and reserve risk is set with reference to premiums and reserves for different lines of business and regions. Paragraph 5 of Annex III however additionally says: "5. Notwithstanding paragraph 1, the factor for geographical diversification shall be equal to 1 for segments 6, 10, 11 and 12 set out in Annex II and for segment 4 set out in Annex XIV." Segment 12 in Annex II is non-proportional property reinsurance. So for the premium and reserve risk module, a diversification factor of 1 is applicable for Non-proportional property reinsurance.
EIOPA answer
Update: Set as CAT 3, because the question had already been answered in Q&A1681.