Question ID: 2172
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: 165, 174, 188
Status: Under Review
Date of submission: 07 Aug 2020
Question
Under IFRS 16 there is a lease right-of-use asset and an associated liability for future rent payments on the Solvency II Balance Sheet. Response to EIOPA Q&A id1922states that the asset should be stressed under the Property Market risk submodule. Should the liability for future rent payments be separately stressed under interest rate and currency submodules? Should the liability be stressed to allow for changes in rent under any other Market Risk submodules?
Background of the question
In practice there appears to be mixed approaches across companies to allowing for this new asset and liability within the SCR's. While there is no change to the inherent risk before and after IFRS 16 came into force there are additional risks relating to the lease. In particular the lease asset and liability will not automatically offset at inception depending on the measurement models and allowance for expenses etc. They also may not be amortised/depreciated consistently, and also may not be revalued consistently together over time in different market scenarios. For example the asset may be impaired while the liability remains. It would be useful for EIOPA to clarify the treatment of the IFRS 16 lease liability within the SCR.
EIOPA answer
The lease right-of-use asset and the associated lease liability for future payments should each individually be included in the calculation of the capital requirement for the respective relevant sub-modules of the market risk modules.
As highlighted by Guideline 4 of the Guidelines on the treatment of market and counterparty risk exposures in the standard formula, undertakings should include all interest rate sensitive assets and liabilities in the calculation of the capital requirement for the interest rate risk sub-module. Therefore, if the lease liability is sensitive to interest rates, it should be included in the calculation of the capital requirement for interest rate risk.
Similarly, if the lease right-of-use asset or the lease liability are sensitive to currency risks, they should be included in the calculation of the capital requirement for currency risk.