In calculating the hypothetical SCR for the Risk Mitigation Effect for Counterparty Default Risk (where there is no reinsurance in place), does the NP adjustment factor need to be applied?

Background of the question

I have a query about your interpretation of how the Risk Mitigation Effect for Counterparty Default Risk should be calculated. In particular I am interested in the interpretation about how the NP Adjustment factor should be applied to Premium Risk when assuming there is no reinsurance in place. In calculating the Risk Mitigation Effect for Counterparty Default Risk we take the difference between the underwriting risk assuming no reinsurance is in place (hypothetical SCR) and the underwriting risk assuming reinsurance is in place. This is in line with Article 107 (2). In the calculation of the Premium & Reserve Risk the NP Adjustment factor is applied and reduces the volatility parameter for Motor Liability, Fire & Other Damage to Property and General Liability by 20%. This is outlined in Article 117 (3). The NP Adjustment factor allows for the effect of non-proportional reinsurance and therefore I would only expect it to be applied in the case where we allow for non-proportional reinsurance i.e. the net Premium & Reserve Risk case. I wouldn’t expect it to be applied in the hypothetical SCR case (where we assume there is no reinsurance in place). This approach makes intuitive sense as the NP adjustment factor is meant to reflect the impact of non-proportional reinsurance.

EIOPA answer

Notwithstanding any potential consequences resulting from the own risk and solvency assessment and the supervisory review process, for the calculation set out in Article 117(3) of the Delegated Regulation the application of the adjustment factor of 80 % for non-proportional reinsurance for segments 1,4 and 5 set out in Annex II does not depend on the existence/non-existence of non-proportional reinsurance.  

Consequently, the adjustment factor should be applied when calculating the capital requirement for underwriting risk and the hypothetical capital requirement for underwriting risk.