The Minimum Capital
Requirement (MCR)
from the Solvency ii
Association, the largest Association of Solvency ii Professionals
in the world
Final CEIOPS’ Advice for Level 2 Implementing Measures on Solvency
II:
Article 130,
Calculation of the
Minimum Capital
Requirement (MCR)
October 2009
1. Introduction
1.1. In its letter of 19 July 2007, the European Commission
requested CEIOPS to provide final, fully consulted advice on Level
2 implementing measures by October 2009 and recommended CEIOPS to
develop Level 3 guidance on certain areas to foster supervisory
convergence.
On 12 June
2009 the European Commission sent a letter with further guidance
regarding the Solvency II project, including the list of
implementing measures and timetable until implementation.
1.2. This Paper aims at providing advice with regard to the
calculation of the Minimum Capital Requirement (MCR) as requested
in Article 130 of the Solvency II Level 1 text1 (“Level 1 text”).
1.3.
The objective of this paper is to
specify the calculation of the MCR in a clear and detailed way,
including the following aspects:
• the calculation of the MCR, including the linear formula subject
to the SCR based cap and floor and the absolute floor defined in
the Level 1 text,
• the quarterly calculation of the MCR, required by Article 129(4)
of the Level 1 text, and
• the calculation of the notional life and non-life MCR required
for composite undertakings by Article 74(3) of the Level 1 text.
1.4. This
Paper does not include advice regarding the calibration of the MCR
linear formula factors. The calibration of these factors is
connected to the calibration of the parameters of the SCR standard
formula.
CEIOPS
will consult on the calibration proposal in its third set of
consultation papers on starting in November 2009.
2. Extract from Level 1 text
2.1. Article 130 – Implementing measures:
The Commission shall adopt implementing measures specifying the
calculation of the Minimum Capital Requirement, referred to in
Articles 128 and 129.
2.2. Recitals:
(69) When the amount of eligible basic own funds
falls below the Minimum Capital Requirement,
the authorisation of insurance and reinsurance undertakings should
be withdrawn, where those undertakings are unable to re-establish
the amount of eligible basic own funds at the level of the Minimum
Capital Requirement within a short period of time.
(70) The Minimum Capital Requirement should ensure a minimum level
below which the amount of financial resources should not fall.
It is
necessary that it is calculated in accordance with a simple
formula, which is subject to a defined floor and cap based on the
risk-based Solvency Capital Requirement in order to allow for an
escalating ladder of supervisory intervention and that it is based
on the data which can be audited.
2.3. Articles:
Article 128 – General provisions
Member States shall require that insurance and reinsurance
undertakings hold eligible basic own funds, to cover the Minimum
Capital Requirement.
Article 129 – Calculation of the Minimum
Capital Requirement
(1) The Minimum Capital Requirement shall be calculated in
accordance with the
following principles:
(a) it shall be calculated in a clear and simple manner, and in
such a way as to ensure that the calculation can be audited;
(b) it shall correspond to an amount of eligible basic own funds
below which policyholders and beneficiaries are exposed to an
unacceptable level of risk where insurance and reinsurance
undertakings were allowed to continue their operations;
(c) the linear function referred to in paragraph 2 used to
calculate the Minimum Capital Requirement shall be calibrated to
the Value-at-Risk of the basic own funds of an insurance or
reinsurance undertaking subject to a confidence level of 85% over
a one-year period;
(d) it shall have an absolute floor of:
(i) EUR 2 200 000 for non-life insurance undertakings, including
captive insurance undertakings, save in the case where all or
some of the risks included in one of the classes 10 to 15 listed
in Part A of Annex 1 are covered, in which case it shall be no
less than EUR 3 200 000,
(ii) EUR 3 200 000 for life insurance undertakings, including
captive insurance undertakings,
(iii) EUR 3 200 000 for reinsurance undertakings, except in the
case of captive reinsurance undertakings, in which case the
Minimum Capital Requirement shall be no less than EUR 1 000 000,
(iv) the sum of the amounts set out in points (i) and (ii) for
insurance undertakings as referred to in Article 73(5).
(2) Subject to paragraph 3 the Minimum Capital Requirement shall
be calculated as a linear function of a set or sub-set of the
following variables: the undertaking’s technical provisions,
written premiums, capital-at-risk, deferred tax and administrative
expenses.
The
variables used shall be measured net of reinsurance.
(3) Without prejudice to point (d) of paragraph 1, the Minimum
Capital Requirement shall neither fall below
25 % nor exceed 45 % of the undertaking’s Solvency Capital
Requirement, calculated in accordance with Chapter VI,
Section 4, Subsections 2 or 3, and including any capital add on
imposed in accordance with Article 37.
Member States shall allow their supervisory authorities, for a
period ending no later than 31 October 2014, to require an
insurance or reinsurance undertaking to apply the percentages
referred to in the first subparagraph exclusively to the
undertaking's Solvency Capital Requirement calculated in
accordance with Chapter VI, Section 4, Subsection 2
(4) Insurance and reinsurance undertakings shall calculate the
Minimum Capital Requirement at least quarterly and report the
results of that calculation to supervisory authorities.
Where either of the limits referred to in paragraph 3 determines
an undertaking’s Minimum Capital Requirement, the undertaking
shall provide to the supervisory authority information allowing a
proper understanding of the reasons therefore.
(5) The
Commission shall submit to the European Parliament and the
European Insurance and Occupational Pensions Committee established
by Commission Decision 2004/9/EC2, by 31 October 2017, a report on
Member States' rules and supervisory authorities' practices
adopted pursuant to paragraphs 1 to 4.
That report shall address, in particular, the use and level of the
cap and the floor set out in paragraph 3 as well as any problems
faced bysupervisory authorities and by undertakings in the
application of this Article.
2.4. Furthermore, Article 74 of the Level 1
text states the following:
Article 74 – Separation of life and non-life insurance management
[...] (2), on the basis of the separate accounts referred to in
paragraph 6.
Without prejudice to Articles 100 and 128, the insurance
undertakings referred to in Article 73(2) and (5) shall calculate:
(a) a notional life Minimum Capital Requirement with respect to
their life insurance or reinsurance activity, calculated as if the
undertaking concerned only pursued that activity, on the basis of
the separate accounts referred to in paragraph 6; and
(b) a
notional non-life Minimum Capital Requirement with respect to
their non-life insurance or reinsurance activity, calculated as if
the undertaking concerned only pursued that activity, on the basis
of the separate accounts referred to in paragraph 6
(3) As a minimum, the insurance undertakings referred to in
Article 72(2) and (5) shall cover the following by an equivalent
amount of eligible basic own fund items:
(a) the notional life Minimum Capital Requirement, in respect of
the life activity;
(b) the notional non-life Minimum Capital Requirement, in respect
of the non-life activity.
The minimum financial obligations referred to in the first
subparagraph in respect of the life insurance activity and the
non-life insurance activity shall not be borne by the other
activity. [...]
3. Advice
3.1 Explanatory text
3.1.1. Previous advice
3.1. Previously, CEIOPS provided advice on the MCR in its Answers
to the European Commission on the second wave of Calls for Advice
in the framework of the Solvency II project (CEIOPS-DOC-07/05,
October 2005) and in its further advice to the European Commission
on Pillar 1 issues (CEIOPS-DOC-08/07, March 2007).
3.2. More recently in its MCR pros and cons paper (Architecture of
the MCR: Pros and cons of different approaches – CEIOPS-DOC-22/07,
December 2007) CEIOPS analysed the advantages and disadvantages of
different proposed approaches to the design of the MCR in the
context of the European Commission’s framework Directive proposal.
While this
paper did not conclude on a final recommended MCR design for the
Solvency II framework, it recommended the testing of a linear
approach in QIS4.
3.3. The combined approach eventually tested in QIS4 did not
follow CEIOPS’ recommendation but reflected guidance by the
European Commission of February 2008.
Later,
this approach became the basis of the current MCR design included
in the Level 1 text.
3.1.2. The MCR in QIS4
3.4. The MCR approach tested in QIS4 combined the linear approach
recommended by CEIOPS with a cap of 50% and a floor of 20% of the
SCR.
Overall,
this approach was found workable in QIS4.
The
calculation of the MCR in QIS4 caused little or no practical
difficulty for most undertakings.
The
calibration of the linear component of the MCR in QIS4 was
regarded as satisfactory for non-life business, whereas it was
also concluded that the calibration of the linear formula for life
business would need improvement.
3.1.3. The overall structure of the MCR in the combined approach
3.5.
Article 127 of the Level 1 text sets out a
combined approach for calculating the MCR.
This
combined approach consists of
• a “linear formula”, i.e. a simple
factor-based combination of basic volume measures (a set or
sub-set of written premiums, technical provisions,
capital-at-risk, deferred taxes and administrative expenses),
combined with
• a cap of 45% and a floor of 25% of the SCR
(calculated using either the standard formula or an internal
model) to ensure a proper ladder of supervisory intervention.
The cap
and the floor together are hereafter referred to as
the “corridor”.
In the final step,
an absolute floor is
applied to the result of the above calculation.
The values
of the absolute floor for different types of undertakings are set
out in Article 129(1)d.
3.6.
The general rule is that if an
undertaking has an approved internal model, then the corridor used
for calculating its MCR is determined by the internal model SCR
result.
However,
for no longer than two years after the entry
into force of Solvency II, the supervisory authority has the power
to
require that the corridor is calculated from the SCR standard
formula.
3.7. The definition of the corridor includes capital add-ons
imposed on the undertaking’s SCR in accordance with Article 37.
3.8.
Although both the SCR and the MCR linear formula are calibrated to
a Value-at-Risk measure subject to a given confidence level, some
important structural differences between the two should be noted:
• the linear formula is a simple factor-based measure, while the
level of complexity of the SCR calculation is typically higher,
involving non-linear calculations and scenario analysis;
• in particular, as opposed to the SCR, the linear formula
includes no allowance for diversification effects,
• the linear formula is retrospective (e.g. previous year actual
volume measures) whereas the SCR is prospective (e.g. next year
projected volume measures).
3.1.4. Structure and segmentation of the linear formula
3.9. This section describes the structure of the linear formula as
recommended by CEIOPS, including the segmentation of the volume
measures used in the linear formula.
The linear
formula structure suggested below is based on the formula tested
in QIS4, however some changes to the
segmentation are suggested.
3.10. Following the separation of life and non-life insurance
management required in Article 74(1) of the Level 1 text, the MCR
linear formula is divided between life and non-life activities.
When the
word “activities” is used in this paper, the distinction between
“life activities” and “non-life activities” reflects the legal
classification for administrative authorisation.
3.11. In addition to the split reflecting the legal distinction
between life and nonlife activities, a second split is made
according to the technical nature of insurance obligations
(whether they are technically similar to life or nonlife).
The combination of these two splits defines the following four
components of the linear formula:
A. Non-life activities practised on a
non-life technical basis
B. Non-life activities technically similar to life
C. Life activities practised on a life technical basis
D. Life activities – supplementary obligations practised on a
non-life technical basis
For the purposes of determining the MCR, health obligations are
divided between the above life and non-life categories A to D
according to the nature of the contracts and their underwriting,
in line with the criteria set out below.
3.12. The volume measures referred to in the linear formula, in
particular technical provisions, written premiums and
capital-at-risk, should be allocated between the above four
components without double counting.
It is also
suggested that all volume measures in the
linear formula are subject to a floor of zero.
3.13. For the purpose of the calculation of the linear formula,
the technical provision net of reinsurance is the difference
between the gross technical provision and the reinsurance
recoverables (including the adjustment for counterparty default),
where the recoverables should not include recoverables from finite
reinsurance.
3.14. For the purpose of the calculation of the linear formula,
the premiums net of reinsurance are the premiums written less the
reinsurance premiums which correspond to these premiums.
The
reinsurance premiums should not include payments of reinsurance
premiums for finite reinsurance.
3.15. It appears necessary to exclude finite reinsurance from the
volume measures for the MCR in order to ensure that the linear MCR
is robust and produces a result in line with
the calibration objective of 85% VaR (Article 129(1c) of
the Level 1 text).
The linear
MCR formula is based on the assumption that the risk transfer by
reinsurance is proportionate to the reinsurance undertaking’s
share of premiums and technical provisions.
For finite
reinsurance the risk transfer is in many cases significantly lower
than the reinsurance undertaking’s share of premiums and technical
provisions.
If finite reinsurance was not excluded from the volume measure it
would be possible to reduce (in extreme cases even to zero) net
premiums and net technical provisions and thereby the linear MCR
without a significant reduction of risk.
The
exclusion of finite reinsurance is consistent with the treatment
for the factor-based non-life premium and reserve risk submodule
of the SCR standard formula (see CEIOPS’ Advice on Reinsurance
mitigation techniques).
3.16. For consistency with the volume measures used in the SCR
standard formula, it is suggested that the technical provision
volume measures in the linear formula are understood without the
risk margin (i.e. the best estimate technical provision should be
used).
3.17. The volume measures prescribed in Article 129(2) of the
Level 1 text do not allow to explicitly reflect in the linear
formula all risks that an undertaking is exposed to. Such risks as
e.g. market risk are reflected implicitly in the calibration of
the factors.
A. Non-life activities practised on a non-life technical basis
3.18. This component of the linear formula should be calculated as
the sum over all lines of business of the higher of the following
two results:
• a fixed percentage (αlob) of net technical provisions,
reflecting underwriting risk for long-term business;
• a fixed percentage (βlob) of net written premiums, reflecting
underwriting risk for short-term business.
3.19. It is suggested that the segmentation of lines of business
for the purposes of this linear formula component should be
consistent with the segmentation of non-life technical provisions,
and with the segmentation of non-life and health lines of business
used in the SCR standard formula (see CEIOPS’ Advice on
segmentation).
The
following segments are suggested:
A.1 Motor vehicle liability
A.2 Motor, other classes
A.3 Marine, aviation, transport
A.4 Fire and other property damage
A.5 Third party liability
A.6 Credit and suretyship
A.7 Legal expenses
A.8 Assistance
A.9 Miscellaneous non-life insurance
A.10 Non-proportional reinsurance – property
A.11 Non-proportional reinsurance – casualty
A.12 Non-proportional reinsurance – marine, aviation, transport
A.13 Accident
A.14 Sickness
A.15 Workers compensation
3.20. The segments A.1 to A.9 and A.13 to A.15 include both
insurance and proportional reinsurance accepted. Other reinsurance
accepted than proportional reinsurance should be allocated to the
segments A.10 to A.12.
B. Non-life activities technically similar to life
3.21. The calculation of this linear formula component should be
the same as the calculation for life activities, with the same
segmentation and the same factors as described below in component
C.
3.22. Examples of non-life activities that are similar in nature
to life insurance include long-term health insurance and non-life
annuities.
3.23. The rationale for change relative to the QIS4 treatment of
this component is that the QIS4 approach may not cover all types
of non-life insurance which are similar to life insurance.
Furthermore, arbitrage opportunities should be avoided: the MCR
should not depend on whether an activity is
done by a life or by a non-life insurer.
C. Life activities practised on a life technical basis
3.24. This component of the linear formula should be calculated as
the sum of the following results:
• a fixed percentage (αi) of net technical provisions, at an
appropriate granularity, to reflect long-term risks relating to
life
business; and
• a fixed
percentage of net capital-at-risk (α).
3.25. For the purposes of the MCR linear formula, CEIOPS suggests
a segmentation that is somewhat different from the life segments
suggested in CEIOPS Level 2 advice on the segmentation of
technical provisions.
The
changes mainly affect the second level of the segmentation.
Some
second level segments have been introduced to capture major
differences in risk profiles.
However,
because of the need for simplicity and comparability, the
granularity of second-level segments is kept at the minimum in the
suggested segmentation, which is described below:
3.26. Technical provisions – with-profit segment: Technical
provisions relating to contracts with profit participation clauses
are split between the following two sub-segments:
C.1.1 provisions for guaranteed benefits
C.1.2 provisions for future discretionary benefits
3.27. As the linear formula charge for the discretionary
sub-segment is negative, it is suggested to include a with-profit
floor (expressed as a percentage of the technical provisions for
guaranteed benefits) in the linear formula charge of the overall
with-profit segment to prevent it from falling too low.
3.28.
Technical provisions – unit-linked segment: Technical provisions
relating to contracts where the policyholder bears the investment
risk are split between the following sub-segments:
C.2.1 provisions for unit-linked contracts without guarantees
C.2.2 provisions for unit-linked contracts with guarantees
3.29. Technical provisions – without profit segment: Technical
provisions relating to contracts without profit participation
clauses are treated as a single segment:
C.3 provisions for contracts without profit
participation clauses
3.30.
Technical provisions – life reinsurance: Reinsurance accepted is
not treated as a separate segment in the linear formula but should
be apportioned according to the segmentation of direct business,
using the same factors as for direct business. The technical
provisions of reinsurance accepted of with-profit business should
be completely assigned to segment C.1.1.
3.31. Capital-at-risk is defined as the sum of financial strains
for each policy on immediate death or disability where it is
positive.
The
financial strain on immediate death or disability is the amount
currently payable on death or disability of the insured and the
present value of annuities payable on death or disability of the
insured less the net technical provisions (not including the risk
margin) and less the increase in reinsurance recoverables which is
directly caused by death or disability of the insured.
As a
starting point, the calculation should be based on a
policy-by-policy approach, but reasonable actuarial methods and
approximations may be used in accordance with See CEIOPS’Advice on
the Best Estimate.
3.32. CEIOPS considers that splitting capital-at-risk into further
segments (like e.g. in QIS4, depending on the outstanding term of
contract) does not have a significant potential benefit that would
justify the added complexity.
Therefore
it is suggested that capital-at-risk is treated as a single volume
measure in the linear formula with no granularity (C.4).
D. Life activities – supplementary obligations practised on a
non-life technical basis
3.33. The calculation of this linear formula component is the same
as the calculation for non-life activities practised on a non-life
technical basis, with the same segmentation and the same factors
(although some classes are unlikely as supplementary insurance, it
is not in the scope of this advice to decide which supplementary
classes should be possible).
Deferred taxes
3.34. According to Article 129 of the Level 1 text, deferred tax
liabilities can be used as a variable in the calculation of the
linear MCR.
However it
is also an option under the Level 1 text not to use this variable
in the linear formula.
The
objective of the inclusion of the deferred tax liability in the
calculation would be to capture the loss-absorbing capacity of
this balance sheet item: in case an undertaking incurs losses, the
deferred tax liabilities potentially decrease and thereby offset a
part of the losses.
The SCR
calculation allows for this effect by an adjustment to the Basic
SCR.
3.35. An allowance for deferred taxes in the linear MCR could
increase the risk sensitivity of the formula.
On the
other hand, there are strong arguments not to allow for deferred
taxes in the linear MCR as follows:
• When the MCR becomes relevant, i.e. when the own funds of an
undertaking are close to the MCR, it has usually incurred losses
in the past that made the deferred tax liabilities vanish.
Therefore,
deferred tax liabilities are likely only to have a significant
effect on the linear MCR in case the MCR itself is not relevant
for the undertaking. (Although some stakeholders questioned this
counterargument, feedback from QIS4 suggested that at least in
some countries this would be the case.)
• The loss-absorbing characteristics of deferred taxes depend on
the tax regulation of the state that the undertaking is situated
in.
It is
unclear whether the characteristics of different (probably
complex) tax regimes can be reflected in one risk factor.
Moreover,
there seems to be no database yet for an analysis of this
question.
The QIS4
results do not appear to be a reliable basis as the participants'
approach to deferred taxes differed significantly.
3.36. A number of stakeholders commented that an allowance for
deferred taxes should nonetheless be included in the linear
formula, arguing that not doing so would lead to inconsistency
between the SCR and the MCR, and that such an allowance would
improve the risk sensitivity of the MCR.
3.37. There is some merit in the argument
that including a deferred taxes allowance could make the linear
formula more risk sensitive, and more consistent with the SCR.
CEIOPS
however notes that these benefits of a deferred taxes allowance
would only appear if its calibration were based on
reliable data, if its quantitative impacts were properly
understood, and if it were intepreted and applied consistently
across jurisdictions and undertakings.
3.38. The results of QIS4 showed that the allowance for deferred
taxes has been one of the least understood elements of the pillar
1 framework.
CEIOPS is
concerned that pressing ahead with a deferred taxes allowance in
the linear formula under the present circumstances would only lead
to added complexity and possible lack of consistent
interpretation, which would have an adverse effect on legal
certainty of the MCR, for unclear benefits on the side of risk
sensitivity.
3.39. For these reasons, CEIOPS considers that the inclusion of
deferred tax liabilities in the MCR linear formula would not lead
to any significant regulatory benefit.
CEIOPS is
however open to revisit this question under possible future
revisions of Level 2, when more experience will have been
accumulated about the functioning of the Solvency II treatment of
deferred taxes.
3.1.5. Notional non-life and life MCR for composite insurance
undertakings
3.40. For composite insurance undertakings – i.e. the insurance
undertakings referred to in Article 73(2) and (5) of the Level 1
text – the notional non life and life MCR (NMCRNL and NMCRLife)
are capital requirements that must be covered by eligible basic
own funds with respect to the non-life and life activity.
3.41. While the Level 1 text explicitly requests separate notional
life and non-life MCR calculations for composite insurance
undertakings, this is not the case for the SCR.
This
raises the question of how to calculate the cap and the floor as a
percentage of the SCR for composites.
CEIOPS
considers that the corridor needs to be calculated separately for
non-life and life activities, and applied to the non-life and life
linear formula respectively.
Without applying the separate corridors, the supervisory ladder
properties of the overall combined approach cannot be retained.
In QIS4,
the separate corridors in respect of non-life and life were not
yet defined: their calculation is a new element in this
preparatory advice.
3.42. For determining the separate non-life and life corridors, in
turn, a notional non-life SCR and a notional life SCR (NSCRNL and
NSCRLife) need to be calculated.
It is
noted that the notional non-life and life SCR results do not
constitute a capital requirement on their own: they are regarded
as interim results of the notional non-life and life MCR
calculations.
3.43. While splitting the linear formula between non-life and life
components is self-explanatory, calculating notional non-life and
life SCR results is not straightforward.
3.44. CEIOPS recommends that, when the two notional SCRs are
calculated, the overall SCR of an undertaking is split in such a
way that NSCRNL + NSCRLife = SCR.
This means
that CEIOPS recognises the diversification benefits that arise
between the non-life and life activities of a composite insurance
undertaking.
3.45. More precisely, NSCRNL and NSCRLife are calculated directly
by splitting the overall SCR charge according to the ratio of the
non-life and life MCR linear formula results. The advantages of
this method are that:
• it is very simple to calculate;
• it avoids the burden of calculating the full SCR separately for
nonlife and life;
• it is directly applicable regardless of whether the corridor is
derived from the standard formula or from an internal model;
• given that the linear formula and the corridor are split
according to the same ratio, the sum of the notional non-life MCR
and the notional life MCR is always equal to the overall MCR.
3.46. Furthermore, the absolute floors should apply to the
notional non-life and life MCR as follows:
• For “old composites”, i.e. the insurance undertakings referred
to in Article 73(5), the notional non-life MCR should not be lower
than the non-life absolute floor defined in point (i) of Article
129(1)d, and the notional life MCR should not be lower than the
life absolute floor defined in point (ii) of Article 129(1)d of
the Level 1 text.
• For “new composites”, i.e the insurance undertakings referred to
in Article 73(2), the amount of the absolute floor is not defined
in the Level 1 text.
Since the
overwhelming majority of “new composites” are life undertakings
that have taken up accessory non-life
activities, CEIOPS considers that the economic reality of these
undertakings is best reflected if they are treated like life
insurance undertakings.
That is,
the overall absolute floor for a “new composite” undertaking
should be equal to the life absolute floor defined in point (ii)
of Article 129(1)d of the Level 1 text.
The same
absolute floor should apply to the notional life MCR of a “new
composite” undertaking, whereas a zero absolute floor should apply
to its notional non-life MCR.
3.47. If capital add-ons are taken into account in the definition
of the corridor, then an add-on imposed on a composite insurance
undertaking should also be allocated between non-life and life
activities for the purposes of calculating the MCR split between
life and non-life.
The split
should be declared by the supervisor imposing the add-on for that
particular undertaking.
3.1.6. Quarterly calculation of the corridor
Frequency of calculation
3.48. According to the Level 1 text Member States shall require
that insurance and reinsurance undertakings hold eligible basic
own-funds to cover the MCR, that the calculation of the MCR shall
be carried out at least quarterly and that the results should be
reported to supervisory authorities.
3.49. By way of the corridor, the calculation of the MCR is linked
to the calculation of the SCR. Regarding the frequency of the SCR
calculations, the Level 1 text in Article 102(1), requires that an
undertaking shall calculate its SCR at least once a year. In
addition, extraordinary SCR calculations are required whenever
there is a significant change in the risk profile.
3.50. Therefore, for the purpose of the MCR calculation, the SCR
shall be calculated on a quarterly basis.
3.51. Since the objective of the quarterly MCR calculation is to
ascertain whether or not the MCR has been breached, the own funds
eligible to cover the MCR should also be calculated in parallel on
a quarterly basis.
Simplification for the quarterly calculation of the SCR for the
purpose of MCR calculation
3.52. When the SCR is calculated using the standard formula, for
the quarterly calculation that is not at year end, undertakings
are allowed to use a simplification.
3.53. The
simplification consists of a
partial recalculation of the last reported SCR.
A partial recalculation means that only those (sub)modules of the
SCR whose main risk drivers have changed significantly since the
last calculation are recalculated.
3.54. A minority of CEIOPS’ members suggested that a simple carry
forward of the last reported SCR should be used as a
simplification.
3.55. However, no simplifications are allowed in the following
cases:
a.
(significant change in risk profile:) if there has been a
significant change in the risk profile of an undertaking since the
last reported SCR,
b. (proximity of intervention point:) if the undertaking falls
below the following capital thresholds, indicating that there is
an increased probability of MCR level intervention in the
forthcoming period:
i. the undertaking has breached the SCR,
ii. the undertaking has breached the MCR, or
iii. the undertaking does not hold eligible Tier 1 and Tier 2
basic own funds covering at least 150% of the MCR (i.e. proximity
of an MCR breach), without taking into account the absolute floor.
3.56. Under the principle of proportionality (see CEIOPS advice on
proportionality9), undertakings using undertaking-specific
parameters, a partial internal model or a full internal model,
shall apply a quarterly calculation that is sufficiently
sophisticated.
3.57. Regarding the thresholds in point b, to avoid circularity,
if the last full MCR/SCR calculation indicated that any of the
thresholds i.–iii. has been breached, then the simplification
should not be used.
If the
simplification has been used but it indicates a breach of any of
the thresholds i.–iii., then the undertaking shall not use the
simplification.
3.58. The reason for not taking into account the absolute floor in
iii. of point b. above is to avoid demanding extraordinary full
SCR recalculations in those cases where the capital requirements
are dominated by the absolute floor.
Architecture of the
Minimum Capital Requirement (MCR)
Minimum Capital Requirement (MCR) -
Pros and cons of different approaches
Consultation Paper No 55 - Draft CEIOPS’ Advice (Level 2):
Calculation of the MCR
CEIOPS’
Advice for Level 2 Implementing Measures on Solvency II:
Article 130 - Calibration of the
MCR (8 April 2010)
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