EIOPA-BoS-14/178 HR

EUROPEAN INSURANCE
AND OCCUPATIONAL PENSIONS AUTHORITY

Guidelines on undertaking-specific parameters

EIOPA – Westhafen Tower, Westhafenplatz 1 - 60327 Frankfurt – Germany - Tel. + 49 69-951119-20; Fax. + 49 69-951119-19; email: info@eiopa.europa.eu site: https://eiopa.europa.eu/

Introduction

1.1. In accordance with Article 16 of Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (hereinafter the “EIOPA Regulation”)1 EIOPA issues guidelines on undertaking-specific parameters.

1.2. The guidelines relate to Article 104(7), Articles 110, 111 and 230 and Article 248(2) of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (hereinafter Solvency II Directive),2 as well as to Articles 218, 219, 220, 338 and 356 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC (hereinafter Commission Delegated Regulation 2015/35).3

1.3. These guidelines are addressed to supervisory authorities under the Solvency II Directive.

1.4. When calculating the solvency capital requirement, undertakings may replace a subset of parameters (standard parameters) within the standard formula with undertaking-specific parameters where the standard formula does not provide an adequate representation of their underlying risks. This should help to foster good risk management within insurance and reinsurance undertakings.

1.5. For the calculation of undertaking-specific parameters, undertakings may choose one of a number of standardised methods set out in Annex XVII to Commission Delegated Regulation 2015/35. Any change to the standardised method to include undertaking-specific parameters means that the approval no longer applies, as set out in Article 110 of the Solvency II Directive. However, the modified method may be recognised as a partial internal model subject to approval by supervisory authorities as provided for in Articles 112 and 113 and Articles 120 to 126 of the Solvency II Directive.

1.6. These guidelines provide further specifications on the data quality criteria that should be taken into account during the process of calculating undertaking-specific parameters and group-specific parameters. Article 48(1)(i) of the Solvency II Directive sets out the role of the actuarial function and establishes how it should contribute to the effective implementation of the risk management system, in particular in the modelling of risks which is the basis for the calculation of the capital requirement. The role of the actuarial function is therefore very important in assessing the quality of the data used in the calculation of undertaking-specific parameters.

1.7. Undertakings may replace a subset of standard parameters only within the non-life underwriting risk module with specific parameters. This means that some input parameters for the calculation of those parameters will be similar (and in some cases may be exactly the same information) to the input parameters used for the calculation of technical

[1] OJ L 331, 15.12.2010, p. 48–83.

[2] OJ L 335, 17.12.2009, p. 1-155.

[3] OJ L 12, 17.01.2015, p. 1-797.

provisions. The actuarial function is expected to contribute to the assessment of those input parameters within the risk management system.

1.8. Only the approval process for undertaking-specific parameters at the individual level is harmonised through the application of technical standards. In order to improve the consistency of the use of group-specific parameters by groups in Member States, the aim of the guidelines is to harmonise the approval process of supervisory authorities by which group-specific parameters are approved.

1.9. Guidelines 1 to 9 apply both to individual undertakings and to the calculation of the group solvency capital requirement according to the consolidation method or according to a combination of methods based on consolidated data calculated in accordance with Article 335(1)(a), (b) and (c) of Commission Delegated Regulation 2015/35.

1.10. Terms not defined in these guidelines shall have the meaning defined in the legal acts referred to in the introduction.

1.11. The guidelines apply from 1 April 2015.

Guideline 1 – Role of expert judgement

1.12. For the purpose of determining undertaking-specific parameters, undertakings should be allowed to use assumptions based on expert judgement only for the purpose of adjusting existing data, and not as a substitute for missing data.

1.13. Undertakings should use assumptions based on expert judgement only if the adjusted data resulting from this meet the criteria set out in Article 219 of Commission Delegated Regulation 2015/35 to a greater extent and should, at the request of supervisory authorities, demonstrate such compliance.

Guideline 2 – Materiality

1.14. Undertakings should ensure that the data quality criteria set out in Article 219 of Commission Delegated Regulation 2015/35 are met irrespective of the materiality of the segment for which the undertaking-specific parameters are used.

Guideline 3 – Adjustments to increase the level of appropriateness of data

1.15. Subject to Guideline 1, when determining undertaking-specific parameters, undertakings should adjust historical data as necessary to remove the effects of risks that are not relevant over a period of at least the next twelve months.

Guideline 4 – Adjustment of historical data to remove the effect of catastrophe events and to reflect current reinsurance contracts

1.16. Undertakings should, where necessary, establish internal policies and procedures

(a) to identify losses from catastrophe events;

(b) to adjust data in accordance with Annex XVII, point B, indent (2)(e) of Commission Delegated Regulation 2015/35;

(c) to adjust data in accordance with Annex XVII, point B, indent (2)(d), point C, indent (2)(c) and point D, indent (2)(f) of Commission Delegated Regulation 2015/35.

1.17. Undertakings should ensure that changes in retained payments in relation to non-proportional reinsurance are appropriately considered where they have an impact on the variability of the reserve risk.

Guideline 5 – Calculation of the non-proportional reinsurance adjustment within the premium risk

1.18. When undertakings determine the adjustment factor for the effect of non-proportional reinsurance as provided for in Article 218(1)(a)(iii) and (1)(c)(iii) of Commission Delegated Regulation 2015/35, they should ensure that both the gross and the net data with non-proportional reinsurance for the next twelve months comply with Guidelines 1 to 4.

Guideline 6 – Ongoing compliance

1.19. Undertakings should monitor compliance with the requirements for the use of undertaking-specific parameters within their own risk and solvency assessment.

1.20. As part of the supervisory report on the own risk and solvency assessment, undertakings should inform supervisory authorities whether there have been any significant changes to the information included in the application and should provide appropriate details on any significant changes.

1.21. Where the use of new data leads to significant changes to those included in the application, undertakings should, at the request of the supervisory authorities, provide all details of the calculation of the undertaking-specific parameters carried out with the new data set, as well as all necessary information supporting the appropriateness of that calculation.

1.22. If undertakings become aware that another standardised method provides a more accurate result for the purpose of meeting the calibration requirements of Article 101(3) of the Solvency II Directive, they should submit a new application for the use of that alternative standardised method.

Guideline 7 – Remedying non-compliance

1.23. In the event of non-compliance with the requirements for the use of undertaking-specific parameters, the supervisory authority should decide whether the undertaking can remedy that non-compliance within three months.

1.24. When taking that decision, the supervisory authority should take into account the degree and scope of the non-compliance, as well as the time needed to remedy it and the actions the undertaking intends to take in order to comply with the requirements for the use of undertaking-specific parameters.

1.25. Where the non-compliance cannot be remedied within three months, the supervisory authority should withdraw the approval for the use of undertaking-specific parameters in accordance with [Article 8 of the EIOPA draft implementing technical standards with regard to the supervisory approval processes for the use of undertaking-specific parameters]4 .

1.26. After the withdrawal of the approval, undertakings should calculate the required solvency capital with standard parameters and submit a new application if they intend to reapply for the use of undertaking-specific parameters.

Guideline 8 – Supervisory authority's requirement to use undertaking-specific parameters

1.27. Where a supervisory authority requires an undertaking to use undertaking-specific parameters in accordance with Article 110 of the Solvency II Directive, the supervisory authority should indicate to the undertaking which parameters, as set out in Article 218 of Commission Delegated Regulation 2015/35, must be replaced. After liaising with that undertaking, the supervisory authority should set a reasonable deadline for submitting the application.

1.28. Upon receipt of the requirement from the supervisory authority, the undertaking should analyse the available standardised methods.

Guideline 9 – Significant deviation

1.29. When considering whether there is a significant deviation as referred to in Article 110 of the Solvency II Directive, supervisory authorities should take into account the following important factors:

a) the results of the supervisory review process;

b) the nature, type and size of the deviation;

c) the likelihood and severity of any adverse effect on policyholders and beneficiaries;

d) the level of sensitivity of the assumptions to which the deviation relates;

e) the expected duration and variability of the deviation during the period of the deviation.

1.30. Supervisory authorities should carry out that analysis at the level of each segment for which the use of undertaking-specific parameters is possible.

Guideline 10 – Application for approval to use group-specific parameters

1.31. The application for approval to use group-specific parameters should include at least the information required under [Article 1(2), (4) and (5) of the EIOPA draft implementing technical standards with regard to the supervisory approval processes for the use of undertaking-specific parameters], with each reference to 'undertaking-specific parameters' being construed as a reference to 'group-specific parameters'.

[4] https://eiopa.europa.eu/publications/technical-standards/draft-implementing-technical-standards-on-the-supervisory-approval-processes-for-solvency-ii/index.html

1.32. At the reasoned request of the group supervisor, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should, where necessary, provide additional information for the assessment of the application.

Guideline 11 – Scope of the group using group-specific parameters

1.33. When determining the group solvency capital requirement on the basis of the first method or on the basis of a combination of the first and second methods, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should use group-specific parameters only for the consolidated data calculated in accordance with Article 335(1)(a), (b) and (c) of Commission Delegated Regulation 2015/35.

1.34. When determining the group solvency capital requirement on the basis of the second method, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should not use group-specific parameters.

1.35. If a company within the scope of the group solvency calculation using the alternative method uses undertaking-specific parameters, then those undertaking-specific parameters should be included in the calculation of the group solvency capital requirement only for those companies that have received approval from the supervisory authorities.

Guideline 12 – Requirements for data quality at group level

1.36. The participating insurance or reinsurance undertaking, insurance holding company or mixed financial holding company should be able to demonstrate to the group supervisor that the nature of the business of the group and its risk profile are sufficiently similar to those of the individual companies providing data to ensure consistency between the statistical assumptions underlying the data used at the level of the individual entity and at the level of the group.

Guideline 13 - Consultation procedure within the college of supervisors

1.37. In the consultation procedure laid down in Article 356(3) of Commission Delegated Regulation 2015/35, the group supervisor and other supervisory authorities within the college of supervisors should, among other things, analyse and discuss the representativeness of the data at group level and the appropriateness of using the standardised method.

Guideline 14 - Information for the college of supervisors

1.38. In the event that an individual company included in the scope of the group solvency calculation submits an application for approval to use undertaking-specific parameters, the supervisory authority receiving such an application should inform the college of supervisors of the receipt and of its decision. If the application is rejected, the college of supervisors should be informed of the main reasons for such a decision.

1.39. Before adopting a final decision on the application to use group-specific parameters, the group supervisor should take into account the decisions of the supervisory authorities on the applications of the individual companies included in the scope of the group solvency calculation to use undertaking-specific parameters.

Compliance and reporting rules

1.40. This document contains guidelines issued under Article 16 of the EIOPA Regulation. In accordance with Article 16(3) of the EIOPA Regulation, competent authorities and financial institutions make every effort to comply with the guidelines and recommendations.

1.41. Competent authorities that comply or intend to comply with these guidelines must incorporate them into their regulatory or supervisory framework in an appropriate manner.

1.42. Competent authorities confirm to EIOPA whether they comply or intend to comply with these guidelines, with the reasons for non-compliance, within two months of the issuance of the translated versions.

1.43. In the event that competent authorities do not submit a response within the stated deadline, they will be considered as not complying with the reporting and will be reported as such.

Final provision on reviews

1.44. These guidelines are subject to review by EIOPA.