EU supervisors set capital add-ons for 21 insurers in 2018

Twenty-one European Union insurers were subject to capital add-ons for atypical risks in 2018. In aggregate, these add-ons contributed 32% to their total solvency capital requirement (SCR). 

Solvency II rules allow national supervisors to set additional capital requirements for insurers in exceptional circumstances, like when a firm’s risk profile is out-of-sync with the assumptions of the regulator-set standard formula or their own internal models.

As of end-2018, eight national supervisors had applied add-ons to their supervisees. Of these, 10 were non-life and eight life insurers, two were reinsurers and one was a composite insurer. The year prior, six national supervisors applied add-ons to 23 insurers.

 

Of the 21 firms with add-ons as of end-2018, 12 were from the UK, two from France, two from Norway, and one each from Cyprus, Finland, Ireland, Italy and Spain.

The add-ons varied widely in severity. One Norwegian non-life insurer’s add-on made up 80% of its overall SCR, while one Spanish life firm saw its add-on account for less than 1%. For all but five firms, however, the add-ons made up more than 10% of their SCRs.

Eighteen of the add-ons were applied to cover insurers’ deviations from the Solvency II standard formula. 

What is it?

The Solvency II ratio is a measure of an insurer’s ability to withstand financial and insurance risk-related shocks, and serves as the cornerstone of the European Union’s Solvency II regulatory regime.

The ratio is found by dividing an insurer’s own funds by its solvency capital requirement, which is calculated either by a firm’s internal model or regulator-set standardised formula. Own funds constitute excess assets over liabilities, and are divided into three tiers based on their loss absorbency. 

The SCR is calibrated to ensure a firm could withstand a one-in-200-year shock. Insurers must maintain a Solvency II ratio above 100% at all times.

Why it matters

Solvency II was intended to harmonise capital requirements for insurers across the EU. This is why individual add-ons can only be applied as a last resort, to cover idiosyncratic risks that cannot be addressed using other supervisory tools. 

Clearly, only a tiny fraction of EU insurers have issues that exceed the capability of the Solvency II framework to sort out – there are 2,819 (re)insurers under the regime after all. But for some of these problems are so glaring that they have necessitated massive capital uplifts while remedies are sought.

These firms have to hold excess capital, not in line with the risk-sensitive calculations of Solvency II, but with supervisor’s own assessments. As such, they are at a disadvantage to their peers free from such add-ons.

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