EIOPA · 2176
Solvency Capital Requirement (SCR)
- Regulation
- (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
- Article
- 140
- Topic
- Solvency Capital Requirement (SCR)
- Submitted
- 2020-08-07
- Answered
- 2021-10-26
Question
Where an contract is in place with a third party, expenses may be fixed or limited to inflationary increases over a period of time. Can you confirm that it is appropriate to allow for this limit on expenses when calculating the Expense SCR? For example, if the per policy expense for third party administration (TPA) is fixed for the term of the contract, then would the SCR expense stress of 10% expense and 1% expense inflation increase not apply to the projected TPA expenses?
Background
For contract fixing fees, or limiting increases in fees is a form of risk management, it may be deemed unduely onerous on insurers to restrict their allowance for this in the Expense scenario. If SCR expense stress calculations take account of such contractual fee limits, I expect it should only be allowed for within the time period of the contractual restriction on fee increases. Once the contractual restriction lapses, the expenses should be projected to increase by the 10% and any cumulative inflation in excess of the contractual increases (if any). There may be second order risks that the third party administrator may fail if they receive insufficient fees which may be beyond the scope of the Solvency II standard formula, and could be considered under Pillar II requirements.
Answer
Article 140 of the Delegated Regulation requires that the amount of expenses taken into account in the calculation of technical provisions is stressed by 10%. Therefore, all expenses incurred in servicing insurance and reinsurance obligations should be stressed by 10%.Article 140 of the Delegated Regulation also requires an increase of 1 percentage point to the expense inflation rate (expressed as a percentage) used for the calculation of technical provisions.Therefore, even if all expenses should be considered in this stress, where the undertaking is using granular assumptions on expenses, i.e. identifying some expenses during the projection where inflation is not relevant, the impact for these expenses should be nil since inflation does not affect them. However, if the undertaking is projecting all expenses together or applies inflation assumptions to all expenses for best estimate valuation purposes, then it would not be possible to accurately make this granular analysis and all expenses should be stressed.
This Q&A is published by European Insurance and Occupational Pensions Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.
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