The European Insurance and Occupational Pensions Authority (EIOPA) has recently published a report which provides public information for the first time on the extent of the use of capital add-ons by national competent authorities (the "Report").
The Solvency II Directive 2009/138/EC ("Solvency II") permits the use of a capital add-on above the calculated Solvency Capital Requirement ("SCR") as a supervisory tool in exceptional circumstances, as more particularly described in Recital 27 of the Solvency II Directive:
The imposition of a capital add-on is exceptional in the sense that it should be used only as a measure of last resort, when other supervisory measures are ineffective or inappropriate.
Overview of Report
The Report shows that, as at 31 December 2016, capital add-ons had been imposed on twenty individual insurance undertakings (ten non-life, seven life and three reinsurers) and four insurance groups. The UK had the most active regulatory authority accounting for fifteen of the individual undertakings and all of the groups involved. Two of the undertakings were French and two were Norwegian. One undertaking was a life company regulated in Ireland, which was subject to an add-on of 50% of its SCR (the fifth-largest of the twenty-four add-ons documented in the report). No undertakings or groups are named in the Report.
The Report also shows that, out of the four permitted grounds for applying a capital add-on under Solvency II, the vast majority have been applied because the undertakings and groups involved had a risk profile that deviated significantly from the assumptions underlying the Standard Formula SCR. In two cases, capital add-ons were applied because of risk profiles that deviated significantly from the assumptions underlying an approved Internal Model SCR calculation. It follows therefore that as at 31 December 2016, no capital add-ons were applied as a result of systems of governance deviating from Solvency II requirements; or risk profile deviations following application of matching adjustment, volatility adjustment or transitional measures.
The size of the capital add-ons
The size of the capital add-ons applied vary considerably. In terms of percentage of calculated SCR, capital add-ons range from 2% up to 85%, with the largest percentage applying to a Norwegian non-life insurer. In monetary terms, two of the add-ons exceed €1 billion; three add-ons lie between €100m and €700m; and the remaining add-ons are less than €100m.
While the Report brings interesting information into the public domain, it cannot be regarded as a complete representation of the EEA-wide situation. This is because twenty-two of the thirty-one EEA Member States have exercised the option within Solvency II, to temporarily limit the public disclosure of capital add-on information (such information will be publicly available from all Member States by the end of 2020).Therefore, the data in the Report relates only to nine EEA Member States, and five of those had applied no capital add-ons as at 31 December 2016.
To view a copy of the Report click here