The supervisor will review and evaluate both the qualitative and quantitative requirements of the firm in relation to its operating environment and the risks it does or may face. The review will be carried out regularly, with the frequency and scope determined by the supervisor, probably on the basis of its own risk assessment of the firm. The review will consider:
- the system of governance;
- the technical provisions;
- the capital requirements;
- the investment rules;
- the quality and quantity of own funds;
- where the insurance or reinsurance undertaking uses a full or partial internal model, on-going compliance with the requirements for that model.
The aim of the review is to assess the ability of firms to withstand possible adverse events or future changes in economic conditions. Supervisors will put in place appropriate tools to enable them to monitor the financial condition of firms and to predict their ability to withstand possible adverse circumstances. The review of firms’ governance and risk management will also assess their ability to identify and react to adverse events and circumstances.
Following the review, the supervisor will have the power to require the firm to remedy any weaknesses or deficiencies. The supervisor can impose a capital add-on only in strictly defined, exceptional circumstances, in particular if the risk profile of the firm deviates significantly from the assumptions underlying the SCR (see below). While it is anticipated that a capital add-on will be a temporary measure, it could become permanent if the deviation is material and the development of the internal model is inefficient. The supervisor can also require the firm to develop a full or partial internal model if the standard formula does not accurately capture the risk profile.
