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Answer: The company can lower the capital charges assessed for determining the capital requirement by decreasing investment risk.
The correct answer is C. According to the Solvency II framework, which is a set of regulations governing the amount of capital insurance companies must hold to cover their risks, there are capital charges for investment risk, underwriting risk, and operational risk. If a company's regulatory capital falls below the solvency capital requirement (SCR) due to a surge in claims, such as from recent flooding, the company can respond by lowering any of these risks to reduce the related capital charges assessed for determining the capital requirement levels. This action would help the company to meet the SCR and avoid regulatory actions. Option A is incorrect because while an insurer whose capital falls below the minimum capital requirement may face restrictions on taking new business, the scenario described specifically pertains to the solvency capital requirement, which is a higher threshold. Option B is incorrect because the minimum capital requirement is lower than the SCR. Therefore, even if the company's capital falls below the SCR, it may still be above the minimum capital requirement, and thus, the company does not necessarily need to formulate a plan to bring capital above the minimum. Option D is incorrect because European insurers are regulated by a European Union regulator, not by state regulators, and there is no mention of a waiver being granted in the context of the solvency capital requirement breach.
Author: LeetQuiz Editorial Team
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The CFO and CRO of a French property-casualty insurance company are concerned about the potential impact of the recent European floods on their firm. They worry that a significant rise in property insurance claims due to the floods could result in their company's regulatory capital falling below the Solvency Capital Requirement (SCR) as specified by Solvency II regulations. What would be the consequence of this situation?
A
The company will be prevented from writing new property-casualty policies.
B
A plan to bring capital above the minimum capital requirement must be formulated.
C
The company can lower the capital charges assessed for determining the capital requirement by decreasing investment risk.
D
A waiver of capital requirements can be granted by the French insurance regulator.
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