Capital add-on

Article 37 of Directive 2009/138/EC gives the supervisor the right to add capital by decision, without waiting for a loss. It can do so in a few bounded cases: the risk profile departs significantly from the assumptions of the standard formula, without the undertaking moving to an internal model; the internal model departs from reality; governance falls short of the standard of Articles 41 to 49 to the point of preventing risks from being measured or managed; or the undertaking uses undertaking-specific parameters, a matching adjustment or an adjustment whose conditions no longer hold. The add-on is added to the SCR and lowers the solvency ratio, all the more so as it is published. The solvency report shows it on a separate line, and the amount of the add-on is a piece of information analysts know. It is not a penalty: it is reviewed at least once a year, and it goes away when the cause is dealt with, for instance after replacing an information system or fixing a failure of the risk management function. EIOPA publishes each year the number of add-ons across the European Economic Area, which stays low relative to the number of undertakings. The threat weighs more than the use: an insurer that knows the supervisor is looking at its underwriting model brings it up to standard before the decision.