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large) number of scenarios which are representative of all possible futures, as for example in a Monte Carlo simulation. 18 In contrast, analytical techniques (based on closed-form solutions) and deterministic techniques (based on a fixed set of assumptions) would generally be less complex and capture the uncertainty in the valuation in a more implicit way. Hence it can be expected that simplified methods or approximations would typically lead to an application of analytic or deterministic techniques. 19 3.22 In the same way, the principle of proportionality applies generally when a valuation methodology is chosen, allowing (re)insurance undertakings the flexibility to select a technique which is proportionate to the nature, scale and complexity of the underlying risks: Figure 1: Assessment of proportionality in the valuation of technical provisions Choice of method Range of valuation techniques : Deterministic, analytic or simulation Nature, scale and complexity of risks Hence where the following sub-sections elaborate further on how such a proportionality assessment could be carried out, these considerations and the related advice set out in this document is applicable to technical provision calculation in general rather than being specific to technical provisions calculation using “simplified methods” 3.23 Notwithstanding, following Article 85(h) it could be contemplated to specify individual simplified methods under Level 2 which (re)insurance undertakings may use under certain conditions, thus complementing the principles-based approach to the valuation of technical provisions. The feasibility of this option – with regard to individual components of the valuation such as best estimate, risk margin and reinsurance recoverables – is discussed in section 3.2 below. 3.1.2. Proportionality assessment – a three step process 3.24 Whereas the ultimate aim of calculating technical provisions is to assign an appropriate valuation to the underlying insurance obligations, it would 18 Cf. CEIOPS-DOC-21-09, former CP26. 19 Note that this does not imply, conversely, that analytical and/or deterministic techniques should typically be considered as simplified methods or approximations, or that such techniques can only be applied where the risk profile of the portfolio is sufficiently simple. Indeed, it may be appropriate for the insurer to apply analytical and/or deterministic techniques even in case of more complex risks provided that the insurer can demonstrate that the valuation technique and the underlying assumptions are realistic and reflect the uncertain nature of the cash-flows, cf. CEIOPS Consultation Paper No. 26. 12/112 © CEIOPS 2010
not be appropriate to reduce this valuation as only providing a single number. Instead, it is important that consideration is given to the different stages of the valuation process. These stages would generally include data, analysis, modelling an validation: 20 Figure 2: Stages of valuation process Validation Modelling 3.25 The assessment of proportionality of the selected valuation methodology to the nature, scale and complexity of the underlying risks is an integral part of this process. 21 3.26 It would be appropriate for such an assessment to include the following three steps: • Step 1: Assess nature, scale and complexity of underlying risks • Step 2: Check whether valuation methodology is proportionate to risks as assessed in step 1, having regard to the degree of model error resulting from its application • Step 3: Back test and validate the assessment carried out in steps 1 and 2 Below, these steps are discussed in more detail. 3.27 Rather than proposing a prescriptive rule, the outlined process is intended to set out general expectations on (re)insurance undertakings and supervisors as to how proportionality should be applied when selecting a valuation methodology. It is important that a flexible and principle-based framework is maintained to allow undertakings to follow an approach which is appropriate with regard to their specific circumstances and risk profile. Relation to undertaking’s internal governance and to supervisory review 3.28 We note that it is the responsibility of the (re)insurance undertaking to choose an adequate and reliable calculation of the technical provisions. 22 Whereas this responsibility ultimately lies with the administrative or 20 Cf. CEIOPS-CP-39-09, http://www.ceiops.eu/content/view/14/18/ 21 We note that the valuation of technical provisions should be proportionate to the nature, scale and complexity of the portfolio throughout all stages of this process. This is also relevant with regard to the selection, use and review of data underlying the valuation analysis which is covered in a separate consultation paper. 22 Cf. CEIOPS-DOC-21-09, former CP26. 13/112 Data Analysis © CEIOPS 2010
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• the loss absorbing capacity of
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OPRU,lob,>0 = an approximation of t
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Life insurance 3.323 With respect t
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3.330 With respect to health insura
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eing applicable for life insurance
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3.351 The structure of the health u
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∆rn = the absolute decrease of th
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the methods to be used for projecti
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CEIOPS’s draft advice on the valu
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3.392 In this context, the technica
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clearly the present difficulties of
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• Even if the undertaking’s rei
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information regarding the RBNS-clai
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CEIOPS’ Advice Simplifications re
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3.5. Quarterly calculations 3.444 A
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e to use the simplified calculation
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Annex A. Example to illustrate the
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Annex B. Some technical aspects reg
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is accurate because the payment of
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C.6. The individual elements sketch
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UMRU,lob,≥0 = max{∑ ≤ t Durmo
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E.5. The considered proxies based o
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E.14. The following criteria should
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“The gross-to-net proxy was used
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where Durmod denotes the modified d
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