CEIOPS' Advice for Level 2 Implementing ... - EIOPA - Europa

More documents

Recommendations

Info

management body of the undertaking, the actuarial function plays an important role in coordinating the valuation of technical provisions and in providing regular reports to the management body on its mandatory tasks performed. 23 3.29 An assessment of the proportionality of the chosen valuation methodology vis-à-vis the nature, scale and complexity of the underlying risks (as described in this sub-section) should be seen as part of this process, which is part of the (re)insurance undertakings’ internal system of governance. 3.30 Information on the methodology chosen by the undertaking (including an assessment of proportionality) would also be important for the supervisory review of the undertaking’s compliance with the valuation requirements. In this context, there should be an open dialogue between the undertaking and the supervisor about the adequacy of the methods and their potential weaknesses. 3.31 For the discussion between undertaking and supervisor, objective quantitative figures or metrics might be helpful. 24 However, these figures should be a natural result of the usual actuarial work and should not be applied as rigid thresholds but be seen as a basis for discussion. 3.1.2.1. Step 1: Assess nature, scale and complexity of risks 3.32 In this step, the (re)insurance undertaking should assess the nature, scale and complexity of the risks underlying the insurance obligations. This is intended to provide a basis for checking the appropriateness of specific valuation methods carried out in step two and shall serve as a guide to identify where simplified methods are likely to be appropriate. 3.33 In elaborating on this assessment, this sub-section analyses: Which risks? • the scope of risks to be considered; • the interpretation of the three indicators “nature”, “scale” and “complexity”; and • the combination of the three indicators in an overall assessment. 3.34 For an assessment of nature, scale and complexity it is important to clarify the scope of risks which shall be included in the analysis. We note that this scope will depend on the purpose and context of the assessment. 25 3.35 For the purpose of calculating technical provisions, the assessment should include all risks which materially affect (directly or indirectly) the amount or timing of cash flows required to settle the insurance and reinsurance obligations arising from the insurance contracts in the portfolio to be valued. Whereas this will generally include all insured risks, it may also include others such as inflation. 23 Cf. CEIOPS-DOC-29-09, Advice on the system of governance, section 3.6 24 Cf. to the discussion on potential metrics to assess the „scale“ criterion, below. 25 For example, in the context of the calculation of the SCR, all risks impacting the level of own funds of the insurer would need to be considered. 14/112 © CEIOPS 2010
3.36 Hence where an (re)insurance undertaking assess the nature, scale and complexity of the risks – and subsequently considers whether a specific valuation method is proportionate to these risks - it should only have regard to the risk characteristics of the cash-flows related to settling the insurance contracts but not to other risks to which the undertaking may be exposed. Following such an approach is expected to improve the comparability and consistency of such assessments across different undertakings. Nature and complexity 3.37 Nature and complexity of risks are closely related, and for the purposes of an assessment of proportionality could best be characterised together. Indeed, complexity could be seen as an integral part of the nature of risks, which is a broader concept. 26 3.38 In mathematical terms, the nature of the risks underlying the insurance contracts could be described by the probability distribution of the future cash flows arising from the contracts. This encompasses the following characteristics: • the degree of homogeneity of the risks; • the variety of different sub-risks or risk components of which the risk is comprised; • the way in which these sub-risks are interrelated with one another; • the level of certainty i.e. the extent to which future cash flows can be predicted; 27 • the nature of the occurrence or crystallisation of the risk in terms of frequency and severity; • the type of the development of claims payments over time; • the extent of potential policyholder loss, especially in the tail of the claims distribution. 3.39 The first three bullet points in the previous paragraph are in particular related to the complexity of risks generated by the contracts, which in general terms can be described as the quality of being intricate (i.e. of being “entwined” in such a way that it is difficult to separate them) and compounded (i.e. comprising a number of different sub-risks or characteristics). 3.40 For example, in non-life insurance travel insurance business typically has relatively stable and narrow ranges for expected future claims, so would tend to be rather predictable. In contrast, credit insurance business would often be “fat tailed”, i.e. there would be the risk of occasional large (outlier) losses occurring, leading to a higher degree of complexity and uncertainty of the risks. Another example in non-life insurance is catastrophe (re)insurance covering losses from hurricanes where there is 26 I.e. whether or not a risk is complex can be seen as a property of the risk which is part of its nature. 27 Note that this only refers to the randomness (volatility) of the future cash flows. Uncertainty which is related to the measurement of the risk (model error and parameter error) is not an intrinsic property of the risk, but dependent on the valuation methodology applied, and will be considered in step 2 of the proportionality assessment process. 15/112 © CEIOPS 2010
Page 1 and 2: CEIOPS e.V. - Westhafenplatz 1 - 60
Page 3 and 4: 1. Introduction 1.1. In its letter
Page 5 and 6: 2.2.2. The following recitals provi
Page 7 and 8: “[…]Where, in specific circumst
Page 9 and 10: 3.6 It is noted that in the recital
Page 11 and 12: have in place internal processes an
Page 13: not be appropriate to reduce this v
Page 17 and 18: Scale 3.46 Assigning a scale introd
Page 19 and 20: “scale” that will apply in all
Page 21 and 22: circumstances of its omission or mi
Page 23 and 24: 3.81 Under these circumstances, it
Page 25 and 26: • the level of certainty i.e. the
Page 27 and 28: 3.105 All in all, at least the foll
Page 29 and 30: the chosen valuation method. If it
Page 31 and 32: development, so that it is likely t
Page 33 and 34: • As part of supervisory guidance
Page 35 and 36: case the threshold is not exceeded.
Page 37 and 38: if the threshold is not exceeded th
Page 39 and 40: principles. In following paragraphs
Page 41 and 42: sign ( x) = −1 if x < 0 . 3.179 E
Page 43 and 44: 3.193 The time value of the investm
Page 45 and 46: distribution to policyholders as th
Page 47 and 48: • assume independency between ass
Page 49 and 50: company or new line of business, al
Page 51 and 52: easonable be supposed proportional
Page 53 and 54: incurred when the method is applied
Page 55 and 56: 3.261 The general rule for calculat
Page 57 and 58: • the loss absorbing capacity of
Page 59 and 60: 3.285 As a consequence of this, the
Page 61 and 62: SCR for the individual lines of bus
Page 63 and 64: • the loss absorbing capacity of
Page 65 and 66:
OPRU,lob,>0 = an approximation of t
Page 67 and 68:
Life insurance 3.323 With respect t
Page 69 and 70:
3.330 With respect to health insura
Page 71 and 72:
eing applicable for life insurance
Page 73 and 74:
3.351 The structure of the health u
Page 75 and 76:
∆rn = the absolute decrease of th
Page 77 and 78:
the methods to be used for projecti
Page 79 and 80:
CEIOPS’s draft advice on the valu
Page 81 and 82:
3.392 In this context, the technica
Page 83 and 84:
clearly the present difficulties of
Page 85 and 86:
• Even if the undertaking’s rei
Page 87 and 88:
information regarding the RBNS-clai
Page 89 and 90:
CEIOPS’ Advice Simplifications re
Page 91 and 92:
3.5. Quarterly calculations 3.444 A
Page 93 and 94:
e to use the simplified calculation
Page 95 and 96:
Annex A. Example to illustrate the
Page 97 and 98:
Annex B. Some technical aspects reg
Page 99 and 100:
is accurate because the payment of
Page 101 and 102:
C.6. The individual elements sketch
Page 103 and 104:
UMRU,lob,≥0 = max{∑ ≤ t Durmo
Page 105 and 106:
E.5. The considered proxies based o
Page 107 and 108:
E.14. The following criteria should
Page 109 and 110:
“The gross-to-net proxy was used
Page 111 and 112:
where Durmod denotes the modified d
show all

CEIOPS' Advice for Level 2 Implementing ... - EIOPA - Europa

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?