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CEIOPS’ Advice A.- Role of proportionality in the valuation of technical provisions 3.88 The principle of proportionality is intended to support the consistent application of the principles-based solvency requirements to all (re)insurance undertakings. 3.89 The undertaking is responsible to determine the technical provisions by using an appropriate method selecting from the continuum of methods available, taking into account nature, scale and complexity of the risks. 3.90 In this context, “risks” 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. 3.91 The undertaking should be able to explain what methods are used and why the specific methods are selected. A.1.- Process of assessment of proportionality 3.92 In assessing whether a valuation method could be considered proportionate to the underlying risks, the (re)insurance undertaking should have regard to the following steps: Step 1: Assessment of nature, scale and complexity 3.93 The 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 the subsequent step and shall serve as a guide to identify where simplified methods are likely to be appropriate. Assessment of nature and complexity: 3.94 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. 45 3.95 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; 45 I.e. whether or not a risk is complex can be seen as a property of the risk which is part of its nature. 24/112 © CEIOPS 2010
• the level of certainty i.e. the extent to which future cash flows can be predicted; 46 • 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. 3.96 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). 3.97 When assessing the nature and complexity of the insured risks, additional information in relation to the circumstances of the particular portfolio should be taken into account. This could include: • the type of business from which the risks originate (e.g. direct business or reinsurance business); • the degree of correlation between different risk types, especially in the tail of the risk distribution; and • any risk mitigation instruments (such as reinsurance or derivatives) applied, and their impact on the underlying risk profile. 3.98 The undertaking should also seek to identify factors which would indicate the presence of more complex and/or less predictable risks. This would be the case, for example, where: 47 • the cash-flows are highly path dependent; or • there are significant non-linear inter-dependencies between several drivers of uncertainty; or • the cash-flows are materially affected by the potential future management actions; or • risks have a significant asymmetric impact on the value of the cash-flows, in particular if contracts include material embedded options and guarantees or if there are complex reinsurance contracts in place; or 46 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 the back testing of the applied simplified methods. 47 Cf. also para. 3.13 in CEIOPS-DOC-33-09. 48 We note that materiality is also important where the uncertainty (or degree of model error) in the measurement is concerned. This will be considered in the back testing. 49 Potentially comprising several homogeneous risk groups. 50 We note that such a level would only be relevant in the context of group solvency calculations carried out on the basis of the consolidated accounts. However, a group perspective would not be appropriate in the context of a solo assessment (cf. para. 3.56). As to the group specificities for the calculation of technical provisions, we refer to CEIOPS’ advice on group solvency assessment. 51 Of course, this would not include the uncertainty arising from a misspecification of the model itself. 25/112 © CEIOPS 2010
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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
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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
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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
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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
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Page 59 and 60: 3.285 As a consequence of this, the
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Page 63 and 64: • the loss absorbing capacity of
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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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