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

• 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.
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© CEIOPS 2010