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

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Table of contents 1. Introduction ....................................................................................... 3 2. Extract from Level 1 Text.................................................................... 4 2.1. Legal basis for implementing measure...................................................... 4 2.2. Other relevant Level 1 text ..................................................................... 4 3. Advice. Explanatory text ..................................................................... 8 3.1. Proportionality....................................................................................... 8 3.2. Best estimate .......................................................................................30 3.3. Risk margin..........................................................................................54 3.4. Reinsurance recoverables ......................................................................78 3.5. Quarterly calculations............................................................................91 Annex A. Example to illustrate the first method of simplification to calculate the best estimate of incurred but not reported claims provision...............................95 Annex B. Some technical aspects regarding the discount factors to be used in the calculation of the risk margin .................................................................97 Annex C. Further comments regarding simplifications for sub-modules under the life underwriting risk ................................................................................100 Annex D. Additional comments regarding the formula for unavoidable market risk......102 Annex E. Gross-to-net techniques.........................................................................104 Annex F. Derivation of the simplification formula for the counterparty default adjustment ........................................................................................................110 Annex G. Illustrative example of further level 3 guidance to foster harmonization and comparability of the counterparty default adjustment..............................112 2/112 © CEIOPS 2010
1. Introduction 1.1. In its letter of 19 July 2007, the European Commission requested CEIOPS to provide final, fully consulted advice on Level 2 implementing measures by October 2009 and recommended CEIOPS to develop Level 3 guidance on certain areas to foster supervisory convergence. On 12 June 2009 the European Commission sent a letter with further guidance regarding the Solvency II project, including the list of implementing measures and timetable until implementation. 1 1.2. This Paper aims at providing advice with regard to simplified methods and techniques to calculate technical provisions in order to ensure that actuarial and statistical methodologies are proportionate to the nature, scale and complexity of the risks, as requested in Article 86(h) of the Level 1 text. 2 1.3. This advice has some commonalities with certain features analyzed in CEIOPS-DOC-33-09 (former CP39) regarding actuarial and statistical methodologies to calculate the best estimate, and CEIOPS-DOC-37-09 (former CP 43_09) regarding data quality standards and approximations. Therefore CEIOPS recommends reading this advice having in mind the content of these two advices. 1.4. In view of the importance of the principle of proportionality with regard to the use of simplified methods, the paper first considers how an assessment of proportionality should be carried out in the context of a valuation of technical provisions. 1.5. In this respect, the paper builds on CEIOPS’ advice on the principle of proportionality published in May 2008 3 , expanding further on the process of a proportionality assessment in this context and on issues such as materiality and model error which are closely related to such an assessment. 1.6. It then elaborates on the role of simplified methods for the valuation of technical provisions under the Solvency II Framework, considering on whether a specification of such methods in Level 2 implementing measures would be desirable. 1.7. Finally, the Paper provides a sample of methods that may be used by undertakings for the estimation of the technical provisions, provided their appropriateness in the respective situations.. 1 See http://www.ceiops.eu/content/view/5/5/ 2 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), Official Journal, L 335, 17 December 2009, http://eur-lex.europa.eu/JOHtml.do?uri=OJ%3AL%3A2009%3A335%3ASOM%3AEN%3AHTML 3 Advice to the European Commission on the Principle of Proportionality in the Solvency II Framework Level 1 text Proposal (CEIOPS-DOC-24/08), http://www.ceiops.eu/media/docman/public_files/publications/submissionstotheec/AdviceProportionality.pdf 3/112 © CEIOPS 2010
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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 and 14: not be appropriate to reduce this v
Page 15 and 16: 3.36 Hence where an (re)insurance u
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
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incurred when the method is applied
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3.261 The general rule for calculat
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• the loss absorbing capacity of
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3.285 As a consequence of this, the
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SCR for the individual lines of bus
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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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