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

case the threshold is not exceeded. However, such an approach could
lead to a number of problems:
• relying on a threshold based on the scale of risks may not be
sufficient. It is important to also consider the nature and complexity
of the risks to which an undertaking is exposed;
• ultimately, it is not the scale of risk which is the deciding factor in a
proportionality assessment, but whether the chosen method is
proportionate to the risks and whether the degree of model error in
the calculation is material. This aspect may not be sufficiently
addressed in this type of threshold.
3.153 Moreover, where thresholds based on the scale of the risk are
introduced, they would often rely on simple volume measures (such as
the amount of premiums or technical provisions) related to the size of
the undertaking. This may be problematic since:
• Size in itself may not be an adequate approximation to the risk to
which an undertaking is exposed. In general, neither the premiums
nor the technical provisions can be considered as a sufficient
benchmark to specify a threshold below which the undertaking would
no longer be vulnerable to the risk.
• undertakings within the scope of the Solvency II Level 1 text should
not be classified differently on the basis of size. Indeed, policyholders
should not expect a lower degree of protection simply because their
cover is provided by a smaller undertaking.
3.154 Therefore, it would not seem appropriate to introduce thresholds based
on the scale of the risks (e.g. with respect to the size of the undertaking
or the size of the risks) to determine the allowance for a simplified
approach for the calculation of technical provisions within implementing
measures on Level 2.
3.2.1.6. Thresholds relating to the degree of model error
3.155 When considering model error in context of Step 2 of the proportionality
assessment process, it was observed that in practice an assessment of
model error may be rather demanding on undertakings, leading to
additional implementation costs.
3.156 In view of this, it could be contemplated to quantify the model error of
simplified valuation methods centrally (by CEIOPS) before Solvency II is
introduced. Following such an approach, specific thresholds (externally
specified on Level 2 or 3) for the use of individual simplified valuation
methods could be set which would reflect the assessed degree of model
error. 61 As long as these thresholds would not be exceeded, it would be
considered that the degree of model error resulting from an application
of the method would not be material, and hence it would not be
necessary for the undertaking to calculate or quantify model errors.
3.157 However, in view of the ultimate aim of Solvency II to improve risk
assessment and risk management processes across (re)insurance
undertakings, it is believed that a holistic approach – which integrates an
assessment of model error into the valuation process as part of actuarial
61 These would be Type 4 thresholds in the classification introduced above.
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© CEIOPS 2010