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

distribution to policyholders as the difference or appropriate percentage
of the difference of the value of the assets currently held to back
insurance liabilities of these contracts and the technical provisions for
these contract without taking into account future discretionary bonuses.
3.207 The possible simplification for distribution of extra benefits to particular
line of business (to each policy) is to assume a constant distribution rate
of extra benefits.
3.2.2.7. Expenses and other charges
A) Expenses
3.208 In accordance with Article 77 of Level 1 text insurance and reinsurance
undertakings shall take into account among others all expenses that will
be incurred in servicing insurance and reinsurance obligations when
calculating technical provisions.
3.209 Under a stochastic simulation approach the expenses to be incurred
should explicitly be included in the simulation and the future expenses
inflation should be consistent with what is assumed in the interest rate
assumptions and other relevant factors influencing the expenses. In
many cases, both the future expenses and the expense loadings may be
sensitive to changes in inflation. However, one should not assume them
to be equal each other unless there is a proper evidence of such
matching. The reference for expense inflation should be built up from the
published prediction of an appropriate inflation-index.
3.210 The estimation of the best estimate assumptions for expenses should be
based on the analysis of the undertaking’s own experience. The aim of
the analysis is to obtain an understanding of current and historical
expenses that in addition to absolute amounts also includes an analysis
of for instance where expenses occur, factors that influence the
expenses and how the expenses are related to sizes and natures of
portfolios.
3.211 Since not all of the expenses that are charged from the premiums or
policyholder’s fund are relevant for the valuation of the expense liability
considerations has to be given to which expenses should be excluded.
Typically excluded are marketing and acquisition expenses, product
development expenses, parts of administration expenses, etc. It is also
of special importance to identify the expenses that are sensitive to
inflation (e.g. policy maintenance expenses).
3.212 An expense analysis is commonly based on a single financial year. In
order to appropriate take into account trends and to be able to ensure
the recent changes and trends in expense levels are reflected
appropriately, several financial years should be included in the analysis.
3.213 The approach to value the expense liability relies on the existence of the
model that projects the expenses into the future consistently with other
cash-flows. This may require rather sophisticated modelling that might
not be justified for all undertakings.
3.214 The possible simplification for expenses is to use an assumption built on
simple models using information from current and past expense loadings
to project future expense loadings, including inflation.
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