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

Moreover a fifth level of this hierarchy could be added:
(5) approximate the risk margin by calculating it as a percentage of the
best estimate.
3.277 In this hierarchy the simplifications are in general getting simpler step by
step. In order to be able to use the simplifications given on each step
appropriate eligibility criteria, based on quality and materiality considerations,
have to be fulfilled.
3.278 It may also be argued that a simple and straightforward approach to be
followed when deciding which level of the hierarchy is most appropriate
could be structured along the following lines:
• Start from the bottom.
• If level no. n is appropriate, then use it.
• Otherwise, go upwards in the hierarchy to level no. n–1.
3.279 When using this approach, the aspired complexity on the calculations
should not go beyond what is necessary in order to capture the
undertaking’s risk profile. In any case, this approach should be applied
consistently with the framework set out when defining the proportionality
principle and the necessity of assessing risks properly.
3.280 However, it should be stressed that based on the lessons learned from the
QIS-exercises (“the state of the art” regarding risk margin calculations), it
seems likely that the majority of (small and medium sized) undertakings
will need more experience with the available methods for stipulating the
risk margin before they can make a “final” decision with respect to the
level of simplifications being most appropriate in their case.
3.281 It seems likely that the majority of undertakings will not be in a position to
apply the most advanced methods for calculating the risk margin as indicated
by level no. 1 of the hierarchy, cf. also the summary of QIS4
technical specifications and QIS4 results below.
3.282 A similar comment applies also to the simplifications on level no. 2, since
this level still requires a very large number of calculations of future SCRs.
3.283 However, even if an undertaking is allowed to use a simplified method (an
approximation) in its risk margin calculations under Solvency II, it should
in general be encouraged to move to more sophisticated methods as it
gathers more experience with respect to this kind of calculations.
3.284 It should also be noted that the distinction between the levels in the
hierarchy sketched above is not always clear-cut. This is e.g. the case for
the distinction between the simplifications on level no. 2 and level no. 3.
An example may be a proportional method (based on the development of
the best estimate technical provisions) applied for an individual module or
sub-module relevant for the calculation of future SCRs for the reference
undertaking. Such simplifications can be seen as belonging to either level
no. 2 or level no. 3.
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© CEIOPS 2010