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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. 58/112 © CEIOPS 2010
3.285 As a consequence of this, the simplifications briefly described from para 3.293 onwards should not be interpreted as an exhaustive list of simplifying approaches being available for the risk margin calculations. However, it would be reasonable to view these simplifications as representative examples of the simplifications that may be used on the various levels of the hierarchy of simplifications. The QIS4 technical specifications and the QIS4 report 3.286 It was highlighted in the QIS4 Technical Specifications that in carrying out the risk margin calculations “[t]he main practical difficulty […] is deriving the SCR for future years for each segment”. 73 It should be stressed that this is the case even if on basis of the best estimate calculations reliable figures and parameters would be available as input to the calculation of future SCRs. 3.287 Acknowledging these practical difficulties, the QIS4 technical specifications proposed that “[t]he calculation of the different risk charges for the future SCRs can either be done by the direct application of the SCR formulae or through simplifications”. In line with this statement and in order to reduce the burden of calculation the QIS4 Technical Specifications introduced several layers of simplifications and proxies which could be applied in the calculation of the risk margin. 74 3.288 As a first layer the QIS4 technical specifications introduced several simplifications for calculating the partial SCR-charges for counterparty default risk for ceded reinsurance and the underwriting risk (for non-life, life and health insurance, respectively). On the other hand, simplifications were not introduced for the partial SCR-charge for operational risk, as the inputs needed for the calculation of this charge per line of business 75 are readily available from the calculation of the best estimate technical provisions. 3.289 With respect to the introduced simplifications for the risk margin, CEIOPS’ QIS4 Report stated that: 76 The majority, if not all, of undertakings (independently of their size) used simplifications to project the SCR for the purposes of calculating the risk margin. The risk margin proxy and helper tab for non-life were also extensively used by undertakings. The most common simplifications used were the duration simplification and the simplification based on best estimate ratios. 3.290 Moreover, with respect to the practicability of the proposed methodologies, the QIS4 report referred e.g. to the following feedback from participating undertakings and supervisors: 77 73 Cf. QIS4 Technical Specifications, TS.II.C.16 74 Cf. QIS4 Technical Specifications, sub-sections TS.II.C and TS.IV.N. 75 Earned gross premiums and gross technical provisions and – for unit linked products – expenses (gross of reinsurance). 76 Cf. QIS4 Report, sub-section 7.2.5, page 78 77 Cf. QIS4 Report, sub-section 7.3.5, page 108–110. 59/112 © CEIOPS 2010
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CEIOPS e.V. - Westhafenplatz 1 - 60
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1. Introduction 1.1. In its letter
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2.2.2. The following recitals provi
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Page 29 and 30: the chosen valuation method. If it
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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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