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

• the loss absorbing capacity of the technical provisions in relation to
the net best estimate is the same (adjustment).
3.305 An undertaking that intends to use this simplification for one or several
lines of business (or homogenous risk groups), should consider to what
extent the assumptions referred to in para 3.304 are fulfilled for the
lines(s) of business in question. If some or all of these assumptions do not
hold, the undertaking should carry out (at least) a qualitative assessment
of how material the deviation from the assumptions is. If the impact of the
deviation is not material compared to the risk margin as a whole, then the
simplification can be used. Otherwise the undertaking should be
encouraged to use a more sophisticated calculation or method.
3.306 The undertaking may also be able to apply the simplification in a piecewise
manner across the years. For instance, if a line of business can be split
into sub-lines having different maturities, then the whole run-off period of
the obligations could be divided into periods of consecutive years where a
proportional calculation method could be used.
3.307 When using the simplification sketched in para 3.301-3.304, some
considerations should be given also regarding the manner in which the
best estimate technical provisions net of reinsurance has been calculated.
According to Article 77(2) of the Level 1 text the best estimate technical
provisions shall at the outset be calculated gross of reinsurance, while
Article 81 states that the calculation of reinsurance recoverables etc.
should comply with Article 76 to 80.
3.308 However, section 3.1.6 discusses various simplifications that may be
applied when calculating the best estimate technical provisions net of
reinsurance. Accordingly, it should be assessed what impact the
simplifications being applied when stipulating the best estimate net of
reinsurance may have on the simplified methods for calculating the future
SCRs.
3.309 In this context it should be noted that even if the applied gross-to-net
techniques may lead to a reasonable figure for the best estimate net of
reinsurance (BENet,lob(t)) as compared to the best estimate gross of reinsurance
(BEGross,lob(t)) at time t = 0, this does not necessarily mean that
all future estimates of the best estimate net of reinsurance will be equally
reliable. And in such cases also the simplified method sketched above may
be biased.
3.310 Moreover, with respect to operational risk it should be noticed that the
capital charge for this risk at t = 0 is basically a function of the best
estimate technical provisions gross of reinsurance and earned premiums
gross of reinsurance, as well as annual expenses (for unit-linked business
only). As a consequence it should be assessed to what extent the
simplification based on the proportional method which assumes that the
SCRs for the operational risk develop pari passu with the best estimate
technical provisions net of reinsurance may introduce a bias in the risk
margin calculations.
63/112
© CEIOPS 2010