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

3.317 This simplification takes into account the maturity and the run-off pattern
of the obligations net of reinsurance. However, it is based on the following
simplified assumptions:
• the length of the contracts is one year at the most, i.e. there is no
premium and catastrophe risk after year 0 (non-life underwriting
risks),
• the average credit standing of reinsurers and SPVs remains the same
over the years (counterparty default risk),
• the modified duration is the same for obligations net and gross of
reinsurance (operational risk, counterparty default risk).
3.318 An undertaking that intends to use this simplification for one or several
lines of business (or homogenous risk groups), should consider to what
extend the assumptions referred to in para 3.317 are fulfilled for the
line(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 either adjust
the formula appropriately or be encouraged to use a more sophisticated
calculation or method.
3.319 For example, if there is a notable difference in the modified durations of
the obligations gross of reinsurance, net of reinsurance and reinsurers'
share of the obligations, then the formula should be adjusted such that the
modified duration used in OPRU,lob,>0 is based on obligations gross of
reinsurance and the modified duration used in CDRU,lob,>0 is based on
reinsurers’ share of the obligations.
3.320 If there arises premium risk or catastrophe risk after the first year then an
additional risk charge that represents this risk can be added to the
formula.
3.321 In the calculations sketched in para 3.315 and 3.316 it has been tacitly
assumed that with respect to the present (simplified) approach the
unavoidable market risk can be disregarded for the lines of business within
non-life insurance. If this assumption does not hold – and the unavoidable
market risk is believed to have a substantial impact on the SCRcalculations
– the method referred to should be adjusted by including an
element covering this risk, e.g. by using the approximation described in
para 3.360-3.364 below. As always the choice of simplified methods
should be advocated by the undertaking.
3.322 It should also be mentioned that the calculations sketched above have
disregarded the diversification effects between underwriting risk and
counterparty default risk. 80 In the present context this should be viewed as
a consequence of the trade-off between simplifications and accuracy that
in general is present.
80 In the Level 1 text the correlation coefficient between non-life underwriting risk and counterparty default risk
has been set to 0.5 in the context of calculating the current SCR by the standard formula.
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© CEIOPS 2010