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

Life insurance
3.323 With respect to the lines of business within life insurance a somewhat
simpler approach was described in connection with the QIS4-exercise.
According to that approach the risk margin for a given line of business
within life insurance (CoCMlob) could be calculated according to the following
formula:
CoCMlob = (CoC/(1+r1))·Durmod,lob(0)·SCRRU,lob(0),
where the following variables and parameters all relate to the same line of
business:
SCRRU,lob(0) = the SCR as calculated at time t = 0 for the reference
undertaking’s portfolio of (re)insurance obligations;
Durmod,lob(0) = the modified duration of reference undertaking’s (re)insurance
obligations net of reinsurance at t = 0; and
CoC = the Cost-of-Capital rate.
This approach applies also to life-like non-life obligations (e.g. non-life
annuities).
3.324 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 composition and the proportions of the risks and sub-risks do not
change over the years (basic SCR),
• 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),
• the unavoidable market risk in relation to the net best estimate
remains the same over the years (market risk),
• the loss absorbing capacity of the technical provisions in relation to
the net best estimate remains the same over the years (adjustment).
3.325 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 3.324 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.
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© CEIOPS 2010