Solvency of Insurance Undertakings (Mueller-Report) - Eiopa

- 57 -ID i := a run-off factor of the market in line of business i provided by the NAIC covering thepast 10 years;PV Qi := a cash value factor provided by the NAIC representing the possible average discounting(with a 5% interest rate) of the provisions available in the market.Before the RBC component for the reserving risk is included in the overall formula certainadjustments have to be made. These are- a deduction for loss-sensitive contracts, i.e. for contracts concluded on the basis of lossfrequency the share of these contracts in the total provisions is determined. In accordancewith this share the value f Qi originally applicable to the RBC is reduced by 30% for directinsurance contracts and by 15% for reinsurance contracts to take account of the lower runoffrisk;- a second deduction for so-called medical malpractice (professional liability of medical doctorsand hospitals); an additional deduction of 20% is granted for policies which assume liabilityonly for losses which have been reported during the policy period (no liability after expiry ofthe contract);- a deduction for adequately spread portfolios calculated on the basis of the shares of theindividual lines of business. In the case of 15 lines with completely equal shares this factorcould be reduced to 72 % of its original level;- an addition for disproportional growth; a growth of more than 10% recorded for premiumswill result in an additional RBC of 45%.b) Underwriting riskThis risk is the risk that the periodical premiums are not adequate to settle future claims. Here, too,percentages are determined for each line of business which when they are multiplied by the writtennet premiums as basic values will result in the premium RBC. The weighting factors are calculatedusing the following formula:-CLILi(3) f = max ⎜0, [ ~ fP⎜0, 5 + 0,5⎟ PV + CE i − 1]P i⎛⎝i⎛⎝i⎞⎠P i⎞⎟⎠where~I ¦¨§ := a factor provided by the NAIC to balance in line of business i the highest loss rate of themarket of the past 10 years;CL i := the individual average loss rate of the company concerned in line of business i coveringthe past 10 years