Solvency of Insurance Undertakings (Mueller-Report) - Eiopa

- 69 -2) This ‘resilience test’ provision is additional to the prudent margins in the technical interestrate already required by Article 18.1B of the EU Third Life Insurance Directive, in respectof future interest rate risk.3) It has some similarities to the capital adequacy tests applied for banks and investmentinstitutions. However, unlike the traditional banking regime, it does also look closely at theinteraction between the assets and liabilities of the undertakings.4) In particular, this means that the life insurance undertaking can take account explicitly orimplicitly of the effect that changing values of assets may have on the future bonusespayable on with-profit policies.5) The parameters of the ‘resilience test’ can be chosen to take account of prevailinginvestment conditions and possible variations in those conditions over an appropriate timehorizon. The length of this time horizon can also take account of the period of time thatmight elapse before investments could be rearranged to match the expected cash flow onthe liabilities more closely.6. SummaryThe resilience test is applied to ensure that an insurance undertaking is adequately protected againstadverse variations in the capital value of the investments that are held as assets to cover technicalprovisions. It examines, for example, the scenario of the rise or fall in the yield on fixed-interestsecurities which could have consequential effect on the value placed on both assets and liabilities,and hence the solvency margin of the undertaking.An assessment is made of the revised value of assets and liabilities that would apply in eachpostulated scenario. If the assets were less than the liabilities in any of these scenarios, then anadditional ‘resilient test’ provision would have to be established at the balance sheet date in respectof the potential shortfall of assets to cover liabilities.