Answers to the European Commission on the ... - Eiopa - Europa

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Explana<strong>to</strong>ry text Solvency II objectives 7.1 Valuation of an insurer’s technical liabilities with a view <strong>to</strong> achieving an increased level of harmonisation across <strong>the</strong> EU, <strong>to</strong>ge<strong>the</strong>r with more explicit definitions of margins for prudence, can be considered as one of <strong>the</strong> essential elements of Solvency II: • all supervisory regimes currently recognise <strong>the</strong> necessity of a standard on technical provisions – in some cases, differing from <strong>the</strong> accounting standards • harmonised technical provisions should increase <strong>the</strong> degree of harmonisation in consumer protection • <strong>the</strong> proper valuation of technical provisions has a wider role within insurance undertakings. For example, it is essential for effective management of <strong>the</strong> underwriting policy or for assetliability management • supervisors use a range of supervisory <strong>to</strong>ols <strong>to</strong> identify incorrect valuation or poor management decisions that may lead <strong>to</strong> failure. A standard on technical provisions has proven <strong>to</strong> be a suitable basis for taking action in a number of cases. 9 • Under <strong>the</strong> Solvency II project, <strong>the</strong> <strong>Commission</strong> has <strong>the</strong>refore recognised 10 <strong>the</strong> importance for insurance undertakings <strong>to</strong> establish prudent technical provisions. 7.2 It might be contemplated whe<strong>the</strong>r <strong>the</strong> need <strong>to</strong> develop an explicit standard on technical provisions could be avoided through using a ‘<strong>to</strong>tal capital requirement’ concept. This is where a <strong>to</strong>tal amount of funds required <strong>to</strong> support future liabilties of an insurance undertaking is calculated, comprising both technical liabilities and capital requirements. Under this approach, different levels of prudence in technical liabilities simply alter <strong>the</strong> split between capital requirements and technical liabilities – <strong>the</strong> <strong>to</strong>tal requirement remains <strong>the</strong> same. 7.3 However, CEIOPS notes that <strong>the</strong> perspective underlying technical liabilities and capital requirements is not necessarily <strong>the</strong> same. Whereas <strong>the</strong> valuation of technical provisions needs <strong>to</strong> consider <strong>the</strong> whole run-off period, capital requirements reflect a potential loss that an insurance undertaking may suffer during a set time horizon (e.g. 9 See Report on prudential supervision of insurance undertakings (December 2002), under <strong>the</strong> chairmanship of Paul Sharma. 10 MARKT/2506/04 – Amended Framework for Consultation on Solvency II. 10
one year). Therefore, capital requirements and amounts in technical provisions are not fully interchangeable. 7.4 In its answer <strong>to</strong> CfA 10, CEIOPS takes <strong>the</strong> view that <strong>the</strong> solvency capital requirement (SCR) should limit <strong>the</strong> risk that <strong>the</strong> level of available capital deteriorates <strong>to</strong> an unacceptable level at any time during <strong>the</strong> specified time horizon. The unacceptable level of capital is defined as <strong>the</strong> point where assets no longer exceed technical provisions (valued with a prudential risk margin, and compatible with <strong>the</strong> principles laid out in CEIOPS’ answer <strong>to</strong> CfA’s 7 and 8) and o<strong>the</strong>r liabilities. This general concept ensures that <strong>the</strong> two main building blocks of <strong>the</strong> quantitative requirements under Solvency II - valuation of technical liabilities and determination of capital requirements – are part of a consistent overall framework. In a situation where a certain type of risk (e.g., reserve risk in non-life insurance) affects both <strong>the</strong> prudential risk margin in <strong>the</strong> provisions and <strong>the</strong> capital requirement, <strong>the</strong> quantification of <strong>the</strong> capital requirement would take in<strong>to</strong> account <strong>the</strong> partial unwinding of <strong>the</strong> prudential risk margin over <strong>the</strong> specified time horizon, thus avoiding a potental ‘double counting’ of risks. 7.5 In setting an appropriate risk margin, CEIOPS recognises that <strong>the</strong>re are a number of issues that need <strong>to</strong> be considered: • any risk premium necessary <strong>to</strong> ensure <strong>the</strong> transferabilty of <strong>the</strong> liabilties <strong>to</strong> a third party • addressing uncertainty in <strong>the</strong> valuation of <strong>the</strong> ‘best estimate’ • achieving an appropriate level of policyholder protection over <strong>the</strong> run-off period of <strong>the</strong> liabilities • supporting harmonisation by setting a quantitative standard in an explicit manner 7.6 CEIOPS is exploring which level of confidence can be used <strong>to</strong> meet <strong>the</strong>se considerations. Alternative formulations, such as a pure ‘market value margin approach’ might be difficult <strong>to</strong> apply in a consistent and transparent way, especially as different margins might be appropriate for different lines of business. 7.7 According <strong>to</strong> <strong>the</strong> IAA 11 , standards should be internationally consistent, but <strong>the</strong>y must recognize important national characteristics of <strong>the</strong> insurance industry. There are significant differences among Member States in product design and in claims experience as well as in financial markets, including <strong>the</strong> supply and quality of financial assets available for insurance undertaking investment. Valuation principles should be sufficiently broad <strong>to</strong> apply <strong>to</strong> different product structures. 11 IAA (2004) – A global framework for insurer solvency assessment. 11
Page 1 and 2: CEIOPS-DOC-07/05 Answers</s
Page 3 and 4: Style convention The following has
Page 5 and 6: • Safety measures (CfA 9); • So
Page 7 and 8: sole purpose is to
Page 9: Call for Advice No. 7 Technical pro
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Page 15 and 16: Discounting 7.22 The present value
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Page 21 and 22: Profit sharing In practice, for uni
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Page 27 and 28: always have resources to</s
Page 29 and 30: developed. They would help
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Page 49 and 50: This shall be reviewed, at least an
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Page 55 and 56: 9.15 Solvency II could also employ
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'Prudent person plus' approach 9.52
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Uniform or different rules for tech
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through a prescribed list. Lists ar
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addition a range of stresses so tha
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(including the Rei
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for review of the
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eligibility criteria, or principles
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should not lead to
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• the degree of
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9.156 The senior management shall r
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- going-concern aspects of business
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features. 81 TailVaR is an example
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10.17 The SCR should also reflect <
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10.26 The risk of asset liability m
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Naturally, the pra
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too few categories
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- Choice of volume measures 10.57 W
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Underwriting risk in non-life insur
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volatility of thei
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those insurers this possible increa
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10.103 A factor-ba
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10.112 Assessing whethe</st
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10.121 The SCR should deliver a lev
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whenever its effects on the
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scenario techniques to</str
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Operational risk just ratings infor
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Call for Advice No. 11 Solvency cap
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Costs and Benefits 11.6 It should b
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• Qualitative requirements for <s
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11.19 Risk management criteria set
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individual undertaking is exposed a
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• sensitivity analyses that have
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• visualizations of flows of prod
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Partial models and the</str
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11.58 There should be few descripti
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of the SCR estimat
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equirements to imp
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Call for Advice No. 12 Reinsurance
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Reflection in technical provisions
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• provide an estimate of an under
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particular reinsurer(s)’ aggregat
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they auto<
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einsurer to <stron
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should be a reduction in risk regar
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Call for Advice No. 13 Quantitative
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• the process of
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• handling questions from insuran
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member countries and in the
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components of the
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Background 14.1 Current insurance D
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14.12 In order to
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groups in its answer to</st
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affected; • Impose restrictions o
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14.43 Regarding the</strong
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off all contracts; • to</
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Call for Advice No. 15 Solvency con
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Minimum capital requirement (MCR) D
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adjusted SCR. From a purely technic
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to be implemented.
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capital
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absolute floor (expressed in euros
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Bolkestein agreed to</stron
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16.14 Generally speaking, complianc
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appoint an additional person <stron
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16.28 It should also be noted that
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Time of application 16.41 The asses
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of the individual
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Background 17.1 This document aims
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Review Panel would be a permanent g
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• the developmen
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asis for considering improvements <
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(I) Regulatory arb
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(II) Capital requirements at group
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into a SCR at grou
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18.31 Additionally, it must be deci
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Capital requirements 18.39 The Fram
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(III) Supervisory Review Process of
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18.60 In view of the</stron
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new structure would need to
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future Framework Directive. CEIOPS
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18.94 Model validation in t
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the assumptions us
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Annexes Annex A (Call for Advice No
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pursuing a strategy which t
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Specific principles for non-life in
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Conformity, suitability and suffici
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• existence of significant insuff
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A.64 In the tests
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the rules on <stro
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TVaR1-α for Tail Value-at-risk. In
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Degree of personalisation B.24 Tran
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B.34 There are two approaches <stro
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Segmentation B.44 In general terms,
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technical technical technical techn
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B.61 The second alternative was cho
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Dutch supervisory authority for <st
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Market risk Equity risk this altern
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B.95 In a scenario-based approach,
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B.106 As an alternative one could t
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where: KTSA = the
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Results from the a
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Solvency ratio prior to</st
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Number of instances Risk group Deta
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Conclusion In general, the<
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where: TP gross = technical provisi
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premium risk, the
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“While proportional reinsurance t
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contribute with any additional info
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E.29 Another way <
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programmes on the
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