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

error in <strong>the</strong> calibration of <strong>the</strong> formula.
Underwriting risk in life insurance
10.140 CEIOPS recommends testing a multiple-fac<strong>to</strong>r based approach <strong>to</strong>
model underwriting risk as <strong>the</strong> base model, supplemented with simple
scenario techniques.
10.141 The fac<strong>to</strong>r-based model should address mortality risk and expense
risk. Lapse risk might be captured ei<strong>the</strong>r by an additional risk fac<strong>to</strong>r,
or by a pre-specified stress test. CEIOPS recommends testing <strong>the</strong>se
two alternatives in QIS. However, CEIOPS notes that lapse risk needs
<strong>to</strong> be addressed in <strong>the</strong> SCR only <strong>to</strong> <strong>the</strong> extent that it is not already
captured by <strong>the</strong> treatment of surrender floors in technical provisions.
10.142 With regards <strong>to</strong> mortality risk, a natural choice for a volume measure,
subject <strong>to</strong> fur<strong>the</strong>r analysis, might be <strong>the</strong> technical provision at <strong>the</strong>
beginning of <strong>the</strong> solvency assessment time horizon in cases where <strong>the</strong>
risk of longevity is relevant, and <strong>the</strong> capital at risk at <strong>the</strong> beginning of
<strong>the</strong> solvency assessment time horizon in cases where an increase in
<strong>the</strong> mortality rate is relevant.
10.143 Using a prospective valuation approach of assets and liabilities means
that all possible future cash flows will have <strong>to</strong> be identified and valued.
Expenses that will have <strong>to</strong> be made in future <strong>to</strong> service an insurance
contract are one of those cash flows for which a provision will have <strong>to</strong>
be calculated. This provision might be a natural choice as a volume
measure for expense risk.
10.144 Lapse risk could be assessed by determining <strong>the</strong> impact of an
appropriate change in lapse rates (for example doubling and reducing
by one-half).
10.145 An assessment of underwriting risk requires underlying data that are
sufficiently homogeneous with respect <strong>to</strong> emergence, development and
statistical pattern of claims. Therefore <strong>the</strong> insurers’ book of business
will need <strong>to</strong> be segmented in<strong>to</strong> homogeneous risk classes.
10.146 The risk capital charges for each segment might be determined
individually, before suitable aggregation methods are applied <strong>to</strong> arrive
at an overall risk capital charge. Alternatively, <strong>the</strong> overall risk capital
charge might be determined from assumptions on <strong>the</strong> type of <strong>the</strong>
distribution on <strong>the</strong> level of <strong>the</strong> diversified overall risk ra<strong>the</strong>r than on
<strong>the</strong> level of <strong>the</strong> segment risk. Such an approach would take only <strong>the</strong>
first two moments of <strong>the</strong> probability distribution from <strong>the</strong> segment
level in<strong>to</strong> account. CEIOPS recommends testing both alternatives in
QIS.
Underwriting risk in non-life insurance
10.147 CEIOPS recommends testing a fac<strong>to</strong>r-based approach <strong>to</strong> model
underwriting risk as <strong>the</strong> base model, supplemented with simple
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