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

perhaps through an explicit additional liability shown in <strong>the</strong> regula<strong>to</strong>ry
returns, or through o<strong>the</strong>r means <strong>to</strong> achieve <strong>the</strong> same effect. Such an
adjustment need not make regula<strong>to</strong>ry technical provision incompatible
with IASB methodology, as such.
7.12 Solvency II should aim at a methodology that will be transparent in <strong>the</strong>
valuation of insurance liabilities. The resulting provision could cover
both <strong>the</strong> expected present value of <strong>the</strong> liability cash flow, given insights
at <strong>the</strong> time <strong>the</strong> insurance liabilities are being determined, and a risk
margin. This risk margin should be set prudently, but not so prudently
as <strong>to</strong> act as a disincentive for <strong>the</strong> private industry <strong>to</strong> underwrite
insurance risk.
7.13 Fur<strong>the</strong>r analysis is necessary <strong>to</strong> determine <strong>the</strong> extent <strong>to</strong> which
methodologies for <strong>the</strong> regula<strong>to</strong>ry valuation of technical liabilities should
be prescribed by <strong>the</strong> supervisor. In any event, guidance (and
requirements) on <strong>the</strong> type of methods which are acceptable <strong>to</strong>
supervisors will be needed. Similar issues occur for <strong>the</strong> use of statistical
methods in valuing non-life insurance liabilities. This is discussed
fur<strong>the</strong>r in paras. 8.11 – 8.15.
7.14 The expected present value could relate <strong>to</strong> individual contracts. But any
risk margin may be applied at a higher level of aggregation (e.g.,
homogeneous risk groups). A single provisioning philosophy should
underlie <strong>the</strong> methodologies adopted in practice for determining
insurance liabilities for all policies, regardless of <strong>the</strong> nature (e.g. profit
sharing, non-profit sharing, unit-linked), premium features (e.g.
regular premium, single premium, reviewable premiums), contract
conditions (e.g. guarantees, options, etc.) or contract duration.
7.15 Policy options and guarantees should be explicitly provisioned. This
includes both financial options, guarantees embedded within <strong>the</strong>
product and o<strong>the</strong>r forms. Options of <strong>the</strong> insurer (for example, <strong>the</strong> right
<strong>to</strong> adapt premiums in some types of health insurance) should also be
taken in<strong>to</strong> account. Financial options and guarantees should be
provisioned in a manner consistent with market-based values.
However, values derived purely from financial <strong>the</strong>ory may not properly
reflect <strong>the</strong> full range of fac<strong>to</strong>rs that can influence policyholders’
excercise rates, such as taxation environment or availability of
insurance coverage. O<strong>the</strong>rs, such as lapse options, or <strong>the</strong> ability <strong>to</strong>
convert <strong>the</strong> policy from a short term <strong>to</strong> a whole of life policy on preagreed
terms (without evidence of continued good health) need <strong>to</strong> be
provisioned on <strong>the</strong> basis of expected present values of cash flows and
also considering a margin for risk. The present value of expected cash
flows could be determined including allowance for best estimates of all
relevant fac<strong>to</strong>rs, e.g. his<strong>to</strong>rical and industry experience, <strong>the</strong> impact of
anti-selection introduced by exercising options, or realistically-assessed
profits on policy lapsation.
7.16 Some allowance could be made for more adverse levels of option takeup,
higher or lower rates of discontinuance, etc. But it may be
appropriate within <strong>the</strong> context of <strong>the</strong> SCR <strong>to</strong> disallow assumptions that
a given policy may lapse if this would lead <strong>to</strong> a reduced insurance
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