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Background 13.1 The <strong>Commission</strong> Services has envisaged that a series of quantitative impact studies (QIS) will be needed throughout <strong>the</strong> Solvency II project. This will also be an input for <strong>the</strong> Impact Assessment that <strong>the</strong> <strong>Commission</strong> has <strong>to</strong> provide when proposing a Framework Directive. The Impact Assessment will consider <strong>the</strong> wider macroeconomic consequences of Solvency II. QIS will test <strong>the</strong> impact of proposed principles with respect <strong>to</strong> <strong>the</strong> financial resources of individual insurance undertakings. As <strong>the</strong> QIS is very challenging from a technical, resource and timing point of view, careful planning and effective execution is required. This is reflected by <strong>the</strong> planning embedded in this response <strong>to</strong> CfA 13. 13.2 The <strong>Commission</strong> Services request CEIOPS <strong>to</strong> contribute <strong>to</strong> <strong>the</strong> organisation, coordination and performance of <strong>the</strong> simulations so that <strong>the</strong> set time goals can be respected. 13.3 The first piece of advice explaining <strong>the</strong> preparations made and <strong>the</strong> plans for <strong>the</strong> execution of <strong>the</strong> first round of quantitative impact studies should be transmitted by 31 Oc<strong>to</strong>ber 2005. Explana<strong>to</strong>ry text Guiding principles 13.4 This answer <strong>to</strong> <strong>the</strong> CfA on QIS and data related issues mainly focuses on <strong>the</strong> organizational aspect related <strong>to</strong> QIS exercise <strong>to</strong> be developed by CEIOPS. For this reason <strong>the</strong> response makes reference <strong>to</strong> <strong>the</strong> internal CEIOPS organisation. This response is based on <strong>the</strong> following four guiding principles: • <strong>the</strong> allocation of responsibilities within CEIOPS’ organization for carrying out QIS and preparing CEIOPS Members’ resolution provides that <strong>the</strong> Pillar I Working Group is responsible for developing quantitative requirements; • <strong>the</strong> Financial Stability Committee (CEIOPS FSC) is responsible for <strong>the</strong> testing of (components of) <strong>the</strong>se requirements; • <strong>the</strong> testing will be carried out through QIS. The QIS process will have several iterations with progressively more sophisticated and comprehensive approaches as quantitative requirements are developed in more detail. In principle, <strong>the</strong> first QIS will primarily focus on <strong>the</strong> level of prudence in technical provisions, while later versions (in 2006 and beyond) will also include <strong>the</strong> minimum capital requirement (MCR) and components for <strong>the</strong> standard formula of <strong>the</strong> solvency capital requirement (SCR). The concrete elements <strong>to</strong> be tested in each round will depend on <strong>the</strong> progress made in <strong>the</strong> context of <strong>the</strong> Pillar I analysis; 150
• <strong>the</strong> process of conducting a QIS and processing a result is estimated <strong>to</strong> take approximately 5 <strong>to</strong> 6 months from <strong>the</strong> point in time where all necessary input is received; and • <strong>the</strong> Prepara<strong>to</strong>ry Field Study (PFS) which has been carried out in <strong>the</strong> first half of 2005 on selected life insurance undertakings is not representative for <strong>the</strong> QIS. 13.5 This response describes <strong>the</strong> preparations made for conducting QIS of <strong>the</strong> Solvency II proposals. CEIOPS has identified <strong>the</strong> following areas as important <strong>to</strong> incorporate in <strong>the</strong> plan for <strong>the</strong> first round of QIS: • experience from <strong>the</strong> PFS; • organisation of work; • scope, data and scenario analysis; • sample sizes; • timing issues; and • planning for progressively more sophisticated and comprehensive approaches <strong>to</strong> field testing. 13.6 The challenges from a technical, resource and timing point of view will be considered in this response. The response primarily focuses on <strong>the</strong> responsibilities of <strong>the</strong> CEIOPS FSC in carrying out <strong>the</strong> QIS. It does not deal with <strong>the</strong> methodological issues related <strong>to</strong> <strong>the</strong> content of <strong>the</strong> solvency proposals, but is based on <strong>the</strong> assumption that all necessary input for developing a testable framework will be provided by <strong>the</strong> Solvency II Working Groups, especially <strong>the</strong> Pillar I Working Group, consistent with <strong>the</strong> answers of CfAs 7-10. Experience from <strong>the</strong> PFS 13.7 During spring 2005 CEIOPS conducted a PFS on selected life insurance undertakings. The following results can be noted. First, <strong>the</strong> PFS resulted in an extensive list of practical issues with respect <strong>to</strong> realistic valuation as well as o<strong>the</strong>r issues, which list will be considered by CEIOPS in its fur<strong>the</strong>r technical work. Guidance with respect <strong>to</strong> market consistent valuation of assets and, in particular, liabilities, seems urgent. With respect <strong>to</strong> quantitative issues, <strong>the</strong> following results can be derived. First, transition from current <strong>to</strong> market consistent valuation may generally lead <strong>to</strong> a slight reduction of liabilities; however <strong>the</strong>re is a large dispersion between countries and undertakings. It should however be noted that in most cases no risk margin had been included yet. It was also noted that embedded options have been taken in<strong>to</strong> account by only a few undertakings, yet an increasing tendency <strong>to</strong> value <strong>the</strong>m can be perceived. Moreover it turned out that some countries do not value <strong>the</strong>ir assets in a market consistent way. In <strong>the</strong>se 151
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CEIOPS-DOC-07/05 Answers</s
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Style convention The following has
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• Safety measures (CfA 9); • So
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sole purpose is to
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Call for Advice No. 7 Technical pro
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one year). Therefore, capital requi
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perhaps through an explicit additio
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Discounting 7.22 The present value
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exposed to risk fr
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insurance liabilities set by refere
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Profit sharing In practice, for uni
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future cash flows will have <strong
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Explanatory text S
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always have resources to</s
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developed. They would help
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8.28 A fourth option could be envis
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In principle, "the
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8.48 Three alternatives can be cons
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essential part of the</stro
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statistical estimate (with a level
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8.77 It may be argued that
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to use more sophis
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consequence on the
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8.105 In some cases, the</s
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This shall be reviewed, at least an
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ut the exposure <s
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Explanatory text M
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9.15 Solvency II could also employ
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9.28 The life formula yields itself
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underestimate them
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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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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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