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

insurance liabilities set by reference <strong>to</strong> <strong>the</strong> given distribution percentile
will not always be found <strong>to</strong> be adequate. Consequently, <strong>the</strong> risk margin
on <strong>the</strong> expected value should not be less than a proportion of <strong>the</strong>
standard deviation. The present value of expected cash flows is <strong>to</strong> be
reported <strong>to</strong> <strong>the</strong> supervisor <strong>to</strong>ge<strong>the</strong>r with <strong>the</strong> insurance liabilities set
using a proportion of <strong>the</strong> standard deviation criterion where it applies. 19
This methodology might also be used for very small portfolios where it
may not be possible <strong>to</strong> obtain a well-behaved probability distribution.
The advantage of this approach is its uniformity. 20
7.41 Alternatively, some CEIOPS members suggest that uncertainty risks
could be addressed by selecting a prudent discount rate for <strong>the</strong>
valuation of liabilities.
Profits at inception
7.42 CEIOPS notes that valuing insurance liabilities by using <strong>the</strong> best
estimate plus risk margin approach may lead <strong>to</strong> <strong>the</strong> recognition of
profits or losses at inception of an insurance contract. IASB
compatibility of this approach should be moni<strong>to</strong>red as work on <strong>the</strong>
insurance accounting project progresses. O<strong>the</strong>r practical consequences
also need <strong>to</strong> be considered – for example, <strong>the</strong> need that such margins
should not be considered as profits in <strong>the</strong> profit and loss account, in
view of <strong>the</strong> requirement in some Member States that in some profit
sharing business, recognised profits must partly be distributed <strong>to</strong>
policyholders. In some cases, provisions may be calculated following a
tariff base.
Segmentation
7.43 For added transparency, determination of <strong>the</strong> insurance liabilities
should be carried out using a policy-by-policy valuation of <strong>the</strong> present
value of expected cash flows. The risk margin related <strong>to</strong> <strong>the</strong>
quantitative level of prudence, calculated by homogenous risk group,
should be added <strong>to</strong> <strong>the</strong> expected value of all <strong>the</strong>se policies. However,
<strong>the</strong> relevance of whole-entity calculations will also need <strong>to</strong> be
considered. In particular, CEIOPS will consider fur<strong>the</strong>r how
diversification effects between homogenous risk groups could be taken
in<strong>to</strong> account where demonstrably based on sound actuarial techniques.
This should be tested in QIS.
Discounting
7.44 Under a best estimate approach, insurance liabilities for life business
should be discounted using an appropriate term structure of interest
rates. Risk-free rates might be used for this purpose, with <strong>the</strong> potential
consequences of any variability addressed in <strong>the</strong> SCR. However, some
CEIOPS members consider that this uncertainty should be addressed
through a prudent risk margin in <strong>the</strong> discount rate.
7.45 A nominal term structure of interest rates for each currency might be
prescribed by <strong>the</strong> supervisor, or acceptable sources of such term
19