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

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structures could be prescribed. 7.46 In some circumstances, a duration approach based on <strong>the</strong> full term structure might be an acceptable practical implementation of discounting. In such cases, <strong>the</strong> undertaking should first estimate <strong>the</strong> maturity characteristics of <strong>the</strong> underlying liabilities at <strong>the</strong> reporting date and determine an average maturity for every portfolio. It should obtain <strong>the</strong> interest rate appropriate <strong>to</strong> this maturity from <strong>the</strong> term structure of risk-free interest rates for that currency. The undertaking can estimate <strong>the</strong> current value of <strong>the</strong> insurance portfolio using this interest rate. The advantage of this is that this method is probably in line with <strong>the</strong> undertaking’s probable actual actuarial/administrative techniques. 7.47 In line with <strong>the</strong> observations made above, <strong>the</strong> insurer should estimate <strong>the</strong> impact which guaranteed interest rates could have on outgoing cash flows. These cash flows should be valued consistently with market values for similar guarantees or <strong>the</strong> related options. Mortality assumptions 7.48 Insurance undertakings should compare <strong>the</strong>ir actual mortality experience against published mortality tables, 21 and demonstrate that <strong>the</strong> risk margin included in technical liabilities takes adequate account of mortality risk, by reference <strong>to</strong> <strong>the</strong>ir recent actual experience. Insurance undertakings should also make reasonable provision for future expected increases in longevity in determining expected cash flows. Where determining insurance liabilities by reference <strong>to</strong> a given confidence level, appropriate allowance for adverse (positive or negative) developments in mortality experience would also be required (and more severe developments should be reflected within <strong>the</strong> SCR). Investment-related parts 7.49 The nature of <strong>the</strong> underlying investments backing an insurance portfolio and <strong>the</strong> yields on those investments should have no impact on <strong>the</strong> valuation of those liabilities, except <strong>to</strong> <strong>the</strong> extent <strong>the</strong>y affect <strong>the</strong> benefits payable <strong>to</strong> policyholders. The nature of <strong>the</strong> underlying investments backing an insurance portfolio and <strong>the</strong> yields on those investments would need <strong>to</strong> be reflected in <strong>the</strong> valuation of liabilities where: • <strong>the</strong> contractual terms of <strong>the</strong> liabilities have a direct link with specific investments of <strong>the</strong> undertaking (e.g. in <strong>the</strong> case of unitlinked insurance where <strong>the</strong> undertaking does not bear <strong>the</strong> 7investment risk); or • in <strong>the</strong> case of with-profit contracts subject <strong>to</strong> minimum benefits, where <strong>the</strong> terms of <strong>the</strong> insurance contract effectively create an option for <strong>the</strong> policyholder <strong>to</strong> benefit from upside whilst being protected from downside investment performance. 20
Profit sharing In practice, for unit-linked contracts without guarantees this would result in <strong>the</strong> chief determinant of <strong>the</strong> technical provision being <strong>the</strong> value of <strong>the</strong> underlying linked assets. 7.50 Cash flows from insurance contracts are not limited <strong>to</strong> specific liabilities set out in <strong>the</strong> agreements or in law and under which one of <strong>the</strong> parties has a legally enforceable right at a given time <strong>to</strong> a benefit or benefits. There are also cash flows which can or do arise, without a legal obligation, on a decision of <strong>the</strong> undertaking’s Board. In such cases, <strong>the</strong> agreement generally includes a clause relating <strong>to</strong> <strong>the</strong> purpose of such payments and <strong>the</strong> undertaking’s discretion on <strong>the</strong>m but it does not generally include a legally enforceable right. There are finally cash-flows which do arise from law, e.g. a minimal profit sharing provision, but without giving a given policyholder a legally enforceable right at a given time <strong>to</strong> a benefit or benefits. For insurers usually <strong>the</strong>se are some type of profit sharing. With-profits benefits (profit-sharing) can be conditional, unconditional or dictated by law without enforceability from policyholders. In this context, three types of liabilities are thus identified: liabilities that are enforceable contractual liabilities, discretionary or constructive liabilities and liabilities provided for by law. Insurers may also have conditional premium payments: 'en bloc' clauses. Under an 'en bloc' clause, <strong>the</strong> Board has discretion <strong>to</strong> change premiums (or o<strong>the</strong>r contractual terms) unilaterally. Such cash flows in <strong>the</strong> form of discretionary benefits or premiums set by <strong>the</strong> undertaking are described here as 'conditional cash flows'. 22 Where such clauses exist, appropriate allowance needs <strong>to</strong> be made for <strong>the</strong> likelihood of premium changes being capable of implementation in practice and <strong>the</strong> effects of adverse selection which typically results when premiums increase. 7.51 CEIOPS needs <strong>to</strong> analyse techniques for <strong>the</strong> valuation of conditional with-profit benefits. Consideration needs <strong>to</strong> be given <strong>to</strong> all fac<strong>to</strong>rs influencing <strong>the</strong>se cash flows, in particular <strong>to</strong> investment yields and <strong>the</strong> process of dissolving safety margins in <strong>the</strong> technical provisions for contractual benefits of policyholders in <strong>the</strong> course of time. In particular, CEIOPS notes that management actions can affect <strong>the</strong> size and timing of conditional cash flows and hence <strong>the</strong> availability of capital <strong>to</strong> cover losses. Moreover, CEIOPS needs <strong>to</strong> consider <strong>the</strong> implications of using risk-free interest rates for <strong>the</strong> valuation of conditional with-profit benefits where those benefits are dependent on returns on investments backing <strong>the</strong> insurance portfolio. 7.52 There might be future changes in <strong>the</strong> IFRS on <strong>the</strong> determination of profits for <strong>the</strong> purpose of determining <strong>the</strong> profits <strong>to</strong> be shared with policyholders. These standards still have <strong>to</strong> be decided. The possible impact on <strong>the</strong> level of insurance liabilities and on solvency capital required can only be determined when <strong>the</strong>se standards are clear. Each insurer may <strong>the</strong>n have <strong>to</strong> determine how it is affected, based on <strong>the</strong> terms and definitions in its insurance contracts and applicable domestic 21
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 and 10: Call for Advice No. 7 Technical pro
Page 11 and 12: one year). Therefore, capital requi
Page 13 and 14: perhaps through an explicit additio
Page 15 and 16: Discounting 7.22 The present value
Page 17 and 18: exposed to risk fr
Page 19: insurance liabilities set by refere
Page 23 and 24: future cash flows will have <strong
Page 25 and 26: Explanatory text S
Page 27 and 28: always have resources to</s
Page 29 and 30: developed. They would help
Page 31 and 32: 8.28 A fourth option could be envis
Page 33 and 34: In principle, "the
Page 35 and 36: 8.48 Three alternatives can be cons
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Page 39 and 40: statistical estimate (with a level
Page 41 and 42: 8.77 It may be argued that
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Page 47 and 48: 8.105 In some cases, the</s
Page 49 and 50: This shall be reviewed, at least an
Page 51 and 52: ut the exposure <s
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Page 55 and 56: 9.15 Solvency II could also employ
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Page 61 and 62: 'Prudent person plus' approach 9.52
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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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