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

legislation.
Retrospective methods
7.53 In general, insurance liabilities should be valued prospectively. Certain
elements of <strong>the</strong> prospective expected cash flows may need <strong>to</strong> be
determined having regard <strong>to</strong> retrospective features - for example,
future surrender values.
Surrender value floor
7.54 Discontinuance experience normally will have a significant effect on
overall profitability <strong>to</strong> <strong>the</strong> insurer for many investment contract types.
The insurer may use credible and relevant discontinuance experience <strong>to</strong>
<strong>the</strong> extent practical. In <strong>the</strong> absence of reliable experience data for <strong>the</strong>
class of risk under consideration (e.g., new products or later durations
in <strong>the</strong> policy), o<strong>the</strong>r comparable sources would normally be considered.
The experience based discontinuance assumptions used will need <strong>to</strong> be
appropriate for <strong>the</strong> purpose for which <strong>the</strong>y are being used. For
example, different sets of assumptions may need <strong>to</strong> be applied
depending on whe<strong>the</strong>r <strong>the</strong>y are being used <strong>to</strong> determine <strong>the</strong> present
value of expected cash flows, <strong>the</strong> risk margin in <strong>the</strong> insurance liabilities
or <strong>the</strong> SCR.
7.55 It is important for each insurer <strong>to</strong> value <strong>the</strong> options of <strong>the</strong> policyholder
<strong>to</strong> change <strong>the</strong> terms of <strong>the</strong> contract from <strong>the</strong> perspective of risk
management.
7.56 A potential requirement supported by several CEIOPS’ members says
that, at any time, <strong>the</strong> minimum insurance liabilities provision is <strong>to</strong> be at
least equal <strong>to</strong> <strong>the</strong> sum of <strong>the</strong> guaranteed surrender values of <strong>the</strong>
contracts (on a contract by contract basis). IAIS says <strong>the</strong> following on
<strong>the</strong> subject: "some jurisdiction believe <strong>the</strong> valuation of insurance
liabilities should cover <strong>the</strong> current surrender values of all insurance
contracts, while o<strong>the</strong>r jurisdictions do not. But all <strong>the</strong> latter jurisdictions
believe that <strong>to</strong>tal financial resources should be available <strong>to</strong> cover <strong>the</strong>
current surrender values of all insurance contracts" 23 . Ano<strong>the</strong>r solution
expected <strong>to</strong> lead <strong>to</strong> lower insurance liabilities but which is more in line
with realistic valuation of liabilities such as <strong>the</strong> best estimate approach,
would be <strong>to</strong> extend <strong>the</strong> calculation of expected value <strong>to</strong> <strong>the</strong> policyholder
option <strong>to</strong> discontinue <strong>the</strong> contract. This solution requires <strong>to</strong> some
extent fur<strong>the</strong>r attention by supervisors and actuaries in order <strong>to</strong>
develop methods and practices for estimation of <strong>the</strong> value of such
policyholder options. Where such an approach were taken <strong>to</strong> valuation
of insurance liabilities, potential for adverse surrender experience due
<strong>to</strong> changes from expected lapse rates would fail <strong>to</strong> be addressed by <strong>the</strong>
SCR and <strong>the</strong> answer <strong>to</strong> CfA 10 refers <strong>to</strong> this.
Expenses
7.57 The realistic valuation of assets and liabilities means that all possible
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