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

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Using a prospective valuation approach of assets and liabilities means that all possible future cash flows will have <strong>to</strong> be identified and valued. Expenses that will have <strong>to</strong> be made in future <strong>to</strong> service an insurance contract are one of those cash flows for which a provision will have <strong>to</strong> be calculated. B.12 The IAA observes that <strong>the</strong> insurer normally selects assumptions with respect <strong>to</strong> <strong>the</strong> future expenses associated with obligations arising from commitments <strong>the</strong> entity has made on, or prior <strong>to</strong>, <strong>the</strong> valuation date, including overheads. When setting expense assumptions, it may be useful <strong>to</strong> differentiate between: • <strong>the</strong> entity’s strategy for determining <strong>the</strong> level of service provided <strong>to</strong> policyholders (and its approach <strong>to</strong> claims management, if applicable); and • <strong>the</strong> entity’s efficiency in providing that level of service and (implementing its approach <strong>to</strong> claims management, if applicable). B.13 Usually all future administrative costs and consequent commissions would need <strong>to</strong> be considered. Where future deposits or premiums are fac<strong>to</strong>rs in <strong>the</strong> determination of <strong>the</strong> liabilities, expenses related <strong>to</strong> <strong>the</strong> deposits or premiums would usually be taken in<strong>to</strong> consideration. In addition, where appropriate, <strong>the</strong> expenses of administering investments normally would be taken in<strong>to</strong> consideration <strong>to</strong>o. Choice of coefficients and degree of personalisation B.14 A choice of coefficients within a fac<strong>to</strong>r-based model for underwriting risk needs <strong>to</strong> reflect <strong>the</strong> use of a limited (one year) time horizon, but with full allowance for changes in <strong>the</strong> expectation over that period of future cash flows <strong>to</strong> be reserved for at <strong>the</strong> end of that period. It is <strong>to</strong> be based on an analysis of <strong>the</strong> insurers’ underwriting result during <strong>the</strong> time horizon; a loss of capital occurs if <strong>the</strong> underwriting result is negative. B.15 The underwriting result of <strong>the</strong> insurer will strongly depend on <strong>the</strong> valuation of <strong>the</strong> technical provisions. The principles for this valuation in <strong>the</strong> context of <strong>the</strong> calculation of <strong>the</strong> capital risk charge for underwriting risk should be compatible with <strong>the</strong> rules on <strong>the</strong> calculation of <strong>the</strong> technical provisions <strong>to</strong> be developed as part of <strong>the</strong> future solvency framework. B.16 To simplify, it is assumed that <strong>the</strong> time horizon is one business year. The forthcoming business year (at <strong>the</strong> point of time of <strong>the</strong> solvency assessment) is referred <strong>to</strong> as <strong>the</strong> current year. The risk charge for underwriting risk is <strong>the</strong>refore derived from <strong>the</strong> properties of UR technical , <strong>the</strong> underwriting result of <strong>the</strong> undertaking in <strong>the</strong> current year, which is regarded as a random variable. B.17 One can assume that <strong>the</strong> risk capital charge for underwriting risk is determined according <strong>to</strong> ruin probability α and risk measure ρ1-α. For example, one may choose ρ1-α = VaR1-α for Value-at-Risk, or ρ1-α’ = 238
TVaR1-α for Tail Value-at-risk. In this context, 1-α or 1-α’ correspond <strong>to</strong> <strong>the</strong> confidence level ensuring <strong>the</strong> degree of prudence, that CEIOPS wishes <strong>to</strong> achieve. B.18 The risk capital charge for underwriting risk is given by technical RC = ρ1−α ( UR technical ) For example, a ruin probability of 0,5% and a VaR risk measure would correspond <strong>to</strong> technical technical technical RC ρ UR ) = VaR ( UR ) = q ( −UR = 1−α ( 99, 5% 99, 5% technical so <strong>the</strong> risk capital charge is <strong>the</strong> 99.5 th -quantile of <strong>the</strong> distribution – UR technical , or <strong>the</strong> smallest value of RC that satisfies <strong>the</strong> inequality – UR technical ≤ RC with a probability of at least 99.5%. In case of <strong>the</strong> risk measure TVaR and a ruin probability of, e.g. 0.8 % <strong>the</strong> risk charge for underwriting risk would be <strong>the</strong> average loss in <strong>the</strong> worst 0.8 % cases: technical technical RC = ρ 1−α ' ( UR ) = TVaR99, 2% ( UR technical ) ) 239
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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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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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Page 265 and 266: Number of instances Risk group Deta
Page 267 and 268: Conclusion In general, the<
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