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

Segmentation
B.44 In general terms, an assessment of underwriting risk involves an
identification of fac<strong>to</strong>rs that influence <strong>the</strong> variability of <strong>the</strong> underwriting
result of <strong>the</strong> undertaking. This requires a classification of underwriting
risks in<strong>to</strong> groups with similar characteristics, known as homogenous
risk groups. This classification must be based in part on information
from his<strong>to</strong>rical data on <strong>the</strong> liabilities portfolio, <strong>the</strong> institution’s specific
circumstances and relevant data from <strong>the</strong> insurance industry.
B.45 The life underwriting risk groups <strong>to</strong> be used need fur<strong>the</strong>r examination.
It is advisable <strong>to</strong> identify <strong>the</strong>se groups on an <strong>European</strong> level but
national specificities resulting in country-specific groups may be taken
in<strong>to</strong> account. A suitable segmentation of <strong>the</strong> book of business might be
explicitly defined within <strong>the</strong> formula, or some flexibility could be
allowed so that national particularities can be taken in<strong>to</strong> account. A
standard classification that is more closely aligned with actual
undertakings behaviour should have positive consequences for risk
management.
O<strong>the</strong>r issues
B.46 O<strong>the</strong>r issues that require fur<strong>the</strong>r analysis include:
• ability <strong>to</strong> reflect an underlying TailVaR risk measure;
• <strong>the</strong> treatment of guarantees and options;
• anti-selection (lapse rates, option take-up rates, etc.);
• morbidity and disability risk;
• interaction effects (e.g. between lapse and mortality);
• variations in sums assured; and
• mortality improvement and trend risks.
Underwriting risk in non-life insurance
Ma<strong>the</strong>matical framework for assessing underwriting risk
B.47 In <strong>the</strong> following paragraphs, some basic notation for <strong>the</strong> quantification
of underwriting risk under a fac<strong>to</strong>r-based approach is introduced. The
aim here is <strong>to</strong> make both <strong>the</strong> discussion of an underwriting risk
treatment more transparent and also <strong>to</strong> provide a link with <strong>the</strong> general
design of <strong>the</strong> SCR standard formula.
B.48 To simplify, CEIOPS assumes 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
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