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

8.28 A fourth option could be envisaged: <strong>the</strong> group level. However, given
<strong>the</strong> role of technical provisions in <strong>the</strong> prudential framework (as a safety
net <strong>to</strong> secure policyholder protection) – and <strong>the</strong> links with local contract
law and winding-up regulation – it cannot be envisaged <strong>to</strong> stipulate a
risk margin at group level. At this level, if necessary, diversification
benefits will have <strong>to</strong> be recognised through a reduction of group capital
requirements.
8.29 The application of <strong>the</strong> confidence level by line of business is <strong>the</strong> basis of
<strong>the</strong> Australian approach. According <strong>to</strong> CEIOPS’ understanding, <strong>the</strong>
APRA standard and guidance state that a risk margin should be
stipulated separately for all individual lines of business. When adding
<strong>the</strong> individual risk margins diversification effects may be taken in<strong>to</strong>
account. However, <strong>the</strong> standard and guidance are both ra<strong>the</strong>r general
on this issue, and accordingly it seems <strong>to</strong> be left <strong>to</strong> <strong>the</strong> discretion of <strong>the</strong>
insurance undertaking and its actuary <strong>to</strong> decide <strong>to</strong> what extent ('where
appropriate') allowance for diversification should be given.
8.30 To assess <strong>the</strong> advantages and drawbacks of each option, several - and
sometimes opposite - considerations must be made.
8.31 When an undertaking is in real difficulty, it might be desirable that
portfolios and <strong>the</strong>ir claims provisions can be transferred <strong>to</strong> o<strong>the</strong>r
undertakings with <strong>the</strong> regula<strong>to</strong>ry risk margin. In such case, it would
make sense that <strong>the</strong> regula<strong>to</strong>ry prudence margin can be easily
allocated <strong>to</strong> <strong>the</strong> transferred portfolio and does not depend on <strong>the</strong> size
and nature of <strong>the</strong> receiving undertaking. To achieve this, <strong>the</strong>
provisioning standard should be 'portfolio invariant'. The only
practicable 'portfolio invariant' standard is <strong>the</strong> standard defined at <strong>the</strong>
individual claim level. Never<strong>the</strong>less, even though a standard defined
line by line is not portfolio invariant, it would have advantages over a
whole entity approach: it would ensure that if each line could be
transferred separately <strong>the</strong> accepting companies do not incur an
immediate loss on <strong>the</strong> transfer.
8.32 The confidence level may be fixed for different segments of an
undertaking (or a group) or even for each claim. When considering
different 'segments', <strong>the</strong> sum of liabilities will include a larger margin
than <strong>the</strong> margin that would have been required by <strong>the</strong> application of
<strong>the</strong> confidence level on an aggregate basis. In this respect, <strong>the</strong> link
with <strong>the</strong> SCR must be considered. The SCR will be defined at <strong>the</strong> whole
entity level: this would suggest considering diversification benefits
within <strong>the</strong> provisions at <strong>the</strong> entity level. Alternatively, <strong>the</strong>se
diversification benefits might be taken in<strong>to</strong> account by adjusting <strong>the</strong>
SCR requirement.
8.33 The use of statistical methods generally requires that <strong>the</strong> group of
claims considered is <strong>the</strong> largest possible, but also as homogeneous as
possible. However, defining a <strong>to</strong>o large level of aggregation (without
regard <strong>to</strong> <strong>the</strong> homogeneity of what is aggregated) may disconnect <strong>the</strong>
requirement from usual actuarial practice and from sound risk
management practice: it may encourage an undertaking <strong>to</strong> compensate
different lines of business, without analysing rigorously <strong>the</strong> quality of
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