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its provisioning practices and <strong>the</strong> volatility of its provisions – which differ according <strong>to</strong> different business lines. 8.34 All things considered, a line of business calculation seems <strong>to</strong> be a necessary starting point. The possibility of allowing for diversification effects might be considered if reliable and testable methods were available, but this option needs fur<strong>the</strong>r analysis. 8.35 In order <strong>to</strong> improve harmonisation across <strong>the</strong> <strong>European</strong> Market, <strong>the</strong> lines of business should be defined by a list at <strong>the</strong> directive level. The segmentation used for <strong>the</strong> calculation of <strong>the</strong> technical provisions should define homogeneous lines of business and should be consistent with <strong>the</strong> segmentation used for SCR underwriting risk. 8.36 The list should be based with strong continuity on <strong>the</strong> existing subdivisions. EU reporting classes from <strong>the</strong> Accounting Directive could be used as a starting point. In practice, aggregating data at <strong>the</strong> level of <strong>the</strong> line of business, as defined in <strong>the</strong> current Directive, may not always be adequate. The need <strong>to</strong> define sub-lines of business, which might depend on national features, should be considered when elaborating <strong>the</strong> <strong>European</strong> quantitative standard. One option would be <strong>to</strong> define principles that companies should apply for subdividing <strong>the</strong> list. Reinsurance 8.37 The quantitative standard can be envisaged for provisions gross or net of reinsurance. • net provisions: Providing that <strong>the</strong> level of reinsurance is adequate, statistical methods should in general be more easy <strong>to</strong> apply <strong>to</strong> provisions net of reinsurance (and more relevant). However, this may not always be <strong>the</strong> case: for example, a significant change in <strong>the</strong> reinsurance programme might be an obstacle <strong>to</strong> <strong>the</strong> application of common actuarial techniques. Net provisions need <strong>to</strong> be considered because <strong>the</strong>y represent economic exposure. • gross provisions: Reinsurance does not exempt <strong>the</strong> direct insurer from its commitments <strong>to</strong>wards policyholders. The insurer still faces a risk of counterparty on <strong>the</strong> amount of ceded provisions. To have a global view of <strong>the</strong> risks linked <strong>to</strong> reserving, it is necessary <strong>to</strong> consider gross provisions. For those reasons, harmonisation should also be sought at gross level. However, in practice, a more significant part of gross provisions might fall out of <strong>the</strong> scope of application of statistical methods. 8.38 The APRA standard does not clearly opt for one of <strong>the</strong> two alternatives 32 : 32 APRA (2002) – Prudential Standard GPS 210: Liability Valuation for General Insurers, paras. 26 and 39, <strong>to</strong> be found on APRA website: www.apra.gov.au. 32
In principle, "<strong>the</strong> risk margin should normally be determined having regard <strong>to</strong> <strong>the</strong> uncertainty of <strong>the</strong> net insurance liabilities, but consideration should also be given <strong>to</strong> any additional uncertainty related <strong>to</strong> <strong>the</strong> estimate of reinsurance recoveries." "In practice, <strong>the</strong> estimation of <strong>the</strong> value of <strong>the</strong> insurance liabilities may be ei<strong>the</strong>r undertaken on a gross basis, with a separate estimate of <strong>the</strong> value of reinsurance recoveries, or on a net basis." Therefore, it could be envisaged <strong>to</strong> define separate quantitative standards for gross and net provisions. Except for proportional reinsurance, <strong>the</strong>re is no reason why <strong>the</strong> two standards should always coincide, even if <strong>the</strong> confidence level is <strong>the</strong> same for both standards. But <strong>the</strong> articulation of a requirement on gross provisions and a requirement on net provisions allowing for a consistent evaluation of reinsurance recoveries, is not an easy task and requires fur<strong>the</strong>r analysis. This difficulty is due <strong>to</strong> <strong>the</strong> fact that <strong>the</strong> VaR measure is not sub-additive. In this respect, <strong>the</strong> concept of TailVaR could be considered <strong>to</strong> build a consistent link between gross and net provisions and reinsurance recoveries 33 . 8.39 There are cases where gross provisions at a given percentile will au<strong>to</strong>matically result in net provisions above <strong>the</strong> same percentile of <strong>the</strong> net claims distribution. There may also be (less frequent) cases where net provisions at a given percentile will only be possible if gross provisions are above <strong>the</strong> same percentile. Therefore, it seems illusory <strong>to</strong> define <strong>the</strong> quantitative standard on provision as a 'precise percentile'. It would be more relevant <strong>to</strong> define this requirement as a minimum (e.g., "at least <strong>the</strong> 75 th / 90 th percentile" for both gross and net provisions). This might simplify <strong>the</strong> articulation of a requirement on gross provisions and a requirement on net provisions. 8.40 The level of confidence defined for gross and net provisions does not necessarily have <strong>to</strong> be <strong>the</strong> same. On <strong>the</strong> contrary, a higher confidence level for net provisions could be an incentive for companies <strong>to</strong> get proper reinsurance cover. Treatment of future cash flows 8.41 A specificity in non-life insurance is that <strong>the</strong> main uncertainty lies in <strong>the</strong> amount of claims. Actually, non-life insurance largely covers short-tail business. In addition, even in <strong>the</strong> case of long-tail claims, <strong>the</strong> final amount remains <strong>the</strong> major source of uncertainty, because <strong>the</strong> randomness of <strong>the</strong> final amount increases with <strong>the</strong> time horizon - due <strong>to</strong> inflation, juridical risks, etc. Thus <strong>the</strong> additional complexity arising from discounting (and <strong>the</strong> difficulty in setting a realistic rate) could simply increase modelling error, ra<strong>the</strong>r than improving <strong>the</strong> realism of <strong>the</strong> solvency framework. 33 See CfA 12 for fur<strong>the</strong>r developments on this 'link'. 33
Page 1 and 2: CEIOPS-DOC-07/05 Answers</s
Page 3 and 4: Style convention The following has
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Page 15 and 16: Discounting 7.22 The present value
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Page 21 and 22: Profit sharing In practice, for uni
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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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