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

8.54 The solution developed for technical provisions will have <strong>to</strong> be
consistent with <strong>the</strong> approach <strong>to</strong> risks underlying <strong>the</strong> solvency capital
requirements.
8.55 If technical provisions are not discounted, a corrective fac<strong>to</strong>r could be
introduced in <strong>the</strong> SCR as is <strong>the</strong> case in <strong>the</strong> National Association of
Insurance <strong>Commission</strong>ers’ Risk Based Capital (RBC) formula. The
practical implications of such an adjustment would require fur<strong>the</strong>r
consideration.
8.56 Alternatively, if provisions are discounted – and explicit allowance for
inflation is made in technical provisions – <strong>the</strong> SCR formula will have <strong>to</strong>
capture more accurately <strong>the</strong> risks of changes in interest rates and in
inflation. Complex elements will have <strong>to</strong> be considered for <strong>the</strong> link
between interests rates and claims inflation in different lines is not
evident <strong>to</strong> capture.
8.57 Also, discounting should be discussed in terms of transparency:
• Should <strong>the</strong> method, assumptions of discount be shown in <strong>the</strong>
notes <strong>to</strong> <strong>the</strong> accounts?
• Should <strong>the</strong> reduction in <strong>the</strong> claims outstanding provisions caused
by discounting be shown in <strong>the</strong> accounts?
Provision for claims outstanding
8.58 The Third Non-Life Directive 36 (Article 17) amending Article 15 of
Directive 73/239/EEC sets that "The home Member State shall require
every assurance undertaking <strong>to</strong> establish adequate technical provisions
in respect of its entire business. The amount of such technical
provisions shall be determined in accordance with <strong>the</strong> rules laid down in
Directive 91/674/EEC."
8.59 Article 28 of <strong>the</strong> Accounting Directive 37 defines <strong>the</strong> provision for claims
outstanding as "<strong>the</strong> <strong>to</strong>tal estimated ultimate cost <strong>to</strong> an insurance
undertaking of settling all claims arising from events which have
occurred up <strong>to</strong> <strong>the</strong> end of <strong>the</strong> financial year, whe<strong>the</strong>r reported or not,
less amounts already paid in respect of such claims". In line with this
definition, Article 60 of <strong>the</strong> Accounting Directive states <strong>the</strong> principle of
case-by-case estimation of notified claims completed by an evaluation
of IBNR.
8.60 The Manghetti report showed that <strong>the</strong> current definition of outstanding
claims, based on <strong>the</strong> case-by-case estimation, has led <strong>to</strong> a common
understanding of provisions for claims in Europe. Fur<strong>the</strong>rmore, as <strong>the</strong>
KPMG report 38 explains it, case-by-case estimation is in practice an
36 Directive 92/49/EEC – On <strong>the</strong> coordination of laws, regulations and administrative provisions relating <strong>to</strong>
direct insurance and o<strong>the</strong>r than life assurance and amending Directives 73/239/EEC and 88/357/EEC.
37 Directive 91/674/EEC – Annual and consolidated accounts of insurance undertakings.
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KPMG for <strong>the</strong> <strong>European</strong> <strong>Commission</strong> (2002) – Study in<strong>to</strong> <strong>the</strong> methodologies <strong>to</strong> assess <strong>the</strong> overall financial
position of an insurance undertaking from <strong>the</strong> perspective of prudential supervision.
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