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

essential part of <strong>the</strong> process of establishing claims provisions. As such,
it can be considered as a potential foundation of most provisioning
procedures principles, under Pillar II.
8.61 Case-by-case estimation is also closely linked <strong>to</strong> <strong>the</strong> nature of contracts
and local law: in some cases, local law may impose <strong>the</strong> minimum
amount <strong>to</strong> be reserved. It should also be added that, in some Member
States, this way of envisaging provisions is also <strong>the</strong> basis for windingup
regulations, granting exclusive access <strong>to</strong> a subset of assets meeting
technical provisions.
8.62 The case-by-case principle, which is a necessary reference for a
prudential framework, should actually not be envisaged as in
contradiction with statistical methods. On <strong>the</strong> contrary, as Article 60 of
<strong>the</strong> Accounting Directive shows it:
• a complement <strong>to</strong> <strong>the</strong> case-by-case estimation (for IBNR) is
necessary: this complement is generally evaluated by statistical
methods; and
• derogation <strong>to</strong> <strong>the</strong> case-by-case estimation is already provided for
by <strong>the</strong> Directive, "having regard <strong>to</strong> <strong>the</strong> nature of risks".
8.63 With <strong>the</strong> introduction of <strong>the</strong> new prudential system, case-by-case
estimation will be necessary:
• The use of statistical methods will not be relevant in all cases. In
such cases, considerable judgement will be needed <strong>to</strong> determine
<strong>the</strong> required prudence level, and <strong>the</strong> undertaking will need <strong>to</strong>
perform case-by-case estimation <strong>to</strong> justify its actuarial approach.
• Even when statistical methods can be used, <strong>the</strong>y may have <strong>to</strong>
rely on some case-by-case estimation ra<strong>the</strong>r than only past
observations. In fact, case-by-case estimation can integrate more
information or 'updated information', 39 in comparison <strong>to</strong> past data
on paid claims.
• Case-by-case estimation is a foundation of sound underwriting
risk management. It is one of <strong>the</strong> 'feedback mechanisms'
identified by <strong>the</strong> Sharma Report 40 "<strong>to</strong> adjust pricing based on
experience and <strong>to</strong> amend technical provisions <strong>to</strong> reflect issues
identified".
8.64 In any event, <strong>the</strong> insurer should understand, and be able <strong>to</strong> explain <strong>to</strong>
<strong>the</strong> supervisor, differences between case-by-case estimates and <strong>the</strong>
provisions it establishes. If <strong>the</strong> two methods are in conflict, ei<strong>the</strong>r <strong>the</strong>
statistical method or <strong>the</strong> case-by-case estimation may not be
adequate. However, <strong>the</strong> statistical method may result in a lower
39 For example, by taking in<strong>to</strong> account <strong>the</strong> results of changes in law or case law.
40 Conference of <strong>the</strong> Insurance Supervisory Authorities of <strong>the</strong> Member States of <strong>the</strong> <strong>European</strong> Union (2002) –
Report on <strong>the</strong> prudential supervision of insurance undertakings.
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