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

<strong>the</strong>y represent 10% of outstanding claims provisions in Germany, and
30% in Portugal.
8.82 Many issues related <strong>to</strong> <strong>the</strong> Premium Provisions are closely connected <strong>to</strong>
<strong>the</strong> Outstanding Claims Provisions and have been addressed above.
However premium provisions present some specific issues.
8.83 First, from a practical point of view, it must be mentioned that <strong>the</strong>
estimation of premium provisions do not rely on <strong>the</strong> same <strong>to</strong>ols
(although, naturally, a proper valuation of claims is a pre-requisite for
a undertaking <strong>to</strong> set premiums – and premiums liabilities). The
estimation of <strong>the</strong> outstanding claims liabilities is built on well-defined
his<strong>to</strong>rical statistics and methodologies. Fewer data and methods are
available for <strong>the</strong> estimation of <strong>the</strong> premium liabilities.
8.84 Moreover, <strong>the</strong> uncertainties related <strong>to</strong> <strong>the</strong> premium liabilities are
typically larger than <strong>the</strong> uncertainties related <strong>to</strong> <strong>the</strong> outstanding claims
liabilities. Premium liabilities have <strong>to</strong> be considered having regard <strong>to</strong>
<strong>the</strong> potentially higher volatility, as <strong>the</strong> exposure period of <strong>the</strong>se
liabilities, differently from claims provisions, belongs <strong>to</strong> <strong>the</strong> future. The
fact that projected payments relating <strong>to</strong> Premiums Liabilities relate <strong>to</strong>
events that are yet <strong>to</strong> occur generates an important source of
uncertainties.
8.85 The relatively higher degree of uncertainty related <strong>to</strong> <strong>the</strong> premium
liabilities is also referred <strong>to</strong> in <strong>the</strong> APRA Guidance Note on actuarial
opinions and reports on non-life insurance. While discussing whe<strong>the</strong>r
<strong>the</strong> valuation principles applied for <strong>the</strong> outstanding claims liabilities can
be applied for <strong>the</strong> premium liabilities as well, <strong>the</strong> Guidance Note states:
"it is recognised that, as a full actuarial valuation of Premiums
Liabilities is essentially a re-underwriting of <strong>the</strong> portfolio, it may not be
appropriate or even possible <strong>to</strong> undertake as complete a valuation as is
appropriate for Outstanding Claims Liabilities".
The higher volatility related <strong>to</strong> <strong>the</strong> premium liabilities should lead <strong>to</strong> a
more significant risk margin.
8.86 If renewals are concentrated <strong>to</strong> one date, <strong>the</strong> premium provision is
very low <strong>the</strong> day before this date. This is <strong>the</strong> case in commercial and
industrial lines where <strong>the</strong> policy period is often <strong>the</strong> calendar year, and
hence <strong>the</strong> premium provision as at December 31 is considerably lower
than it would be at o<strong>the</strong>r dates of <strong>the</strong> year. However, <strong>the</strong> risk margin
should not result in an incentive for insurers <strong>to</strong> underwrite all <strong>the</strong>ir
policies at <strong>the</strong> beginning of <strong>the</strong> year. Actually, on an on-going basis, an
undertaking for which renewal has effect beginning January is exposed
<strong>to</strong> <strong>the</strong> same uncertainty for supervisory purposes as one with its
renewal in July.
8.87 Therefore it could be more appropriate <strong>to</strong> address <strong>the</strong> supplementary
volatility of <strong>the</strong> claims yet <strong>to</strong> come under <strong>the</strong> SCR. With this approach,
a more deterministic calculation of premium provisions (unearned
premiums + unexpired risks) could be adopted, e.g. on <strong>the</strong> basis of an
analysis of <strong>the</strong> claims/premiums ratios over <strong>the</strong> past years. A possibility
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