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

<strong>to</strong> use more sophisticated methods, by derogation <strong>to</strong> this simple rule,
could be envisaged.
8.88 More specific issues should briefly be mentioned: one of <strong>the</strong>m concerns
<strong>the</strong> handling of multiyear contracts. In general terms it seems
reasonable <strong>to</strong> expect that <strong>the</strong> uncertainty related <strong>to</strong> <strong>the</strong> premium
liabilities for such contracts could be considerably higher than <strong>the</strong>
uncertainty related <strong>to</strong> <strong>the</strong> premium liabilities for one-year contracts.
Accordingly, <strong>the</strong> ratio of <strong>the</strong> risk margin <strong>to</strong> <strong>the</strong> central estimate of <strong>the</strong>
CBNI-payments should be higher for multiyear contracts. On <strong>the</strong> o<strong>the</strong>r
hand, when stipulating <strong>the</strong> central estimate and risk margin for CBNIpayments
related <strong>to</strong> multiyear contracts, <strong>the</strong> relevant terms and
conditions regarding e.g. <strong>the</strong> premiums rates (including possible
clauses for adjusting premium rates during <strong>the</strong> duration of <strong>the</strong>
contract) should be taken in<strong>to</strong> consideration. Provisions relating <strong>to</strong>
reinstatements in reinsurance also need <strong>to</strong> be considered.
Equalisation mechanism
8.89 The current EU regulation regarding technical provisions includes <strong>the</strong>
need for equalisation provisions 49 . These provisions generally provide
additional safety margins in volatile areas of non-life business and may
work as a 'countercyclical <strong>to</strong>ol'. More precisely, <strong>the</strong>y are used for two
purposes: equalising claims ratio over time, and providing catastrophe
reserves for special risks.
8.90 Equalisation provisions are currently in addition <strong>to</strong> <strong>the</strong> requirement <strong>to</strong>
set up outstanding claims provisions, and <strong>the</strong>y form part of <strong>the</strong>
technical provisions of <strong>the</strong> insurer. Conversely, in <strong>the</strong> IASB framework,
equalisation provisions are unlikely <strong>to</strong> be included as a technical
provision. 50 However, <strong>the</strong> removal of this item could result in increasing
<strong>the</strong> risk insurers are exposed <strong>to</strong> when significant claims arise. The
impact of future catastrophes and adverse claims experience has <strong>to</strong> be
taken in<strong>to</strong> account when assessing <strong>the</strong> need <strong>to</strong> maintain sufficient
reserves in <strong>the</strong> future solvency system. Therefore, an equalisation
mechanism should be considered as a possible component of <strong>the</strong>
prudential regime.
Possible approaches
8.91 The first approach would be <strong>to</strong> maintain <strong>the</strong> current system, where
amounts set aside <strong>to</strong> face future catastrophes or adverse claims
experience are treated as provisions. The main advantage of this
approach is that <strong>the</strong> amounts set aside during favourable years are
tax-free. This allows for consistency and durability of <strong>the</strong> system, since
<strong>the</strong> reserve <strong>to</strong> pay extra claims during future adverse years is not paid
out in <strong>the</strong> form of taxes and dividends.
49 Article 6 Accounting Directive.
50 IFRS 4 states that insurers shall not recognise equalisation provisions as a liability.
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