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

• trend uncertainty: arises from <strong>the</strong> difficulty in accurately
assessing <strong>the</strong> future direction of assumptions (e.g. rising life
expectancy) in future years.
10.53 When a policy lapses, <strong>the</strong> insurer pays <strong>the</strong> surrender value and
'receives' <strong>the</strong> technical provision that is released by <strong>the</strong> policy’s
termination. Therefore, <strong>the</strong> treatment of lapse risk in <strong>the</strong> SCR strongly
depends on how lapses are dealt with in evaluating technical
provisions. If when valuing liabilities, surrender floors are considered
on a contract-by-contract basis, <strong>the</strong>n an increase in lapse rates
presents no additional risk. If not, <strong>the</strong> insurer is at risk of higher lapse
rates if surrender values are higher than policy technical provisions.
But lower lapse rates may also be unfavourable <strong>to</strong> <strong>the</strong> insurer if
surrender values are lower than technical provisions of those particular
contracts and lapse assumptions are included in <strong>the</strong> calculation of
technical provisions on a portfolio basis.
10.54 Unanticipated lapse rates may also prevent an insurer from recovering
initial policy acquisition expenses from future premiums. Acquisition
expenses may be recognized implicitly in financial statements through
<strong>the</strong> use of modified net level premium valuation methods. But such
implicit methods do not currently include any provision for
unfavourable variations in lapse rates. Under a 'best estimate + risk
margin' valuation approach, unfavourable variations should be partly
included in <strong>the</strong> risk margin unless this risk is excluded from <strong>the</strong>
valuation of technical provisions.
- Choice of structure for modelling approach <strong>to</strong> underwriting risk
10.55 A scenario-based modelling approach <strong>to</strong> underwriting risk would require
<strong>the</strong> definition of a set of scenarios that adequately describe any
adverse development of <strong>the</strong> underwriting result of <strong>the</strong> insurers’
portfolio. Given <strong>the</strong> heterogeneity of underwriting risk, even within
established 'classes' of insurance business, relying solely on such an
approach does not seem feasible in <strong>the</strong> context of <strong>the</strong> standard
formula.
10.56 However, by nature of <strong>the</strong>ir construction, fac<strong>to</strong>r-based models may be
less able <strong>to</strong> predict extreme, catastrophic events, which may constitute
an important source of risk in life insurance. This may also be <strong>the</strong> case
for lapse risk since <strong>the</strong> impact on <strong>the</strong> technical provisions of a higher or
lower than expected lapse rate may not be constant in time. The
impact of this kind of events on <strong>the</strong> risk situation of <strong>the</strong> insurer may be
better captured by stress and scenario techniques than by static fac<strong>to</strong>rbased
models.
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