Captives
and Solvency ii
Captive
Insurance and Captive Reinsurance Companies after the Solvency ii
Directive
from the Solvency ii
Association, the largest Association of Solvency ii Professionals
in the world
PROPORTIONALITY - LEVEL 2
MEASURES
CEIOPS-CP-45/09, 2 July 2009,
Consultation Paper No. 45
Draft CEIOPS
Advice for Level 2 Implementing Measures on Solvency II: Technical
Provisions Article 85 h, Simplified
methods and techniques to calculate technical
provisions
Introduction
1.1. In its letter of 19 July 2007, the European
Commission requested CEIOPS to provide final, fully consulted advice
on Level 2 implementing measures by
October 2009 and recommended CEIOPS to develop Level 3 guidance on certain areas to foster
supervisory convergence.
On 12 June 2009 the European
Commission sent a letter with further guidance regarding the
Solvency II project, including the list of implementing measures and
timetable until implementation.
1.2. This Paper aims at
providing advice with regard to simplified methods and
techniques to
calculate technical provisions in order to ensure that actuarial and
statistical methodologies are proportionate to the nature, scale and
complexity of the risks, as requested in Article 85(h) of the Level 1
text.
1.3. In view of the
importance of the principle of proportionality
with regard to the use of simplified methods, the paper first
considers how an assessment of proportionality should be carried out in the
context of a valuation of technical
provisions.
1.4. In this respect, the
paper builds on CEIOPS advice on the principle
of proportionality published in May 2008, expanding further
on the process of a proportionality assessment in this context and
on issues such as materiality and model error which are closely
related to such an assessment.
1.5. It then elaborates on
the role of simplified methods for the valuation
of technical provisions under the Solvency II Framework,
considering on whether a specification of such methods in Level 2
implementing measures would be desirable.
1.6. Finally, the Paper
considers two valuation components where
the use of simplified methods is especially relevant (reinsurance
recoverables and the risk margin) in more
detail.
1.7. Concrete
simplifications will be consulted upon in the third set of
advice.
2. Extract from Level 1 Text
2.1 Legal
basis for implementing measure
2.1. Reference for the advice presented in this
paper is Article 85(h) of the Level 1 text:
Article 85 - Implementing
measures
The Commission shall adopt
implementing measures laying down the
following:
(h)
where necessary, simplified methods and techniques to calculate
technical provisions, in order to ensure the actuarial and
statistical methodologies referred to in point (a) and (d) are
proportionate to the nature, scale and complexity of the risks
supported by insurance and reinsurance undertakings including
captive insurance and reinsurance undertakings.
2.2 Other
relevant Level 1 text
2.2.1 Recitals
2.2. The following recitals
explicitly refer to the principle of
proportionality:
(14) [
] In order to
ensure the effectiveness of the supervision all actions taken by the
supervisory authorities should be proportionate
to the nature and the complexity of the risks inherent to the
business of an insurance or reinsurance undertaking, regardless of
the importance of the undertaking concerned for the over-all
financial stability for the market.
(14a) The new solvency
regime should not be too burdensome for small
and medium-sized insurance undertakings.
One of the tools to achieve
this objective is a proper application of the
proportionality principle.
This principle
should apply both to the requirements on the insurance and
reinsurance undertakings and on the exercise of supervisory
powers.
(14b) In particular, the
new solvency regime should not be too burdensome
for insurance undertakings who specialise in providing specific
types of insurance or providing services to specific customer
segments, and it should recognise that specialising in this way can
be a valuable tool for efficiently and effectively managing risk.
[
]
(14c) The new solvency
regime should also take account of the specific
nature of captive insurance and reinsurance undertakings.
As those undertakings only
cover risks associated with the industrial or commercial group to
which they belong, appropriate approaches should thus be provided in
line with the principle of proportionality to
reflect the nature, scale and complexity of their
business.
(92) [
] In accordance with the principle of
proportionality, as set out in that Article, this Directive
does not go beyond what is necessary in order to achieve those
objectives.
2.3. The following
recitals provide background to the general
principles on the valuation of technical
provisions:
(30) In order to allow
insurance and reinsurance undertakings to meet their commitments
towards policyholders and beneficiaries, Member States should
require those undertakings to establish adequate technical
provisions.
The principles and actuarial
and statistical methodologies underlying the calculation of those
technical provisions should be
harmonised throughout the
Community in order to achieve better comparability and
transparency.
(31)
The calculation of technical provisions should be consistent with
the valuation of assets and other liabilities, market consistent and
in line with international developments in accounting and
supervision.
(32) The value of
technical provisions should therefore correspond to the amount an
insurance or reinsurance undertaking would have to pay if it
transferred its contractual rights and obligations immediately to
another undertaking.
Consequently, the value of
technical provisions should correspond to the amount another
insurance or reinsurance undertaking
(reference undertaking)
would be expected to require to take over and meet the underlying
insurance and reinsurance obligations.
The amount of
technical provisions should reflect the characteristics of the
underlying insurance portfolio.
Undertaking-specific
information should therefore only be used in their calculation
insofar as that information enables insurance
and reinsurance
undertakings to better reflect the
characteristics of the underlying insurance portfolio, such
as information regarding claims management and
expenses.
(33) It is necessary that
the expected present value of insurance
liabilities is calculated on the basis of current and credible
information and realistic assumptions, taking account of
financial guarantees and options in insurance or reinsurance
contracts, to deliver an economic valuation of insurance or
reinsurance obligations.
The use of effective and
harmonised actuarial methodologies should be
required.
2.4.
The following recital explicitly refers to the valuation of
technical provisions using simplified
approaches:
(34)
In order to reflect the specific situation of small and medium sized
undertakings, simplified approaches to the calculation of technical
provisions should be provided for.
2.2.2
Articles
2.5. With regard to the principle of
proportionality, Article 28 stipulates that this is fundamental to
all requirements in the Level1 text:
Article 28 -
General principles of supervision
[
]
3. Member States
shall ensure that the requirements laid down in this Directive are
applied in a manner which is proportionate to
the nature, complexity and scale of the risks inherent in the
business of an insurance or reinsurance
undertaking.
3a. The Commission shall
ensure implementing measures include the
principle of proportionality, thus ensuring the proportionate
application of the Directive, in particular to very small insurance
undertakings.
2.6. General requirements
on the valuation of technical provisions also applicable to the
use of simplified approaches - are set out in Articles 75 to 81. For
the purposes of this paper, background relevant to this paper is
provided in particular by Articles 75, 76(2) and
81:
Article 75
General provisions
[
]
2. The value of technical provisions shall
correspond to the current amount insurance and reinsurance
undertakings would have to pay if they were to transfer their
insurance and reinsurance obligations immediately to another
insurance or reinsurance undertaking.
3. The calculation of
technical provisions shall make use of and be consistent with
information provided by the financial markets and generally
available data on underwriting risks (market
consistency).
4.
Technical provisions shall be calculated in a prudent, reliable and
objective manner. [
]
Article 76(2)
Calculation of the technical provisions
The best estimate shall
correspond to the probability-weighted average of future cash-flows,
taking account of the time value of money (expected present value of
future cash-flows), using the relevant risk-free interest rate term
structure.
The calculation of the
best estimate shall be based upon up-to-date and credible
information and realistic assumptions and be performed using
adequate, applicable and relevant actuarial and statistical
methods.
The cash-flow projection
used in the calculation of the best estimate shall take account of
all the cash in- and out-flows required to settle the insurance and
reinsurance obligations over the lifetime thereof.
The best
estimate shall be calculated gross, without deduction of the amounts
recoverable from reinsurance contracts and special purpose vehicles.
Those amounts shall be calculated separately, in accordance with
Article 80.
Article 81
Data quality and application of approximations, including
case-by-case approaches, for technical provisions
[
]Where, in specific
circumstances, insurance and reinsurance undertakings have insufficient data of appropriate quality to
apply a reliable actuarial method to a set or subset of their
insurance and reinsurance obligations, or amounts recoverable from
reinsurance contracts and special purpose vehicles, appropriate
approximations, including case-by-case approaches, may be
used in the
calculation of the best estimate.
PROPORTIONALITY - LEVEL 2
MEASURES
CEIOPS-CP-45/09, 2 July 2009,
Consultation Paper No. 45
1.
Introduction
2.
Advice - Proportionality
3.
Proportionality Assessment A three step process
4.
Simplified Methods
5.
Reinsurance Recoverables
6.
Annex A: Gross-to-net Techniques
New:
Solvency ii and Captives, CEIOPS Level 2 measures
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