Consultation Paper No. 49 - CEIOPS-CP-49/09, 2
July 2009
Draft CEIOPS
Advice for Level 2 Implementing Measures on Solvency II:
Standard formula SCR - Article 109 c, Life
underwriting risk
3.4. Disability-morbidity
risk
3.4.1. Explanatory text
Introduction
3.53.
Morbidity or disability risk is associated with
all types of
insurance compensating or reimbursing losses (e.g. loss of income)
caused by illness, accident or disability (income insurance), or
medical expenses due to illness, accident or disability (medical
insurance).
3.54. It is applicable for (re)insurance
obligations contingent on a definition of disability.
However
CEIOPS
expects that the majority of (re)insurance obligations for
which disability-morbidity risk is applicable will be covered by the
health module rather than by the life underwriting module.
This sub-module of the life underwriting risk module is
therefore likely to be applicable only in cases where contracts
cannot be unbundled.
3.55. The capital charge for morbidity
or disability risk is intended to reflect the uncertainty in
morbidity and disability parameters as a result of changes in the
level, trend and volatility of disability, sickness and morbidity
rates and capture the risk that more policyholders than anticipated
are diagnosed with the diseases covered or are or unable to work as
a result of sickness or disability during the policy
term.
3.56. The (re)insurance obligations may be structured
such that, upon the diagnosis of a disease or the policyholder being
unable to work as a result of sickness or disability, recurring
payments are triggered.
These payments may continue until
the expiry of some defined period of time or until either the
recovery or death of the policyholder.
In the latter case,
the (re)insurance undertaking is also exposed to the risk that the
policyholders receives the payments for longer than anticipated i.e.
that claim termination rates are lower than anticipated (recovery
risk).
3.57. Morbidity and disability risk is normally
captured by increasing the claim inception rate either by a fixed
amount or by a proportion of the base inception rates and, where
applicable, reducing the claim termination rates.
The
calibration (of the increase) should capture the impact of each of
the above factors (level, trend and volatility).
Morbidity
and disability risk in QIS4
3.58. The QIS4 approach to the
SCR standard formula included a morbidity and disability risk
sub-module in the life underwriting risk module (section TS.XI.B of
the QIS4 Technical Specifications (MARKT/2505/08)).
The
calculation of the capital requirement for morbidity and disability
risk was a scenario based stress. The scenario tested was an
increase of 35% to “disability rates” for the first year followed by
a 25% increase in “disability rates” for all subsequent
years.
3.59. An alternative scenario was also proposed by the
UK under which the capital charges for critical illness, income
protection and long term care obligations were calculated separately
and there was an additional capital charge in respect of recovery
risk.
3.60. There were a number of comments from QIS4
participants on the general methodology of the morbidity and
disability stress:
• One respondent argued that recovery
rates should be taken into account.
• There was some
confusion over the treatment of disability in terms of catastrophe
risk.
• Support for the UK alternative approach was noted by
one Member State.
3.61. With respect to the calibration of
the morbidity and disability stress, some (re)insurance undertakings
commented that the calibration was too strong.
Calculation of
the capital requirement
3.62. As described above, there are
two aspects to morbidity/disability risk:
• The risk that the
number of claims are greater than anticipated
• The risk that
the duration of the claim is higher than anticipated
The
second risk is only applicable for (re)insurance obligations where
benefits consist of recurring payments which continue until either
the recovery or death of the policyholder.
3.63. Therefore
the capital requirement should be calculated as:
• The change
in net asset value (assets minus liabilities) following an increase
of x1% in morbidity/disability inception rates for the first year
followed by an increase of x2% in morbidity/disability inception
rates for all subsequent years.
• Plus, where applicable, the
change in net asset value (assets minus liabilities) following a
permanent decrease of y% in morbidity/disability recovery
rates
Calibration of morbidity and disability
stress
3.64. The basis for the QIS4 calibration of the
morbidity-disability risk stress is described in the CEIOPS paper
“QIS3 Calibration of underwriting risk, market risk and MCR”.
This paper is available from the CEIOPS
website.
3.65. Subsequent to QIS4, an investigation by the
Swedish FSA indicated that an increase of 50% in
morbidity/disability inception rates for the first year would be
more appropriate.
3.66. This investigation also suggested
that the appropriate calibration of the decrease in
morbidity/disability recovery rates was 20%.
3.67. The
results of the investigation by the Swedish FSA are explained
further in Appendix A.
3.68. In addition, the UK Actuarial
Profession Healthcare Reserving Working Party has undertaken a
survey which investigated the levels of 1 in 200 year morbidity
stresses used by the major UK life insurance firms.
3.69. The
range of stress used by the major UK life insurers for income
protection business averaged 27% for inception rates and 15% for
termination rates.
For critical illness, morbidity margins,
intended to represent a 99.5% confidence over 1 year, averaged
around 40%.
3.70. Furthermore, on average, the average
morbidity margins for statutory reserving for critical illness and
income protection (both inceptions and terminations) were about
20%.
The margins in a statutory reserving basis are partly to
allow for adverse deviations of the inception and termination rates
used in the pricing.
As such, a 1 in 200 stress should be at
least greater than these margins as these margins are not normally
set at the same level as a 1 in 200 year scenario.
3.71.
Looking at the results of this survey in conjunction with the
results of the investigation by the Swedish FSA, we would propose
the following calibration of the disability-morbidity
stress:
• The change in net asset value (assets minus
liabilities) following an increase of 50% in morbidity/disability
inception rates for the first year followed by an increase of 25% in
morbidity/disability inception rates for all subsequent
years.
• Plus, where applicable, the change in net asset
value (assets minus liabilities) following a permanent decrease of
20% in morbidity/disability recovery rates.
This should be
applied together with the above increase in inception rates i.e. it
is a combined stress.
3.4.2. CEIOPS’
advice
Morbidity-disability risk
3.72. The
morbidity-disability risk sub-module is applicable for (re)insurance
obligations contingent on a definition of disability.
3.73.
The calculation of the capital requirement for disability risk shall
be a scenario based stress.
3.74. The capital requirement
shall be calculated as the change in net asset value (assets minus
liabilities) following:
• An increase of 50% in
morbidity/disability inception rates for the first year followed by
an increase of 25% in morbidity/disability inception rates for all
subsequent years.
• Plus, where applicable, a permanent
decrease of 20% in morbidity/disability recovery rates.
Life Underwriting
Risk:
Introduction to Solvency ii Life Underwriting Risk
Solvency ii Mortality Risk
Solvency ii Longevity Risk
Solvency ii Disability Morbidity Risk
Solvency ii Life Expense Risk
Solvency ii Life Revision Risk
Solvency ii Lapse Risk
Solvency ii Life Catastrophe Risk
  
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