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
3.8 Life catastrophe risk
3.8.1.
Explanatory text
Introduction
3.174. Catastrophe risk stems
from extreme or irregular events whose effects are not
sufficiently captured in the other life underwriting risk
sub-modules.
Examples could be a pandemic event or a nuclear
explosion.
3.175. This risk is normally treated by using a
one-off extreme mortality and/or morbidity rate.
3.176.
Catastrophe risk is mainly associated with products (such as
term assurance, critical illness or endowment policies) in which
a company guarantees to make a single or recurring & periodic
series of payments when a policyholder dies or is diagnosed with
a specified disease within a pre-agreed period.
Life
catastrophe risk in QIS4
3.177. The QIS4 approach to the SCR
standard formula included a catastrophe risk sub-module in the
life underwriting risk module (section TS.XI.H of the QIS4
Technical Specifications (MARKT/2505/08)).
The calculation of the
capital requirement for catastrophe risk was a scenario based
stress.
The scenario tested was a combination of the following
events:
• an absolute 1.5 per mille increase in the rate of
policyholders dying over the following year (e.g. from 1.0 per
mille to 2.5 per mille)
• an absolute 1.5 per mille increase in
the rate of policyholders experiencing morbidity over the
following year.
Where appropriate, undertakings should assume
that one-third of these policyholders experience morbidity for 6
months, one-third for 12 months and one third for 24 months from
the time at which the policyholder first becomes sick.
3.178.
The following comments were made by QIS4 participants with regard
to the catastrophe risk stress:
• An inconsistency was noted
between the full and simplified standard SCR approaches for Cat
risk: whereas the full approach allows a negative contribution
from annuity business, this is not possible under the simplified
methodology.
• The "policy by policy" calculation for the
assessment of the Life Lapse and Life Cat risk is considered too
burdensome for many undertakings.
Calculation of the
capital requirement
3.179. QIS4 participants did not comment on
the general methodology of the mortality catastrophe stress and
CEIOPS has therefore concluded that the approach adopted in QIS4
was suitable.
3.180. Therefore the capital requirement should be
calculated as the change in net asset value (assets minus
liabilities) following an absolute increase in the rate of
policyholders dying over the following year of x per
mille.
3.181. With regard to the morbidity catastrophe stress,
CEIOPS has considered further the modelling of health catastrophe
risk as part of the development of the health underwriting
module.
There is a wide variety of health products written across
Member States and CEIOPS believes that it is not possible to
define a single stress which captures the catastrophe
risk associated with different products.
Therefore a number of
pan European catastrophe scenarios will be developed for health
business.
For further information on this process, please refer
to CEIOPS’ advice on non life catastrophe risk.
3.182. In
light of the above, CEIOPS proposes to remove the
morbidity catastrophe stress from the life underwriting module.
However firms will be expected to consider the extent to which
any of the health catastrophe stresses are applicable for their
business firm and, if so, apply these stresses in addition to the
mortality catastrophe stresses defined above.
Correlations
between life and health catastrophe risk will be considered in a
later paper.
Calibration of the life catastrophe stress
3.183.
The QIS4 calibration of the mortality catastrophe stress was
supported by a study carried out by Swiss Re14 in 2007 which
estimated that the 1 in 200 year pandemic stress for most
developed countries is between 1.0 and 1.5 per mille within
insured lives.
This study was based on a sophisticated
epidemiological model.
3.184. However, there are a number of
potential weaknesses in this model such as not adequately
allowing for the probability of flu jumping across species such
as from birds to humans, not allowing for non-influenza
pandemics (e.g. AIDS, drug resistant TB, Ebola virus / MRSA /
SARS) or other causes of mortality catastrophe such as terrorism
or physical catastrophes such as
earthquakes.
If these weaknesses
were addressed, it is likely that the estimated stress would
increase.
3.185. Furthermore, due to sparse historical data on
pandemics, there is a significant degree of uncertainty around
the calibration of any pandemic model.
3.186. We also note
that the 1918 flu pandemic, which is the most
significant mortality catastrophe for which data is available,
gave rise to death levels of above 5 per mille.
3.187. In
light of the above, a mortality catastrophe stress constituting
an absolute increase of 2.5 per mille is proposed.
3.188.
CEIOPS would appreciate stakeholder feedback on the
appropriateness and impact of the proposed increase in the
mortality catastrophe stress.
Alternative proposal for life
catastrophe stress
3.189. The above propoal does not restrict the
application of the catastrophe module to (re)insurance
obligations which are contingent in mortality i.e. the module may
also be applied to (re)insurance obligations, such as annuities,
where the increase in mortality leads to a reduction in
technical provisions.
3.190. Although this may seem to reflect
the economic substance of (re)insurance undertakings' portfolios
by allowing for the diversification between different lines of
business, there is evidence to suggest that this diversification
benefit may not exist in reality. In particular, historic
data indicates that primarily young and healthy people died as a
result of influenza pandemics.
3.191. CEIOPS is therefore
considering the restriction of the mortality catastrophe module
to (re)insurance obligations which are contingent on mortality
i.e. where an increase in mortality leads to an increase
in techncial provisions.
3.192. If this proposal were
implemented, CEIOPS believes that it would be reasonable to
consider a lower calibration of the mortality
catastrophe stress.
3.193. CEIOPS would appreciate stakeholder
feedback on whether the alternative proposal could be considered
a better reflection of a 1-in-200 year catastrophe stress than
the current proposal.
3.7.2. CEIOPS’ advice
Catastrophe
risk
3.194. The calculation of the capital requirement for
catastrophe risk shall be a scenario based stress.
3.195. The
capital requirement shall be calculated as the change in net
asset value (assets minus liabilities) following an absolute
increase in the rate of policyholders dying over the following
year of 2.5 per mille.
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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