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
3.5
Life expense risk
3.5.1. Explanatory
text
Introduction
3.75. Expense risk arises from the
variation in the expenses incurred in servicing insurance or
reinsurance contracts.
3.76. It is likely to be applicable
for all (re)insurance obligations.
3.77. The capital charge
for expense risk is intended to reflect the uncertainty in expense
parameters as a result of changes in the level, trend or volatility
the expenses incurred.
3.78. This risk is normally captured
by increasing expected future expenses by a fixed proportion,
increasing expected future expense inflation or a combination of
both.
Expense risk in QIS4
3.79. The QIS4 approach to
the SCR standard formula included an expense risk sub-module in the
life underwriting risk module (section TS.XI.F of the QIS4 Technical
Specifications (MARKT/2505/08)).
The calculation of the
capital requirement for expense risk was a scenario based stress.
The scenario tested was:
• An increase of 10% in
future expenses compared to best estimate anticipations,
• An
increase of 1% per annum of the expense inflation rate compared to
anticipations
For policies with adjustable loadings6, 75% of
these additional expenses can be recovered from year 2 onwards by
increasing the charges payable by policyholders.
3.80. There
was a range of opinions with regard to the calibration of the
expense risk as a result of which no useful conclusion could be
drawn.
Calculation of the capital requirement
3.81. QIS4
participants did not raise any significant issues with the design
and structure of this module and CEIOPS has therefore concluded that
the approach adopted in QIS4 is appropriate.
3.82. The
capital requirement should therefore be calculated as the change in
net asset value (assets minus liabilities) following:
An
increase of x% in future expenses compared to best estimate
anticipations,
An increase of y% per annum of the expense
inflation rate compared to anticipations
3.83. However CEIOPS
does not intend to retain the specific reference to policies with
adjustable loadings. This is because any future change to charges
payable by policyholders is, in essence, a management action and
should thus be considered in light of CEIOPS’ advice on management
actions rather than specified by CEIOPS.
Calibration of
expense stress
3.84. The basis for the QIS4 calibration of
the expense 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.
3.85. As
mentioned above, QIS4 feedback on the calibration of the expense
stress was varied.
However the expense risk capital charge
from the internal model tended to be, for many undertakings, in line
with the standard formula.
The median ratio was equal to
100% and the inter quartile range was 85% to 166%.
3.86.
CEIOPS therefore proposes to maintain the QIS4 calibration of the
expense risk stress i.e. the stress shall be based on:
• An
increase of 10% in future expenses compared to best estimate
anticipations,
• An increase of 1% per annum of the expense
inflation rate compared to anticipations
3.5.2. CEIOPS’
advice
Expense risk
3.87. The calculation of the
capital requirement for expense risk shall be a scenario based
stress.
3.88. The capital requirement shall be calculated as
the change in net asset value (assets minus liabilities)
following:
• An increase of 10% in future expenses compared
to best estimate anticipations,
• An increase of 1% per annum
of the expense inflation rate compared to anticipations
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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