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
1. Introduction
2. Mortality
risk
3. Longevity risk
4. Disability-morbidity
risk
5. Life expense risk
6. Revision risk
7. Lapse
risk
8. Life catastrophe risk
1.
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 the design, structure and
calibration of the life underwriting module for the standard formula for the Solvency Capital
Requirement as requested in Article 109 of the Solvency II
Level 1 text.
1.3. Correlations between the life underwriting
risk sub-modules and between the life underwriting module and other
modules are not covered by this draft advice.
They will be
addressed in the third set of advice.
1.4. This Paper only
covers simplifications to the standard formula with regard to the
lapse risk sub-module.
CEIOPS will publish a further
consultation paper covering simplifications in the third set of
advice.
2. Extract from Level 1 Text
Legal basis for
implementing measure
Article 109 - Implementing measures
1. In order to ensure
that the same treatment is applied to all
(re)insurance and reinsurance undertakings calculating the Solvency
Capital Requirement on the basis of the standard formula, or to take
account of market developments, the Commission shall adopt
implementing measures laying down the following:
(a) a standard formula in accordance with the
provisions of Articles 101 and 103 to 108;
(b) any
sub-modules necessary or covering more precisely the risks which
fall under the respective risk modules referred to in Article 104 as
well as any subsequent updates;
(c) the methods, assumptions
and standard parameters to be used, when calculating each of the
risk modules or sub-modules of the Basic Solvency Capital
Requirement laid down in Articles 104 and 105.
[…]
(k) the
simplified calculations provided for specific sub-modules and risk
modules, as well as the criteria that insurance and reinsurance
undertakings shall be required to meet in order to be entitled to
use each of these simplifications, as set out in Article
108;
Other relevant articles for provisiding background to
the advice
Article 105 - Calculation of the Basic Solvency
Capital Requirement
1. The Basic Solvency Capital Requirement
shall be calculated in accordance with paragraphs 2 to
6.
[...]
3. The life underwriting risk
module shall reflect the risk arising from the life insurance
obligations, in relation to the perils covered and the processes
used in the conduct of business.
It shall be
calculated, in accordance with point 3 of Appendix IV, as a
combination of the capital requirements for at least the following
submodules:
(a) the risk of loss, or of adverse change in the
value of insurance liabilities, resulting from changes in the level,
trend, or volatility of mortality rates, where an increase in the
mortality rate leads to an increase in the value of insurance
liabilities (mortality risk);
(b) the risk of loss, or of adverse change in
the value of insurance liabilities, resulting from changes in the
level, trend, or volatility of mortality rates, where a decrease in
the mortality rate leads to an increase in the value of insurance
liabilities (longevity risk);
(c) the risk of loss, or of adverse change in
the value of insurance liabilities, resulting from changes in the
level, trend or volatility of disability, sickness and morbidity
rates (disability – morbidity risk);
(d) the risk of loss,
or of adverse change in the value of insurance liabilities,
resulting from changes in the level, trend, or volatility of the
expenses incurred in servicing insurance or reinsurance contracts
(life expense risk);
(e) the risk of loss,
or of adverse change in the value of insurance liabilities resulting
from fluctuations in the level, trend, or volatility of the revision
rates applied to annuities, due to changes in the legal environment
or in the state of health of the person insured (revision
risk);
(f)
the risk of loss, or of adverse change in the value of insurance
liabilities, resulting from changes in the level or volatility of
the rates of policy lapses, terminations, renewals and surrenders
(lapse risk);
(g) the risk of loss, or of adverse change in
the value of insurance liabilities, resulting from the significant
uncertainty of pricing and provisioning assumptions related to
extreme or irregular events (life catastrophe risk).
Article 108 -
Simplifications in the standard formula
Insurance and
reinsurance undertakings may use a simplified
calculation for a specific sub-module or risk module where
the nature, scale and complexity of the risks they face justifies it
and where it would be disproportionate to require all insurance and
reinsurance undertakings to apply the standardised calculation.
Simplified calculations shall be calibrated in accordance
with Article 101(3).
3. Advice
3.1 General
considerations
3.1.1. Explanatory
text
Design and structure
3.1. A number of the
life underwriting risk stresses are based on a delta- NAV (change in value of assets minus
liabilities) approach.
The change in net asset value
should be based on a balance sheet that does not include the risk
margin of the technical provisions.
This approach is based
on the assumption that the risk margin does not change materially
under the scenario stress.
This simplification is made to
avoid a circular definition of the SCR since the size of the risk
margin depends on the SCR.
3.2. Furthermore, where a
delta-NAV approach is used, the revaluation of technical provisions
should allow for any relevant adverse changes in option take-up
behaviour of policyholders in this scenario.
Calibration
3.3. The calibration of the life
underwriting parameters should capture changes in the level, trend
and volatility of the parameter.
However, for QIS 3, it was
decided to reduce the complexity of the design of the underwriting
risk module by maintaining the level and trend risk components only.
It is assumed that the volatility risk component is
implicitly covered by the level, trend and catastrophe risk
components.
This is considered to be acceptable since, for
QIS2, the volatility risk proved to be considerably lower than the
trend risk.
CEIOPS therefore proposes to retain this
approach.
3.1.2. CEIOPS’
advice
General considerations
3.4. The change
in net asset value shall be based on a balance sheet that does not include the risk margin of the
technical provisions.
3.5. The revaluation should allow for
any relevant adverse changes in option take-up behaviour of
policyholders in this scenario.
3.6. The calibration of the
life underwriting parameters shall capture changes in the level and
trend of the parameters only. It is assumed that the volatility risk
component is implicitly covered by the level, trend and catastrophe
risk components.
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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