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
3.3. Longevity risk
3.3.1.
Explanatory text
Introduction
3.28. Longevity risk is
associated with (re)insurance obligations (such as annuities) where
a (re)insurance undertaking guarantees to make recurring series of
payments until the death of the policyholder and where a decrease in
mortality rates leads to an increase in the technical provisions, or
with (re)insurance obligations (such as pure endowments) where a
(re)insurance undertaking guarantees to make a single payment in the
event of the survival of the policyholder for the duration of the
policy term.
3.29. It is applicable for (re)insurance
obligations contingent on longevity risk i.e. where there is no
death benefit or the amount currently payable on death is less than
the technical provisions held and, as a result, a decrease in
mortality rates is likely to lead to an increase in the technical
provisions.
3.30. The risk that a policyholder
lives longer
than anticipated is longevity risk.
Longevity risk is
particularly significant as a result of an increasing life
expectancy among policyholders in most developed
countries.
3.31. The capital charge for longevity risk is
intended to reflect the uncertainty in mortality parameters as a
result of changes in the level, trend and volatility of mortality
rates and capture the risk of policyholders living longer than
anticipated.
3.32. This risk may be captured in a number of
different ways: a simple approach of a reduction in base mortality
rates, a more realistic approach of using improvement factors which
leads to a two dimensional mortality table, or a combination of
these two approaches.
In any event, the calibration (of the
increase) should capture the impact of each of the above factors
(level, trend and volatility).
Longevity risk in
QIS4
3.33. The QIS4 approach to the SCR standard formula included
a longevity risk sub-module in the life underwriting risk module
(section TS.XI.C of the QIS4 Technical Specifications
(MARKT/2505/08)).
The calculation of the capital requirement for
longevity risk was a scenario based stress.
The scenario
tested was a permanent 25% decrease in mortality rates.
3.34.
QIS4 feedback from several Member States suggested that a gradual
change to inception rates and trends would be more appropriate than
a one-off shock for biometric risks.
3.35. With regard to the
calibration of the longevity stress, several undertakings argued for
an age and duration dependent treatment of longevity, reinforcing
more general comments that a one-off shock is not the most
appropriate form of stress for biometric risks.
An
improvement of x% per annum (over base mortality) was suggested as
an alternative by one respondent.
3.36. Some undertakings
felt the longevity shock was too conservative.
Calculation of
the capital requirement
3.37. QIS4 participants suggested
that a gradual change to inception rates and trends would be more
appropriate than a one-off shock for biometric risks.
For
example, one respondent suggested that an improvement of x% per
annum (over base mortality) could be used as an
alternative.
3.38. Subsequent to QIS4, an analysis by UNESPA
proposed an alternative structure to the longevity shock which
depended on age and duration.
3.39. CEIOPS has considered the
above mentioned proposals but has concluded that a one-off shock to
longevity is more appropriate for the purposes of the standard
formula for the following reasons:
• It is more
straightforward to apply
• With respect to differentiating by
duration, CEIOPS’ investigations (see Appendix B to this paper)
indicate that shocks for different durations are small and are not
monotone.
• With respect to differentiating by age,
portfolios of (re)insurance obligations for which longevity risk is
applicable are generally heavily weighted in favour of older age
groups.
• We do not believe that there is sufficient reliable
data to calibrate at a more granular level
3.40. The capital
requirement should therefore be calculated as the change in net
asset value (assets minus liabilities) following a permanent
decrease in mortality rates of x%.
Calibration of longevity
stress
3.41. The basis for the QIS4 calibration of the
longevity risk stress is described in the CEIOPS paper “QIS3
Calibration of underwriting risk, market risk and MCR”.
3.42.
Subsequent to QIS4, an investigation has been carried out by the
Polish FSA which analysed the mortality data for nine countries
indicated based both on historic improvements and a stochastic model
of future mortality improvements.
3.43. The results of this
analysis indicated that, on average (across the nine countries for
which data was analysed), historic improvements in mortality rates
over 15 years from 1992 to 2006 were higher than 25%.
Although the results of the stochastic model of future
mortality improvements may imply a lower stress, CEIOPS has attached
more weight to the analysis of historic improvements because of the
significant uncertainty inherent in modelling
mortality.
3.44. Furthermore feedback from internal model
firms as part of QIS4 indicates that the median stress was
25%.
3.45. CEIOPS therefore proposes to maintain the QIS4
calibration of the longevity risk stress i.e. the stress shall be
based on a permanent 25% decrease in mortality
rates.
Unbundling of (re)insurance obligations
3.46.
Where (re)insurance obligations provide benefits both in case of
death and survival and the death and survival benefits are
contingent on the life of the same insured person(s), these
obligations should not be unbundled.
For these contracts the
longevity scenario should be applied fully allowing for the netting
effect provided by the ‘natural’ hedge between the death benefits
component and the survival benefits component (note that a floor of
zero applies at the level of contract if the net result of the
scenario is
favourable to the (re)insurer).
3.47. Where
model points are used for the purposes of calculating the technical
provisions and the grouping of the data captures appropriately the
longevity risk of the portfolio, each model points can be considered
to represent a single insured person for the purposes of applying
the above
advice.
3.3.2. CEIOPS’ advice
Longevity
risk
3.48. The longevity risk sub-module is applicable for
(re)insurance obligations contingent on longevity risk i.e. i.e.
where there is no death benefit or the amount currently payable on
death is less than the technical provisions held and, as a result, a
decrease in mortality rates is likely to lead to an increase in
the technical provisions.
3.49. The calculation of the
capital requirement for longevity risk shall be a scenario based
stress.
3.50. The capital requirement shall be calculated as
the change in net asset value (assets minus liabilities) following a
permanent decrease in mortality rates of 25%.
3.51. Where
(re)insurance obligations provide benefits both in case of death and
survival and the death and survival benefits are contingent on the
life of the same insured person(s), these obligations should not be
unbundled.
For these contracts the longevity scenario should
be applied fully allowing for the netting effect provided by the
‘natural’ hedge between the death benefits component and the
survival benefits component (note that a floor of zero applies at
the level of contract if the net result of the scenario
is favourable to the (re)insurer).
3.52. Where model
points are used for the purposes of calculating the technical
provisions and the grouping of the data captures appropriately the
longevity risk of the portfolio, each model points can be considered
to represent a single insured person for the purposes of applying
the above advice.
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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