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
3.2 Mortality risk
3.2.1. Explanatory text
Introduction
3.7. Mortality risk is
associated with (re)insurance obligations (such as term assurance or
endowment policies) where a (re)insurance undertaking guarantees to
make a single or recurring series of payments in the event of the
death of the policyholder during the policy term.
3.8. It is
applicable for (re)insurance obligations contingent on mortality
risk i.e. where the amount currently payable on death exceeds the
technical provisions held and, as a result, an increase in mortality
rates is likely to lead to an increase in the technical
provisions.
3.9. The capital charge for mortality 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 that more policyholders than anticipated
die during the policy term.
3.10. This risk is normally
captured by increasing the mortality rates either by a fixed amount
or by a proportion of the base mortality rates.
The
calibration (of the increase) should capture the impact of each of
the above factors (level, trend and volatility).
Mortality
risk in QIS4
3.11. The QIS4 approach to the SCR standard formula
included a mortality 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 mortality risk was a scenario based stress.
The scenario
tested was a permanent 10% increase in mortality rates.
3.12.
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.
3.13. QIS4 feedback on
the calibration of the mortality stress was varied.
Some
undertaking felt that the calibration was too strong and without
sufficient granularity whereas other undertakings thought that the
calibration was below the 99.5th percentile.
3.14. QIS4 also
tested alternative approaches for dealing with (re)insurance
obligations which provide benefits on both death and survival.
The first option proposed that where the death and survival
benefits are contingent on the life of the same insured person(s),
the obligation should not be unbundled.
Under the second
option, all contracts were unbundled into two separate components:
one contingent on the death and other contingent on the survival of
the insured person(s).
Only the former component was taken
into account for the application of the mortality
scenario.
3.15. Feedback from QIS4 indicated that the vast
majority of (re)insurance undertakings chose not to unbundle the
obligations (option one).
The practical difficulty in
unbundling obligations was cited as the main reason for choosing
this option.
Undertakings in one Member State also noted
that this (option one) was consistent with IFRS classifications.
Where supervisors offered views, they generally agreed with
undertakings.
However one Member State argued that more
analysis would be necessary before deciding on the most appropriate
option.
Calculation of the capital requirement
3.16. QIS4
participants suggested that a gradual change to inception rates and
trends would be more appropriate than a one-off shock for biometric
risks.
However CEIOPS has considered this proposal (see in
particular discussion under longevity risk below) and has concluded
that a one-off shock is more appropriate in the context of the
standard formula.
3.17. The capital requirement should
therefore be calculated as the change in net asset value (assets
minus liabilities) following a permanent increase in mortality rates
of x%.
Calibration of mortality stress
3.18. The basis
for the QIS4 calibration of the mortality 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.
3.19. As mentioned above, QIS4 feedback on the
calibration of the mortality stress was varied.
However an
analysis of the mortality stress parameters provided by firms using
internal models indicated that the standard formula parameter was
relatively low.
Based on a sample size of 21 internal model,
the median stress was 22%, with an inter quartile range of 13% to
29%. This is significantly higher than the standard formula
calibration of 10%.
3.20. CEIOPS therefore proposes to amend
the calibration of the mortality stress to a permanent increase in
mortality rates of 15%.
Unbundling of (re)insurance
obligations
3.21. 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 mortality 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).
3.22. Where model points are used for the
purposes of calculating the technical provisions and the grouping of
the data captures appropriately the mortality risk of the portfolio,
each model points can be considered to represent a single insured
person for the purposes of applying the above advice.
3.2.2.
CEIOPS’ advice
Mortality risk
3.23. The mortality risk
sub-module is applicable for (re)insurance obligations contingent on
mortality risk i.e. where the amount currently payable on death
exceeds the technical provisions held and, as a result, an increase
in mortality rates leads to an increase in the technical
provisions.
3.24. The calculation of the capital requirement
for mortality risk shall be a scenario based stress.
3.25.
The capital requirement shall be calculated as the change in net
asset value (assets minus liabilities) following a permanent
increase in mortality rates of 15%.
3.26. 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 mortality 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).
3.27. Where model
points are used for the purposes of calculating the technical
provisions and the grouping of the data captures appropriately the
mortality 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
  
|
