Please clarify on the following three points relating to Health income protection disability stress Article 156: i) the % increases to morbidity and disability incidence, recovery and persistency rates should apply to the annualised rates; ii) that the changes to claim recovery/persistency rates should be applied to all durations, including during any initial deferred period; iii) changes to recovery/persistency are applied so as to create a compounding effect, meaning the stressed rate in a given month is applied to the stressed number of claims exposure at the start of that month and not to the base exposure.
Background of the questionIn practice there are mixed approaches to calculating this stress with simplifications being used by some insurers. For example, to approximate the change in claim persistency/recovery rates for future claims and different approaches when stressing expected future claims and existing claims reserves. On point iii) there is some uncertainty as to whether or not the stress should be applied to each future month individually, meaning the stressed persistency/recovery rate for month x is applied to the claims exposure at the start of month x from the base scenario. One view is that the stressed persistency/recovery rate should be applied to the stressed claims exposure at the start of month x, meaning the claims exposure grows over time, but wish to clarification from EIOPA.
i) For the same reasons as those underpinning the Guidelines on application of the life underwriting risk module (EIOPA-BoS-14/175 EN), undertakings should apply the % increase to the rates used (irrespective of time unit of the rate)
ii) Changes to rates should be applied to all durations, including any initial deferred period
iii) Changes should be applied consistently, which will result in a compounding effect