As part of the Review of Solvency II, the Commission (subject to agreement from Council and Parliament) has adopted the EIOPA recommendation to allow prudent deterministic valuation of contracts with options and guarantees, where it is proportionate to do so. The criteria for applying proportionality measures are yet to be finalised, but it is expected that the measures will apply automatically to undertakings that are small and non-complex. For example, undertakings with a low risk-profile that currently perform deterministic technical provisions (TP) calculations due to computational constraints.
The objective of the PHRSS (Prudent Harmonized Reduced Set of Scenarios) framework is to provide undertakings with an approach to reflect a prudent level of the time value of options and guarantees (TVOG) in their calculation of TP.
EIOPA will be expected to provide a methodology and tools to produce the scenarios under the PHRSS framework, as well as a description of the methodology to adjust deterministic TP using these scenarios in order to ensure a prudent TVOG assessment. In this context, EIOPA plans to conduct two information requests with industry.
- The first information request is targeted towards undertakings which already perform a full stochastic valuation of their TP, and is aimed at assessing the impact of a limited number of options for the PHRSS methodology. The comparison between full Economic Scenario Generator (ESG) TP and PHRSS TP will assist EIOPA in refining the sensitivities of the scenarios; and improving the correction technique. This will help achieve the objective of a prudent reflection of the TVOG level.
- The second information request will then target undertakings that are expected to be in the eventual scope of the automatic application of proportionality measures, including the PHRSS framework.
Rolling out of information request
To facilitate the rolling out of the information request, EIOPA is providing access to technical documents and information related to the request. The documents available on this webpage are the following:
- A technical specification describing the specificities of the request and detailing the information to be provided by the participants;
- A description of the methodology applied by EIOPA to derive the PHRSS scenarios;
- Files containing technical information, including the specified PHRSS scenarios to be applied by the participants;
- A reporting template to be filled by the participants, specifying both quantitative and qualitative information; and
- Information on Q&A’s pertinent to the request.
On basis of the information provided centrally by EIOPA, national supervisory authorities will contact a representative sample of undertakings to participate in the information request.
The information request is intended to use a (single) reference date as of year-end 2021.
Insurance and reinsurance undertakings should submit the completed reporting template to the respective national supervisory authority by 14 April 2023.
The template should be filled according to the instructions in the technical specifications and taking into account the technical information.
Scope of information request
In view of the aim of the PHRSS framework, the scope of the TP information sought under the information request is limited to life insurance obligations that include options and guarantees. This could also include obligations arising from with profit business, from unit-linked or index-linked contracts or from obligations from health insurance pursued on a similar technical basis to that of life insurance.
As set out above, undertakings participating in the first information request are expected to already use of a “full” stochastic valuation of their TP. Whereas these undertakings are likely to be outside the scope of the PHRSS framework, this allows a comparison of the TVOG implicit in a “full” stochastic valuation with the TVOG derived by the PHRSS framework. Such information is necessary to further fine-tune the calibration of the PHRSS scenarios before the launch of the second information request targeted at undertakings that are likely to be in the scope of the PHRSS framework.
Also note that this first information request is limited to obligations denominated in Euro. EIOPA plans to incorporate all relevant currencies in the second information request for the PHRSS framework. This second information request will also include undertakings using a stochastic valuation of their technical provisions where they report TVOG in currencies other than the Euro.