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European Insurance and Occupational Pensions Authority

1428

Q&A

Question ID: 1428

Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)

Topic: Technical Provisions (TPs)

Article: 18(3)

Status: Final

Date of submission: 17 Aug 2021

Question

We are refering to article 18-3 of the Delegated Regulation. Our understanding is that this article is dealing with the definition of the contract boundaries of those contracts that are recognised in the prudential balance sheet according to article 17.

In other words, we see the determination of the liability cash-flows comprising the best estimates in two steps :

1) Recognition of in-force contracts as at valuation date : that is all contracts to which the insurance undertaking is a party to. The obligations underlying those contracts should be projected until the end of the contract and should be modeled according to the general principles underlying the assessment of the best estimate, that is on the basis of credible information, realistic assumptions derived from experience and management actions.

2) Limitation of the cash-flows to be projected, ie the contract boundaries, with regards future premiums and the obligations attached to those future premiums. Hence article 18-3 states the following :

Obligations which relate to insurance or reinsurance cover provided by the undertaking after any of the following dates do not belong to the contract, unless the undertaking can compel the policyholder to pay the premium for those obligations:

(a) the future date where the insurance or reinsurance undertaking has a unilateral right to terminate the contract;

(b) the future date where the insurance or reinsurance undertaking has a unilateral right to reject premiums payable under the contract;

(c) the future date where the insurance or reinsurance undertaking has a unilateral right to amend the premiums or the benefits payable under the contract in such a way that the premiums fully reflect the risks.

Hence, our understanding is that premium commitments already paid belong to the contract and are not covered by article 18-3. The obligations related to premiums already paid should be modelled according to the general principles underlying the assessment of the best estimate on the basis of credible information, realistic assumptions based on experience and management actions.

In the case where the insurer holds the unilateral right referred to in article 18-3 to terminate a contract it is an option for the insurer. This option should be modelled in the best estimate according to experience and should model the probable behavior of the contract flows under different scenarios, but excluding future premiums and their related obligations after the date at which the unilateral.

Could EIOPA confirm our understanding of article 18-3-a ?

EIOPA answer

Contract boundaries determine the premiums and obligations that belong to the contract considering the rights and risks for the undertakings. Where the undertaking can compel the policyholder to pay the premium, the premium and the related obligations belong to the contract because the undertaking has the right to request and keep the premium. Where the undertaking has the obligation to accept new premiums and cover the related obligations, but does not hold the unilateral right the to amend the premiums/benefits so that the premiums fully reflect the risk, these premiums and the related obligations belong to the contract because the undertaking has the obligation to cover the risks.

In most of the cases, paid-in premiums and the related obligations reflect a right and an obligation for the undertaking, i.e. the right to keep the premium and the obligation to cover the risk. Therefore, the premium and the related obligations belong to the contract.

However, under very specific circumstances, this may not be the case. For example, in case of a contract with a paid-in premium where either party can cancel the contract during a limited period of time, e.g. a few days after entering into it. In such a case, the undertaking does not have the right to keep the premium nor the obligation to cover the risk and, therefore, the premium and the related obligations do not belong to the contract.