Question ID: 1523
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Article: 83
Status: Final
Date of submission: 05 Jul 2018
Question
How the policies for which an increase in mortality rates (and analogically this applies to other life underwriting risk sub-modules) leads to an increase in technical provisions without the risk margin are chosen? Should ASSUMPTION from article 83(1)(c) (scenario does not change the value of future discretionary benefits included in technical provisions) apply or not when selecting the policies sensitive to mortality shock? Or does it depend on the fact whether I am calculating capital requirement on mortality risk BEFORE or AFTER loss-absorbing capacity of technical provisions?
I see 3 options and I would appreciate your opinion which one of them is correct:
Option 1 = select the sensitive policies based on the shock on technical provisions without the risk margin and taking into account aforementioned ASSUMPTION. And then use this set of policies in the gross (without LACoTP) as well as net (with LACoTP) calculation.
Option 2 = select the sensitive policies based on the shock on technical provisions without the risk margin and NOT taking into account aforementioned ASSUMPTION. And then use this set of policies in the gross (without LACoTP) as well as net (with LACoTP) calculation.
Option 3 = for net and gross calculation select set of sensitive policies independently. This may result in different set of policies for net and gross calculation as it may apply for single policy that:
- BEL without FDB increases (ASSUMPTION applies) but
- BEL with FDB decreases (ASSUMPTION does not apply)
or vice versa.
EIOPA answer
1. The question is which portfolio of insurance policies should be included in the calculation of the BSCR and the nBSCR.
2. In the following BSCR_i/nBSCR_i denote for a policy i the increase in technical provisions without the risk margin excluding/including changes in the future discretionary benefit component.
3. In the following paragraphs 4 and 5 it is assumed that for all policies with BSCR_i>0 the condition 0<=nBSCR_i <= BSCR_i holds.
4. The set which is used to calculate the capital requirement for mortality risk should include all policies i, where the relevant shock leads to an increase in technical provisions without the risk margin, whilst keeping the future discretionary benefit component constant (BSCR_i>0).
5. Under the above condition using BSCR_i>0 and nBSCR>0 for identifying the policies to be included in the calculation produces actually the same result.
6. If the condition was not met this would imply that either the loss absorbency "overcompensates" the loss (nBSCR_i < 0) or that the effect of the shock with loss absorbency is larger than without loss absorbency (nBSCR_i > BSCR_i) – i.e. the loss absorbency is "negative".
7. Based on the currently available information it is considered that the likely cause for the situation described in paragraph 6 is a calculation error. The insurer should look for its cause and in the interim use a prudent calculation.
8. In case information should become available that there are cases in which the situation described in paragraph 6 reflects the actual risk sharing of the insurance contract, the issue will be revisited and this answer possibly revised.