Q&A

Question

The answer to a previously raised Question 1678 (given on 22 Nov 2018) implies that in a mass lapse stress one should change the expense assumptions. However, the report EIOPA-14-322 (The underlying assumptions in the standard formula for the Solvency Capital Requirement calculation) states on page 8 that an underlying assumption is that "The dependence between risks can be fully captured by using a linear correlation coefficient approach." This in my interpretation implies that the correlation between lapse and expense risk is intended to fully capture the likelihood that there will be an increase in expenses in a lapse shock. Hence this implies that one should use the same expenses in the lapse shock as are used in BEL. However, the answer to Q1678 is not consistent with this. Can you please clarify whether the answer to Q1678 is correct in light of EIOPA-14-322?

Background of the question

I am asking the question as it appears to me  that the answer to Q1678 is incorrect and is leading to inconsistent application of Article 142. I am aware of companies that follow my interpretation (i.e. that EIOPA-14-322 indicates that there should be no change to the expense assumption in a lapse stress) whereas I am also aware of companies that now follow the approach suggested in the answer to Q1678. 

EIOPA answer

This question has been rejected because the matter it refers to has been answered in Q&A 1678 , which remains valid. The non-linearity of the dependency is taken into account in the calibration as per CEIOPs Advice. Also, answer to Q&A 1678 said that the capital requirement for mass lapse risk should reflect the adjustments after the mass lapse event that the insurer would have to make to the expense component of the cash flow projection in the best estimate calculation.