Question ID: 2029
Regulation Reference: (EU) No 2009/138 - Solvency II Directive (Insurance and Reinsurance)
Topic: Technical Provisions (TPs)
Article: 105(3)
Status: Final
Date of submission: 27 Sep 2019
Question
Expenses in the technical provision are increased yearly with the HCIP inflation. To hedge the inflation risk a indexed linked bond based on the HCIP inflation is bought. Is it possible to take this hedge into account in the SCR expenses given the formulation in the DA: loss in basic own funds due to an increase of 1 percentage point to the expense inflation rate (expressed as a percentage) used for the calculation of technical provisions.
Background of the question
Article 105 (3) (d) directive and
Article 140 Life-expense risk sub-module delegated act
EIOPA answer
Based on Article 83(4) Commission Delegated Regulation (EU) 2015/35 the impact of the expense scenarios on the value of any risk mitigation instruments that meet the requirements set out in Article 209 to 215 shall be taken into account. One crucial requirement in accordance with Article 210(2) is the absence of material basis risk. The level of general inflation is only one driver for the development of expenses. Moreover, the prices of index-linked bonds depend in a non-linear way on actual and expected inflation rates. Therefore it can be expected for most insurers that there is material basis risk.