Question ID: 2177
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Solvency Capital Requirement (SCR)
Article: 140
Status: Final
Date of submission: 07 Aug 2020
Question
Under the Expense stress scenario, should the expense inflation increase be applied to fund-based investment expenses charged by a third party where these are a percentage of fund value? Meaning that the projected fee as a percentage of projected fund value increases over time?
Background of the question
In practice there are mixed approaches. Where expenses are a percentage of another variable, such as fund value should the level of expenses be increased for inflation. In this example, the percentage parameter would need to be increased over time to reflect the inflation increases.
EIOPA answer
Article 140 of the Delegated Regulation requires an increase of 1 percentage point to the expense inflation rate (expressed as a percentage) used for the calculation of technical provisions.
Therefore, even if all expenses should be considered in this stress, where the undertaking is using granular assumptions on expenses, i.e. identifying some expenses during the projection where inflation is not relevant, the impact for these expenses should be nil since inflation does not affect them. However, if the undertaking is projecting all expenses together or applies inflation assumptions to all expenses for best estimate valuation purposes, then it would not be possible to accurately make this granular analysis and all expenses should be stressed.