Q&A

Question

The underlying assumptions for the expense risk submodule are described in EIOPA’s document EIOPA-14-322 “The underlying assumptions in the standard formula for the Solvency Capital Requirement calculation” as follows: Undertakings are exposed to the risk of the change of expenses arising predominantly from: staff costs, cost of commissions to sales intermediaries (on the basis of the contractual terms of the arrangements), cost of IT infrastructure, cost of land and buildings occupied. And further in the same document: Expense risk arises from the variation in the expenses incurred in servicing insurance or reinsurance contracts. It is likely to be applicable for all insurance obligations. That can be read as the following: cost of commissions on the basis of the contractual terms of the arrangements which are not varying in time according to the underlying contractual agreements with sales intermediaries should not be stressed during the calculation of SCR expense risk. That would be a contradiction to EIOPA’s Q&A 1788 according to which all expenses taken into account in the valuation of the best estimate should be included in life expense risk. Our question is: Should or should not commissions on the basis of the contractual terms of the arrangements, which are not a subject to the variation risk, be stressed in accordance to article 140 of Solvency II Delegated act?

Background of the question

Different praxis on the market have been noticed.

EIOPA answer

Article 140 of the Delegated Regulation requires that the amount of expenses taken into account in the calculation of technical provisions is stressed by 10%. Therefore, all expenses incurred in servicing insurance and reinsurance obligations should be stressed, which also includes commissions.

Article 140 of the Delegated Regulation also 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.