Question ID: 2433
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: Article 118(1)(a); 142(6)(a)(b) of the Delegated Regulation; Article 77(2) of Directive 2009/138/EC
Status: Final
Date of submission: 07 May 2022
Question
The non-life lapse risk is based on a scenario with "discontinuance of 40 % of the insurance policies for which discontinuance would result in an increase of technical provisions without the risk margin" ... "the undertaking shall base the calculation on the type of discontinuance which most negatively affects the basic own funds of the undertaking on a per policy basis."
Why is the discontinuance effect on TP relevant?
If a prepaid profitable policy is cancelled, TP will drop when the premium is returned - but own funds would still be negatively effected through reduced EPIFP. Does the regulation assume a brief increase in TP from the time the policy was cancelled (triggering a larger future negative cash-flow) to the time the premium was returned - and thus considers this contract (i.e. all profitable contracts) within the scope of the lapse risk model?
EIOPA answer
When deciding whether an insurance policy falls under Article 118(1)(a) or Article 142(6)(a) or (b) of the Delegated Regulation (EU) 2015/35, the result of two calculations of technical provisions should be compared:
1. The technical provisions for the point in time before the policyholder triggered the discontinuance.
2. The technical provisions for the point in time after the policyholder triggered the discontinuance but before the payments caused by the discontinuance are made.
In accordance with the third subparagraph of Article 77(2) of Directive 2009/138/EC, the cash-flow projection used in the calculation of the best estimate shall take account of all the cash in- and out-flows required to settle the insurance and reinsurance obligations over the lifetime thereof. Consequently, the payments caused by the discontinuance should be included in the calculation of the best estimate of these technical provisions.
In the calculation of the second result, the discontinuance referred to in Article 118(1)(a) or Article 142(6)(a) or (b) of the Delegated Regulation (EU) 2015/35 is assumed to be certain. Therefore the probability of the discontinuity payments should be 100% for the probability-weighted average of future cash-flows referred to in first subparagraph of Article 77(2) of Directive 2009/138/EC when the technical provisions of the second result are calculated.