Typically, payment flows are dependent on capital market developments. However, options and guarantees can relate to other factors. E.g., the German participating business also has cost margins and underwriting margins as sources of profits to be shared with the policyholders and, thus, impacting future cash flows in addition to investment margins.

To what extent is a stochastic valuation of expenses (e.g. via inflation) and biometrics (mortality, longevity, morbidity,...) expected here? Or did EIOPA only have economic scenarios in mind here?

Article 77(2) of the Directive states that the Best Estimate shall correspond to the probability-weighted average of future cash-flows.

This is further specified in the Commission Delegated Regulation 2015/35 (DR), inter alia in Article 30 and 34:

Art. 30 DR requires that the cash flow projection used in the calculation of the best estimate shall, explicitly or implicitly, take account of all uncertainties in the

cash flows. Article 34 (2) DR requires calculation methods for TPs to be chosen in order to reflect the risks which affect the underlying cash flows. I.e. there is no restriction to economic scenarios.

Article 34(5) of the Delegated Regulations highlights that where dependencies exist, for example if the cash-flows are path-dependent, undertakings should reflect those dependencies in the calculation method. In these circumstances, there is more likelihood of a stochastic estimate being significantly more accurate than a deterministic approach.

Article 34(5) is not limited to economic dependencies (that is, not only economic scenario generators should be considered), and Article 34(5) does not over-ride the proportionality principle as set out in Article 56(1). Undertakings should only be stochastically modelling biometric and expense risks where it is proportionate to do so. This would depend, among other things, on the specifics of the underlying contracts.

Guideline 53a of the revised Guidelines on TPs should be considered within the context of the regulations as set out above, in particular the proportionality principle, as further highlighted by Guideline 0 of the revised Guidelines on TPs.