The industry considers that, even though all expenses are formally included in the stress, when an undertaking identifies specific expense components where variation is not possible or not relevant, the impact on these expenses should be nil. This should be assessed on a case-by-case basis using a granular approach, similar to that applied by EIOPA in Q&A 2188 for the 1% inflation stress. Certain expense components, such as fixed distribution commissions, provide a clear example of this situation. In a non-exhaustive list: • If the terms of this agreement cannot be modified unilaterally and require mutual consent for any changes (considering that there is no practical, commercial, or regulatory incentive for the insurer to renegotiate them upwards.) these commissions are not exposed to variability. As a result, they do not give rise to expense risk as defined under Solvency II. • An insurance company distributes its products through a bancassurance agreement or a broker. The distribution contract establishes a fixed commission structure (e.g., a fixed percentage of premiums), which remains unchanged for the entire duration of the distribution period or for a predefined term agreed between the parties for a specific insurance product or portfolio. Unlike general expenses, where there is a risk of variation related to the will and management of the insurance companies, any change to contractual terms affecting the level of commissions requires the company’s consent, and the company has no incentive to modify these conditions due to the negative impact on its financial position and solvency. In these circumstances, such expense components should be regarded as contractual data rather than assumptions, in the same way as other contractually defined cash flows (e.g. contractually defined premiums). As a result, they are not subject to uncertainty regarding their future level or trend. Where an expense component is not an assumption but a contractual cash flow, it does not constitute a source of underwriting risk within the meaning of Article 13(30) of Directive 2009/138/EC, which defines underwriting risk as “the risk of loss or of adverse change in the value of insurance liabilities, due to inadequate pricing and provisioning assumptions.” Based on this, acquisition expenses are not, in all cases, cash flows subject to variability, and therefore applying the Article 140 stress by default to all expenses is not economically justified. The impact for expenses not subject to variation should be nil, provided that the assessment is done case by case using a granular approach to identify which components are genuinely subject to risk. To justify this approach, two technical references from the Solvency II framework are provided: • The document “The underlying assumptions in the standard formula for the Solvency Capital Requirement calculation”, published by EIOPA in 2014, sets out that expense risk (point 3.4): “The underlying assumptions for the expense risk sub-module can be summarised 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 […]” The explicit reference to “contractual terms of the arrangements” implies that only those expenses subject to variability under contractual agreements should be considered at risk. Moreover, while the expense risk stresses calibration includes all expenses, it explicitly recognizes that commissions and other expenses depend on contractual agreements. This means that expenses which are contractually fixed and cannot vary according to those agreements may be excluded from the stress. This approach aligns with the risk-based principle of focusing on variability and avoids mechanically applying the stress to all expenses regardless of their nature. • The Technical specifications for the Quantitative Impact Study 5 (QIS5), published by the European Commission in 2010, state in section SCR.7.65: “An expense payment should not be included in the scenario, if its amount is already fixed at the valuation date (for instance agreed payments of acquisition provisions). For policies with adjustable expense loadings the analysis of the scenario should take into account realistic management actions in relation to the loadings.” This confirms that, from the initial calibration of Solvency II, fixed expenses (such as agreed, non-revisable acquisition provisions) were explicitly excluded from stress scenarios, limiting the application to variable or adjustable expenses.

This question has been rejected because the issue it deals with is already explained in the previous Q&A 2188.