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European Insurance and Occupational Pensions Authority

969

Q&A

Question ID: 969

Regulation Reference: Guidelines on contract boundaries

Article: 8, 18

Status: Final

Date of submission: 24 Apr 2018

Question

We have a question about the term (duration) over which riders attached to life policies can be projected.

Life riders are attached to either unit linked or term policies and are commonly considered long term contracts. These typically last a number of years or decades, as per the respective duration of the basic life contracts to which they are attached.

We believe that the boundary conditions specified in the delegated act/regulation 35/2015 are open to interpretation. In consequence there can be a significant difference in the results depending on which approach a company takes. It would thus be helpful to have a common approach across the industry.

Rationale of the current approach

Based on Article 18, paragraph 3c of the delegated act/regulation shown below, we have to model our life riders as similar to non-life techniques:
3.   Obligations which relate to insurance or reinsurance cover provided by the undertaking after any of the following dates do not belong to the contract, unless the undertaking can compel the policyholder to pay the premium for those obligations:
(a)    the future date where the insurance or reinsurance undertaking has a unilateral right to terminate the contract;
(b)    the future date where the insurance or reinsurance undertaking has a unilateral right to reject premiums payable under the contract;
(c)    the future date where the insurance or reinsurance undertaking has a unilateral right to amend the premiums or the benefits payable under the contract in such a way that the premiums fully reflect the risks.

The reason we do that is that, based on our contact, the company has a unilateral right to change premiums any time throughout the term of the contract. Therefore, boundary conditions are restricted till next premium payment/revision. The exact wording in such a contract states the following:

ARTICLE 8 (of a typical life rider contract)
Readjustments:
The initial premium of the supplementary benefit was determined based on the following factors:
1.    The Life Insured’s age.
2.    All the parameters of the actuarial basis used for the pricing of the supplementary benefit.
The Company reserves the right to adjust the premium of the supplementary benefit when whichever of the above factors changes either individually or in conjunction with anyone of the other factors. Every readjustment is done by the Company at its fair discretion.

As a result both reserves and capital requirements associated with life riders are quite marginal.

A possible alternative
For paragraph 3c of article 18 to be ignored, the following condition must be met:
  in the case of life insurance obligations where an individual risk assessment of the obligations relating to the insured person of the contract is carried out at the inception of the contract and that assessment cannot be repeated before amending the premiums or benefits, insurance and reinsurance undertakings shall assess at the level of the contract whether the premiums fully reflect the risk for the purposes of point (c).
  In other words, when dealing with a long term contract we need to see whether some sort of individual underwriting can be carried out any time after the inception of the contract. Given that we cannot collect the relevant data at a later stage, which implies no further risk assessment, one may conclude that boundary conditions span the whole term of the contract.
In our case the above conditions are met, and if the long term duration is applied then the BETPs for these riders will have a substantial reduction which will lead to 10 basis points improvement of the SCR cover ratio.
Given the possible impact on our solvency position, we will appreciate your reply as soon as possible.

EIOPA answer

As your question goes beyond matters of consistent and effective application of the regulatory framework the relevant Directorate General of the European Commission (Directorate General for Financial Stability, Financial Services and Capital Markets Union) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which EIOPA publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.

Where a unilateral right exists to amend the premiums under the contract to fully reflect the risk, the contract boundary is reached at the next date at which this right can be exercised. The inability to collect data on individual risk assessments is not sufficient to apply the derogation set out in Art. 18(3) paragraph 3. For this derogation to be applied, a right to amend premiums on portfolio level must exist, which is combined with a limitation on the ability to repeat individual risk assessments conducted at the inception of the contracts within the portfolio. Art. 18(3) paragraph 3 must be read in conjunction with Art. 18(3) paragraph 2. Art. 18(3) paragraphs 2 and 3 do not exempt from the application of Art. 18(3)(c), but specify how Art. 18(3)(c) shall be read where a right to amend premiums on portfolio level exist.