The European Insurance and Occupational Pensions Authority (EIOPA) has published its information request on its proposed changes to Solvency II. This provides some insight into EIOPA’s thinking following the consultation on its proposed changes to Solvency II (summarised in Milliman briefing notes here).
Interestingly, despite not proposing changes to the risk margin in its consultation papers, EIOPA is including a possible change to the risk margin in the impact assessment. The technical specification for the impact assessment sets out a scenario where the projected Solvency Capital Requirements (SCRs) used in the calculation of the risk margin are multiplied by a factor of 0.975 (“the lambda factor”) compounded by the number of years between the valuation date and the projected date. This adjustment to projected SCRs is subject to a minimum of 50% (which bites at projection year 28). This tapering approach is mentioned in a paper by a working party of the Institute and Faculty of Actuaries that reviewed the risk margin and was included in a submission to EIOPA from the Association of British Insurers.
In relation to extrapolation, an alternative extrapolation method is proposed which affects the Euro yield curve at 31 December 2019 as shown in the graph below. This is one of the five options proposed in the EIOPA consultation paper.
As can be seen, the impact is to reduce the Euro curve after the Last Liquid Point (LLP), but not as materially as some of the other EIOPA proposals that were included in the consultation which involved increasing the LLP. Non-Euro yield curves will also be affected but less materially, as the LLP is later. By comparison the UK yield curve actually increases at later durations using this approach.
Unsurprisingly, interest rate shocks are proposed which increase the impact of the interest rate down shock for the Euro yield curve. The graph below shows the interest rate shocks that would apply as at 31 December 2019 using the current approach and those proposed in the impact assessment (both based on the alternative base Euro yield curve proposed above).
As can be seen, the proposed interest down
shock would increase the impact of this shock (while the impact of the interest
up shock would reduce).
Several other changes are being assessed, including:
- Reflecting realistic new
business assumptions in best estimate expenses
- Correlation factor between
interest rate risk and spread risk
- Volatility adjustment
- Dynamic volatility adjustment
in standard formula (and internal models)
- A floor on the interest rate
- Long-term equity requirements
- Recognition of risk mitigation
- Non-life Minimum Capital
- Contract boundaries
Supervisors have notified companies that are required to participate in the impact assessment. Submissions are due 31 March 2020. EIOPA’s final opinion on the 2020 review of Solvency II is due in June.
On 11 April, the Prudential Regulation Authority (PRA) issued a Consultation Paper in which it sets out its proposal to consider applications from internal model firms that include a Dynamic Volatility Adjustment. This proposal is relevant to Solvency II firms in the UK and the Society of Lloyd’s and its managing agents. It is also relevant to firms with, or seeking, Volatility Adjustment approval that use, or may develop in the future, a full or partial internal model to determine the Solvency Capital Requirement (SCR). Milliman’s Robert Bugg and Lyndsay Wrobel offer some perspective in this briefing note.
Organisations completing their second full year of Solvency II reporting are required to submit four additional reporting templates. These additional templates disclose the change in the excess of assets over liabilities over the 12-month period since the previous set of annual reporting templates were submitted to regulators. In this briefing, Milliman’s Barry Murphy and Cormac Gleeson discuss these templates and provide insight on how to approach them.
This report by Milliman consultants summarises the Solvency and Financial Condition Reports of the main players in the life and non-life insurance business in Luxembourg. It focusses on the largest insurance entities in Luxembourg as well as some large reinsurance entities and includes an overview of the factors determining the Solvency Capital Requirement ratio.
Solvency and Financial Condition Reports (SFCRs) and Quantitative Reporting Templates (QRTs) show that UK non-life and health insurers are overall well capitalised. However, it appears that undertakings using the Standard Formula (SF) have not utilised all possible ways available to better reflect their risk profiles, thereby missing out on potentially reducing their Solvency Capital Requirements and improving their solvency ratios. Milliman consultants Vincent Robert and Lamia Amouch provide more perspective in their article “Have you made the Standard Formula yours?“
On 6 November 2017 the European Insurance and Occupational Pensions Authority (EIOPA) released a consultation paper on its second set of advice to the European Commission on the Solvency II review. This follows on from an earlier consultation paper and subsequent report released by EIOPA in July and October, respectively, on its first set of advice on the Solvency II review.
The second consultation paper is very detailed and sets out EIOPA’s proposed advice on a number of areas including various Solvency Capital Requirement (SCR) risk modules (premium and reserve risk, mortality and longevity risk, catastrophe risk, market risk, counterparty default risk), the risk margin, own funds and the look-though approach.
We are currently reviewing the consultation paper in detail and plan to publish a briefing note outlining EIOPA’s proposals for each of the topics covered in the consultation paper in the coming weeks.
However in advance of that, we have highlighted a few key proposals in this blog post:
• EIOPA is proposing that the calibration of the standard formula mortality risk capital charge should increase from 15% to 25% (as set out in section 3 of the consultation paper).
• EIOPA is proposing changes to the methodology underlying the interest rate risk capital charge to take account of the low interest rate environment. Two options are proposed in the consultation paper (see section 7).
• EIOPA is proposing simplifications to the application of the ‘look through’ approach for the purposes of the SCR calculation (as set out in section 15).
• EIOPA is proposing to keep the cost of capital rate used in the calculation of the risk margin unchanged at 6% (as set out in section 18).
• EIOPA is proposing changes to the standard formula factors for the standard deviation of premium and reserve risk for some non-life lines of business, including medical expense insurance (see section 1). For medical expense insurance EIOPA is proposing to increase the factors for standard deviation of premium risk from 5.0% to 6.0% and for reserve risk from 5.0% to 6.6%.
The deadline for responses to the consultation is 5 January 2018. EIOPA is expected to provide final advice to the European Commission on the proposed changes on 28 February 2018.