Tag Archives: Standard Formula

Alternative mortality and longevity stress calibration considerations

In recent Consultation Papers, the EIOPA proposed an alternative calibration of the Standard Formula mortality and longevity stresses. In this paper, Milliman’s Alexandre Boumezoued proposes two alternative and complementary views to the EIOPA’s final technical set of advice on the mortality and longevity shock calibration: a prospective approach in the spirit of one-year calculations and a retrospective analysis based on historical data from corrected mortality tables.

Solvency II risk-free rate curve review

Solvency II came into force on 1 January 2016. The agreed Pillar 1 quantitative requirements set a market-consistent valuation framework for the valuation of assets and liabilities, as well as sufficient holdings of capital to withstand a combination of so-called ‘1-in-200-year’ Standard Formula (SF) stresses. There is no doubt these fundamental principles are set in stone but nonetheless there have been ongoing changes to the detailed rules since their introduction. This was planned from the outset with certain powers given to the European Insurance and Occupational Pensions Authority (EIOPA) to review methodology and assumptions over time, as well as a specific milestone for the European Commission (EC) to review elements of the Standard Formula in 2018, followed by a more holistic review of the entire rulebook by 2021.

Any changes are intended to reflect developments in the insurance sector and the wider environment. These changes could have significant impacts on individual companies and firms may need to reassess their capital management strategies.

This report by Milliman’s Karl Murray, Eamonn Phelan, and Bridget MacDonnell revisits the rules in specifying the risk-free rate term structure, which forms a fundamental part of the calculation of Technical Provisions (TPs). In particular, they analyse changes to the Ultimate Forward Rate (UFR).

Judging the appropriateness of the Standard Formula under Solvency II

The Standard Formula (SF) aims to capture the risk that an average European (re)insurance company is exposed to. The SF may not be appropriate for all (re)insurance companies, but the majority of European insurers currently uses it. In this article, Milliman’s Steven Hooghwerff, Sinéad Clarke, and Roel van der Kamp provide a short overview of the SF’s structure. They also present a suggested framework and worked examples, and discuss challenges and pitfalls to be considered.

Assessing the appropriateness of the Solvency II standard formula

The assessment of the appropriateness of the standard formula is a key part of the Own Risk and Solvency Assessment (ORSA) process under Solvency II. As part of this assessment, (re)insurers must identify any material deviations in risk profile compared with the assumptions underlying the standard formula. This briefing note by Milliman’s Andrew Kay and Sinéad Clarke outlines what is expected under this assessment, including the key challenges such as the treatment of risks that are not reflected in the standard formula, the qualitative assessment, and what is required if a material deviation is identified.

Solvency II Standard Formula: Right for your company?

Murray-KarlWe previously published the results of our survey looking at how prepared Irish companies are in relation to assessing the appropriateness of the Solvency II Standard Formula for their risk profiles. One interesting finding was that almost half of high/medium-high companies in the survey, as assessed under the Central Bank of Ireland’s risk rating system, the Probability Risk and Impact SysteM (PRISM), said they were not intending to include an assessment of the appropriateness of the Standard Formula parameters in their 2015 Own Risk and Solvency Assessments (ORSAs) or Forward-Looking Assessments of Risk (FLAORs) as the ORSA is known during the preparatory phase in lead up to Solvency II.

The European Insurance and Occupational Pensions Authority (EIOPA) paper on the background to the calibration of the Standard Formula is of particular interest in making such an assessment. Key calibration assumptions include:

• The equity portfolio is well diversified and there is no adverse exposure to a rise in equities
• The portfolio of liability benefits is well diversified in terms of applying the underwriting risk stresses
• There is no inflation risk on insured benefits
• Concentration risk doesn’t capture geographic or sector diversification

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