Internal Market and Services DG
FINANCIAL INSTITUTIONS
Insurance and pensions
Brussels, 5 July 2010
QIS5 Technical Specifications
Annex to Call for Advice from CEIOPS on QIS5
This document is a working document of the Commission services for testing purposes.
It does not purport to represent or pre-judge the formal proposals of the Commission.
All documents relating to QIS5 produced by CEIOPS will be made available on their website (http://www.ceiops.eu/index.php?option=content&task=view&id=732 )
Table of content
SECTION 1 – VALUATION 6
V.1. Assets and Other Liabilities 6
V.1.1. Valuation approach 6
V.1.2. Guidance for marking to market and marking to model 8
V.1.3. Requirements for the QIS5 valuation process 8
V.1.4. IFRS Solvency adjustments for valuation of assets and other liabilities under QIS5 10
V.2. Technical Provisions 20
V.2.1. Segmentation 20
V.2.2. Best estimate 25
V.2.2.1. Methodology for the calculation of the best estimate 25
V.2.2.2. Assumptions underlying the calculation of the best estimate 39
V.2.2.3. Recoverables 43
V.2.3. Discount rates 50
V.2.4. Calculation of technical provisions as a whole 52
V.2.5. Risk margin 54
V.2.6. Proportionality 67
V.2.6.1. Possible simplifications for life insurance 74
V.2.6.2. Possible simplifications for non-life insurance 78
V.2.6.3. Possible simplifications for reinsurance recoverables 84
SECTION 2 – SCR – STANDARD FORMULA 90
SCR.1. Overall structure of the SCR 90
SCR.1.1. SCR General remarks 90
SCR.1.2. SCR Calculation Structure 94
SCR.2. Loss absorbing capacity of technical provisions and deferred taxes 97
SCR.2.1. Definition of future discretionary benefits 97
SCR.2.2. Gross and net SCR calculations 97
SCR.2.3. Calculation of the adjustment for loss absorbency of technical provisions and deferred taxes 97
SCR.3. SCR Operational risk 102
Description 102
SCR.4. SCR Intangible asset risk module 105
SCR.5. SCR market risk module 106
SCR.5.2. Introduction 106
SCR.5.3. Scenario-based calculations 109
SCR.5.4. Look-through approach 109
SCR.5.5. Mktint interest rate risk 110
SCR.5.6. Mkteq equity risk 112
SCR.5.7. Mktprop property risk 116
SCR.5.8. Mktfx currency risk 117
SCR.5.9. Mktsp spread risk 119
SCR.5.10. Mktconc market risk concentrations 127
SCR.5.11. Mktip illiquidity premium risk 132
SCR.5.12. Treatment of risks associated to SPV notes held by an undertaking 133
SCR.6. SCR Counterparty risk module 134
SCR.6.1. Introduction 134
SCR.6.2. Calculation of capital requirement for type 1 exposures 136
SCR.6.3. Loss-given-default for risk mitigating contracts 138
SCR.6.4. Loss-given-default for type 1 exposures other than risk mitigating contracts 141
SCR.6.5. Calculation of capital requirement for type 2 exposures 141
SCR.6.6. Treatment of risk mitigation techniques 142
SCR.6.7. Simplifications 144
SCR.7. SCR Life underwriting risk module 147
SCR.7.1. Structure of the life underwriting risk module 147
SCR.7.2. Lifemort mortality risk 149
SCR.7.3. Lifelong longevity risk 151
SCR.7.4. Lifedis disability-morbidity risk 152
SCR.7.5. Lifelapse lapse risk 155
SCR.7.6. Lifeexp expense risk 159
SCR.7.7. Liferev revision risk 160
SCR.7.8. LifeCAT catastrophe risk sub-module 161
SCR.8. Health underwriting risk 164
SCR.8.1. Structure of the health underwriting risk module 164
SCR.8.2. SLT Health (Similar to Life Techniques) underwriting risk sub-module 166
SCR.8.3. Non-SLT Health (Not Similar to Life Techniques) underwriting risk sub-module 174
SCR.8.4. Health risk equalization systems 184
SCR.8.5. Health catastrophe risk sub-module 186
SCR.9. Non-life underwriting risk 196
SCR.9.1. SCRnl non-life underwriting risk module 196
SCR.9.2. NLpr Non-life premium & reserve risk 197
SCR.9.3. NLLapse Lapse risk 203
SCR.9.4. Non life CAT risk sub - module 206
SCR.10. Undertaking specific parameters 244
SCR.10.1. Subset of standard parameters that may be replaced by undertaking-specific parameters 244
SCR.10.2. The supervisory approval of undertaking-specific parameters 244
SCR.10.3. Requirements on the data used to calculate undertaking-specific parameters 244
SCR.10.4. The standardised methods to calculate undertaking-specific parameters 245
SCR.10.5. Premium Risk 246
SCR.10.6. Reserve Risk 253
SCR.10.7. Shock for revision risk 257
SCR.11. Ring- fenced funds 261
SCR.12. Financial Risk mitigation 269
SCR.12.1. Scope 269
SCR.12.2. Conditions for using financial risk mitigation techniques 269
SCR.12.3. Basis Risk 270
SCR.12.4. Shared financial risk mitigation 270
SCR.12.5. Rolling and dynamic hedging 270
SCR.12.6. Credit quality of the counterparty 271
SCR.12.7. Credit derivatives 272
SCR.12.8. Collateral 273
SCR.12.9. Segregation of assets 273
SCR.13. Insurance risk mitigation 274
SCR.13.1. Scope 274
SCR.13.2. Conditions for using insurance risk mitigation techniques 274
SCR.13.3. Basis Risk 274
SCR.13.4. Credit quality of the counterparty 275
SCR.14. Captive simplifications 276
SCR.14.1. Scope for application of simplifications 276
SCR.14.2. Simplifications for captives only 277
SCR.14.3. Simplifications applicable on ceding undertakings to captive reinsurers 280
SCR.15. Participations 281
SCR.15.1. Introduction 281
SCR.15.2. Valuation 281
SCR.15.3. Solvency Capital requirement Standard formula 283
SCR.15.4. Treatment of participations in insurance or reinsurance undertakings 284
SECTION 3 – Internal Model 286
SECTION 4 – Minimum Capital Requirement 287
MCR.1. Introduction 287
MCR.2. Overall MCR calculation 287
MCR.3. Linear formula – General considerations 289
MCR.4. Linear formula component for non-life insurance or reinsurance obligations 289
MCR.5. Linear formula component for life insurance or reinsurance obligations 290
MCR.6. Linear formula component for composite insurance undertakings 292
SECTION 5 – OWN FUNDS 295
OF.1. Introduction 295
OF.2. Classification of own funds into tiers and list of capital items: 295
OF.2.1. Tier 1 – List of own-funds items 295
OF.2.2. Tier 1 Basic Own-Funds – Criteria for classification 296
OF.2.3. Reserves the use of which is restricted 299
OF.2.4. Expected profits included in future premiums 299
OF.2.5. Tier 2 Basic own-funds – List of own-funds items 300
OF.2.6. Tier 2 Basic own-funds – Criteria for Classification 301
OF.2.7. Tier 3 Basic own-funds– List of own-funds items 302
OF.2.8. Tier 3 Basic own-funds– Criteria 302
OF.2.9. Tier 2 Ancillary own-funds 303
OF.2.10. Tier 3 Ancillary own-funds 304
OF.3. Eligibility of own funds 304
OF.4. Transitional provisions 304
OF.4.1. Criteria for grandfathering into Tier 1 305
OF.4.2. Criteria for grandfathering into Tier 2 306
OF.4.3. Limits for grandfathering 307
SECTION 6 – GROUPS 308
G.1. Introduction 308
G.1.1. Aim 308
G.1.2. Calculation of the group solvency: description of the methods 308
G.1.3. Comparison of the methods 309
G.1.4. Scope 310
G.1.5. Availability of group own funds 310
G.1.6. QIS5 assumptions for the treatment of third country related insurance undertakings and non-EEA groups 310
G.2. Accounting consolidation-based method 311
G.2.1. Group technical provisions 311
G.2.2. Treatment of participations in the consolidated group SCR 312
G.2.3. Additional guidance for the calculation of the consolidated group SCR 314
G.2.4. Floor to the group SCR 316
G.2.5. Consolidated group own funds 317
G.2.6. Availability of certain own funds for the group 319
G.3. Deduction and aggregation method 322
G.3.1. Aggregated group SCR 322
G.3.2. Aggregated group own funds 323
G.4. Use of an internal model to calculate the group SCR 324
G.5. Combination of methods (optional) 324
G.6. Treatment of participating businesses and ring fenced funds 325
G.6.1. General comments on group SCR calculation and loss absorbing capacity of technical provisions 325
G.6.2. General comments on available own funds 325
G.6.3. Example for the calculation of the group SCR with the consolidated method in the case of several participating businesses 326
G.7. Guidance for firms that are part of a subgroup of a non-EEA headquartered group 328
G.8. Guidance for running the QIS5 exercise at a national or regional sub-group level 329
G.8.1. Scope of the sub-group at a national or regional level 330
G.8.2. Methods 330
SECTION 1 – VALUATION
V.1. Assets and Other Liabilities
V.1. The reporting date to be used by all participants should be end December 2009
V.1.1. Valuation approach
V.2. The primary objective for valuation as set out in Article 75 of the Framework Solvency II Directive (Directive 2009/138/EC) requires an economic, market-consistent approach to the valuation of assets and liabilities. According to the risk-based approach of Solvency II, when valuing balance sheet items on an economic basis, undertakings should consider the risks that arise from holding a balance sheet item, using assumptions that market participants would use in valuing the asset or the liability.
V.3. According to this approach, insurance and reinsurance undertakings value assets and liabilities as follows:
i. Assets should be valued at the amount for which they could be exchanged between knowledgeable willing parties in an arm's length transaction;
ii. Liabilities should be valued at the amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm's length transaction.
When valuing financial liabilities under point (ii) no subsequent adjustment to take account of the change in own credit standing of the insurance or reinsurance undertaking should be made
V.4. Valuation of all assets and liabilities, other than technical provisions should be carried out, unless otherwise stated in conformity with International Accounting Standards as endorsed by the European Commission. They are therefore considered a suitable proxy to the extent they reflect the economic valuation principles of Solvency II. Therefore the underlying principles (definition of assets and liabilities, recognition and derecognition criteria) stipulated in the IFRS-system are also considered adequate, unless stated otherwise and should therefore be applied to the Solvency II balance sheet.
V.5. When creating the Solvency II balance sheet for the purpose of the QIS5, unless stated otherwise, it is only those values which are economic and which are consistent with the additional guidance specified in this document which should be used.
V.6. In particular, in those cases where the proposed valuation approach under IFRS does not result in economic values according to the Framework Solvency II Directive reference should be made to the additional guidance in subsection V.1.4. onwards where a comprehensive overview of IFRS and Solvency II valuation principles is presented.
V.7. Furthermore valuation should consider the individual balance sheet item. The assessment whether an item is considered separable and sellable under Solvency II should be made during valuation. The “Going Concern” principle and the principle that no valuation discrimination is created between those insurance and reinsurance undertakings that have grown through acquisition and those which have grown organically should be considered as underlying assumptions.
V.8. The concept of materiality should be applied as follows:
“Omissions or misstatements of items are material if they could, by their size or nature, individually or collectively; influence the economic decisions of users taken on the basis of the Solvency II financial reports.” Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size, nature or potential size of the item, or a combination of those, could be the determining factor.”
V.9. Figures which do not provide for an economic value can only be used within the Solvency II balance sheet under exceptional situations where the balance sheet item is not significant from the point of view of reflecting the financial position or performance of an (re)insurance undertaking or the quantitative difference between the use of accounting and Solvency II valuation rules is not material taking into account the concept stipulated in the previous paragraph.
V.10. On this basis, the following hierarchy of high level principles for valuation of assets and liabilities under QIS5 should be used:
i. Undertakings must use a mark to market approach in order to measure the economic value of assets and liabilities, based on readily available prices in orderly transactions that are sourced independently (quoted market prices in active markets). This is considered the default approach.
ii. Where marking to market is not possible, mark to model techniques should be used (any valuation technique which has to be benchmarked, extrapolated or otherwise calculated as far as possible from a market input). Undertakings will maximise the use of relevant observable inputs and minimise the use of unobservable inputs. Nevertheless the main objective remains, to determine the amount at which the assets and liabilities could be exchanged between knowledgeable willing parties in an arm´s length transaction (an economic value according to Article 75 of the Solvency II Framework Directive).
V.1.2. Guidance for marking to market and marking to model
V.11. Regarding the application of fair value measurement undertakings might take into account Guidance issued by the IASB (e.g. definition of active markets, characteristics of inactive markets), when following the principles and definitions stipulated, as long as no deviation from the “economic valuation” principle results out of the application of this guidance.
V.12. It is understood that, when marking to market or marking to model, undertakings will verify market prices or model inputs for accuracy and relevance and have in place appropriate processes for collecting and treating information and for considering valuation adjustments. Where an existing market value is not considered appropriate for the purpose of an economic valuation, with the result that valuation models are used, undertakings should provide a comparison of the impact of the valuation using models and the valuations using market value
V.13. Subsection V.1.4 includes tentative views on the extent to which IFRS figures could be used as a reasonable proxy for economic valuations under Solvency II.
V.14. These tentative views are developed in the tables included below in this subsection (see V.1.4: IFRS solvency adjustment for valuation of assets and other liabilities under QIS5). These tables identify items where IFRS valuation rules might be considered consistent with economic valuation, and where adjustments to IFRS are needed which are intended to bring the IFRS treatment closer to an economic valuation approach because the IFRS rules in a particular area are not considered consistent.
V.15. As a starting point for the valuation under Solvency II accounting values that have not been determined in accordance with IFRS could be used, provided that either they represent an economic valuation or they are adjusted accordingly. Undertakings have to be aware that the treatment stipulated within the international accounting standards, as endorsed by the European Commission in accordance with Regulation (EC) No 1606/2002 in combination with the tentative views included in subsection V.1.4 represent the basis for deciding which adjustments should be necessary to arrive at an economic valuation according to V.3. Undertakings should disclose the rationale for using accounting figures not based on IFRS (when they provide for an economic valuation in line with V.3 and the corresponding guidance). In such cases undertakings should explain how the values were calculated and set out the resulting difference in value.