Questions & Answers as of 6 Feb February 2013

Transcription

1 LongTerm Guarantees Assessment Questions & s as of 6 Feb 2013 EIOPA/13/ February 2013 ID Document Topic No. Question TS part I TP! Segmentation 1005a TS part I TP Segmentation TP 1.14 In relation to par. TP.1.14, where should the mandatory insurance It should be included in General Liability insurance. The obligations of liability contracts should not be allocated to the for Employer s Liability be included for the purposes of segmentation in the 12 classes included therein: Under the worker s compensation class or the General Liability class? health lines of business but to the liability lines of business (or in case they are annuities to the line of business for annuities stemming from nonlife insurance contracts other than health insurance contracts). Where an accident gives rise to a liability to compensate the victim for disability or the expenses of medical treatment, the eventual liability obligation (due on behalf of an insured person against liabilities) does not cover the compensation for the victim's disability or medical expenses, but it covers the compensation for the liability of the insured person to make compensations for the victim's disability or medical expenses. 1011a TP Segmentation TP The modelling of technical provisions is generally based on cash Yes, we can confirm this. flows that are projected on a monthly basis. This means that a monthly interpolation of the provided risk free structure is required (commonly the 12th root of the yearly rate) and all elements of the model allow for monthly occurrence of events. Can you confirm that the yearly cashflow input required for the LTG stress spreadsheet (and also for QRT TPF2) is the sum of the monthly cashflows for that year and you will estimate the average timing of these cash flows? TS part I TP! Recoverables 1005c TS part I TP Recoverables TP In relation to paragraphs TP and TP.2.142, can you please clarify the definition of settled claims, since it impacts the amounts considered as part of technical provisions: (1) Do we consider Settled as far as the policyholder is concerned only? (2) If the policyholder/beneficiary is fully compensated, but there are payments due to 3rd parties (e.g. motor garage shops) is the claim considered to be settled? Undertakings should consider as "settled" those claims where, at the reference date, no additional payments to the policyholders are expected. Recoveries due on "settled" claims shall not be included within the reinsurance recoverables, but shown as separate item in the balance sheet (reinsurance receivables). 1011b TS part I TP Recoverables TP The section states that no internal expenses should be allowed for Internal expenses (including investment expenses if any) due to reinsurance contracts shall be accounted for in the in reinsurance recoverables. A common approach when calculating calculation of the gross technical provisions only and should be included in the recoverables calculation. The latter may gross technical provisions is to allow for a level of investment distort the SCR CDR capital charge. expenses that would cover the total reserves required to be held if no reinsurance was in place. This results in a higher gross technical provision than if the actual investment expenses were allowed for. (Assuming that reinsurance leads to a reduction in reserves.) The impact of reinsurance is then shown to include the impact of having lower investment expenses due to holding lower reserves. Given that this approach is more prudent than that proposed (given that it also increases the CDR SCR) can it be considered as an acceptable method? TS part I TP! Best estimate 1005b TS part I TP Best estimate TP 2.32 In relation to par. TP.2.32, as part of the administrative expenses, No, TP states that the calculation of reinsurance recoverables should follow the same principles and methodology reinsurance expenses are included. Does the term reinsurance expenses also include the reinsurance premiums? as presented in the LTGA TS for the calculation of other parts of the technical provisions, with exception of the risk margin calculation (see TP 2.136). Therefore, in case there are future premiums to be paid for the reinsurance contract, these will be taken into account in the calculation of the recoverables, since projection of all cash in and out flows belonging to the existing reinsurance contract (others than the administrative expenses derived from reinsurance contract to the direct insurer in line with TP. 2.32) will constitute the best estimate of reinsurance recoverables. TS part I TP! Discount rate Page 1

2 1011d TS part I TP Discount rate TP 4.8 Per the unit linked example we understand this to mean that for a Yes. unit linked contract you put the current unit reserve (normally equal to the surrender value) in the technical provision as a whole line and the future expenses less future charges BE calculation in the TP BE line? Presumably it also follows that the cashflows for a unit linked contract to be input into the LTG spreadsheet (and also for QRT TPF2) are just the future expense and future charges items? 1011e TS part I TP Discount rate TP 4.8 Normally when calculating unit prices for unit linked contracts, buying and selling costs are allowed for. However, Solvency II looks for asset values as per the IFRS accounts which do not allow for buying and selling costs. Therefore, in order to be consistent with unit linked asset values being used in Solvency II are we correct in assuming that the unit prices in calculating the value to put in the technical provision as a whole line also do not allow for buying and selling costs? Yes. 1011g TS part I TP Discount rate TP 5.10 Aligned to Q1011a [TP Segmentation], we would generally expect to calculate the risk margin on a monthly basis, particularly to facilitate quarterly reporting. Please can you confirm that it is reasonable when calculating the risk margin to assume that the SCR will reduce monthly? This would be consistent with actual experience where business goes off the books on a regular basis. Yes. Although simpler methods than monthly calculations may be applied. TS part I TP! Risk Margin 1021k TS part I Risk Margin TP 5.36 Will detail on the simplification approach taken (as per TP of the EIOPA Technical Specification guidance issued on December 21st 2012) to the Risk Margin calculation be required? All simplifications that follow either the Technical Specifications or the two dedicated Simplification documents published by EIOPA for the LTGA, do not need to be documented or explained by participants beyond what is required by the input spreadsheets. However, any further simplifications applied should be documented by participants in a supporting letter which needs to be submitted alongside the final results (no template available here). Furthermore, NSAs might request the Risk Margin helper tab to be submitted with the final results. TS part I SCR! LAC & Deferred Taxes 1021q TS part I SCR Deferred Tax Asset SCR 2.2 If the deferred tax asset can be included in the calculations, is it necessary to demonstrate that it is recoverable from future margins? If so, how should this be demonstrated and what time period should be used to demonstrate this? 1021r TS part I SCR Deferred Tax Asset SCR 2.2 When aggregating the total impact of the SCR calculations, is it permissible to allow for a Deferred Tax Asset which would arise as a result of the SCR scenarios? Eg. Might it be assumed that 50% of the Spread Risk SCR be recovered over a set time period so that a deferred tax asset of 50%*Spread Risk SCR*12.5% can be set up? TS part I SCR! Operational Risk SCR In accordance with SCR.2.25, the recognition of lossabsorbing DTA for the purpose of the SCR calculation should be based on the extent to which offsetting is permitted according to the relevant tax regimes, which may include offset against past tax liabilities, or current or likely future tax liabilities. For demonstrating the latter criterion, future profit projections can be employed that take into account the undertakings position post SCRstress. The techncial specifications foresee no time limit for the recoverablity proof, however, limits according to local tax regimes should be observed. Criteria for the valuation and recognition of lossabsorbing DTA can be found in chapter 2.2 of the technical specifications part 1. Any assumption on the recoverability of tax losses should comply with those criteria. 1011h TS part I SCR Operational Risk SCR 3.3 The definition of Expul refers to annual expenses on unit linked business. We are assuming that this is defined as per solvency 1 as being the renewal expenses for administrating unit linked business? It should cover all expenses (not charges) associated with the unit linked business over the last year. Note that costs related to investment guarantees should not be included. 1011i TS part I SCR Operational Risk SCR 3.3 The operational risk calculation is based on Premium earned a measure that most life companies do not currently report. Instead they report the accounting premiums on an accrued basis (i.e. premiums paid plus movement in o/s premiums balances). Can the accounting premiums on an accrued basis be used in this calculation for life business? However because accrued premiums may not be suitable for calculating operational risk for all HRGs, if the use of accrued premiums is accepted we would suggest that the Max(Op premiums, Op Provisions) test be calculated at HRG level rather than total level. Yes, the accounting premiums can be used in this calculation for the purpose of the LTGA purpose only. Page 2

3 1069 TS part 1 SCR.3.6 Calculation of the SCR risk operational in the Specs part I: In paragraph SCR.3.6, the first factor for the Op Provisions is 0.045, while in all previous versions indicated Could you confirm that this is indeed a typo? This is a typo indeed. It will be corrected in the next published version. TS part I SCR! Market Risk 1002 TS part I SCR Market Risk Equity dampener SCR 5.37 We have a question regarding the symmetric equity adjustment as initially described in the technical specifications SCR Is the formula for the calculation of the adjustment the same as described in draft L2 as of October 2011? Please note that the initially published Technical Specifications Part I have been amended regarding the equity dampener (or symmetric equity adjustment). It is no longer relevant for the LTGA as the equity transitional measure is applied, i.e. a reduced equity shock of 22% is applied to each type of equity in all scenarios. 1011k TS part I SCR Market Risk Spread risk SCR Please can you confirm that consistent with definition of Assetsxl which excludes contracts where the investment risk is fully borne by the policyholders that the exposure at default to counterparty also excludes the Asset exposure where the asset is held in respect of life insurance contracts where the investment risk is fully borne by the policyholders? Consistency between the numerator and the denominator should be ensured. 1021o TS part I SCR Market Risk Currency SCR 5.66 The company reports it s results in Euro but the majority of the The currency shock is based on a scenario approach as described in section SCR.1.1. and defined as the variation of basic liabilities are in Sterling. Therefore, it would be deemed prudent own funds expressed in the local currency see SCR.5,59 in case of changes of value of relevant currencies against that most of the surplus assets held are also in Sterling in order to the local currency. In the situation described, the Sterling will be a relevant currency whose simulated variation in value hedge future currency movements. However, previous Solvency II against euro will need to be assessed. Excluding some assets from this simulation wouldn't accurately reflect the potential guidance has suggested that own funds denominated in a impact on own funds. currency other than the local currency be hit by a 25% shock. The latest guidance from December 2012 states (in SCR.5.66) that in calculating the currency SCR all of the participants individual currency positions and it s investment policy (eg, hedging arrangements, gearing etc.) should be taken into account. Does this imply that the 25% currency shock is not applicable to our Own Funds if we can demonstrate that it forms part of a hedging strategy? 1030 TS part I SCR Market Risk SCR.5.3 When Technical Specifications enumerate the inputs required for market risk module, Mktint is defined as Capital requirement for intangible assets risk. Is that correct or it is a mistake? This has been corrected in the TS(I) published on 28 January It should be interest rate risk TS part I SCR Market Risk SCR What does F n mean? Is it a mistake? ow should be calculated the decrease of the spreads (in relative terms) of 75%? Yes, it is a mistake. It has been corrected in the latest TS(I) published on 28 January TS part I SCR! Life Underwriting Risk 1011l TS part I SCR Life underwriting SCR 7.35 Recovery rates in the early years of a disability are generally calculated monthly. Are we correct in assuming that the 20% decrease in the recovery rates can be applied to these monthly rates and not to an equivalent yearly rate? Stresses defined in the Technical Specifications should be applied to all disability rates used to calculate technical provisions, even if recovery rates were calculated monthly. 1011m TS part I SCR Life underwriting SCR Can you confirm that the disability inception rates shock is only Stresses should be applied to all disability and morbidity rates used to calculate technical provisions. 7.35/ applied to claims arising after the valuation date? The technical SCR 8.38 specification states: "An increase of 35% in disability and morbidity which are used in the calculations of technical provisions to reflect the disability and morbidity experience in the following 12 months." This would appear to indicate that the SCR inception shock should not be applied to unreported claims incurred before the valuation date. It would however appear to be intended that the recovery SCR shock will apply to unreported claims incurred before the valuation date. 1011n TS part I SCR Life underwriting SCR 7.7 Similarly to the approach noted in relation to Q1011a [TP Segmentation}, we allow for a monthly mortality rate of Q(x)/ /12. We assume that where contracts terminate during the course of the year that the mortality stress applied relates only to the number of months a contract is in force and a full year s stress does not apply. The stresses provided in the Technical Specifications shall be applied anyway. Page 3

4 1011o TS part I SCR Life underwriting SCR 7.7 For a joint life first death policy is the extra applied to each The factor should be applied to each mortality rate used to calculate TP. life s mortality rate or to total mortality rate i.e. is it (a) q(x) + q(y) q(x).q(y) or (b) (q(x) ) + (q(y) ) (q(x)+.0015).(q(y)+.0015)? Our understanding is that method (a) should apply? TS part I SCR! Health SCR Underwriting 1005d TS part I SCR Health Underwriting SCR 1.12 In relation to SCR.1.12SCR.1.14: It is stated that The SCR SCR 1.14 should cover the risk of existing business as well as the new business expected to be written over the following 12 months. However, in SCR.1.14, it is not made clear how and if the life insurance and SLT health insurance would allow inclusion of unexpected losses stemming from new business. SCR For life insurance and SLT health insurance the calculation of underwriting risk in the standard formula is based on scenarios. The scenarios consist of an instantaneous stress that occurs at the valuation date and therefore the new business is not considered. 1005e TS part I SCR Health Underwriting SCR 8.95 SCR 8.95: The accident concentration risk considers workers compensation obligations and group income protection Medical expenses insurance is defined as "Medical expense insurance obligations where the underlying business is not pursued on a similar technical basis to that of life insurance, other than obligations included in the line of business 3 obligations. Should we exclude the medical expenses cover, which (Workers' compensation insurance)". Therefore medical expenses obligations due to accidents at work, industrial injury is part of such obligations? and occupational diseases are included as part of the Workers' compensation insurance. 1005f TS part I SCR Health Underwriting SCR SCR 8.106: The accident concentration risk considers accidents occurring in concentrated exposures ( e.g. offices) stemming from the SLT health and nonslt health classes. If such exposures are covered under the Public Liability class, should they also be considered in this module? No. The obligations of liability contracts should not be allocated to the health lines of business but to the liability lines of business (or if they are annuities to the line of business for annuities stemming from nonlife insurance contracts other than health insurance contracts). Where an accident gives rise to a liability of an insured person (under a general third party liability insurance or a motor vehicle liability insurance) to compensate the victim for disability or the expenses of medical treatment, the liability obligation does not cover the compensation for the victim's disability or medical expenses, but it covers the compensation for the liability of the insured person to make compensations for the victim's disability or medical expenses. 1005g TS part I SCR Health Underwriting SCR In the initially published TS part I for SCR 8.116, the pandemic risk module explicitly excluded medical insurance and medical expenses for pandemic in the description. However in the SCR formula it was explicitly included. Please clarify. Medical expenses insurance is included in the final version of the Technical Specification Part I (as published on 28 Jan 2013) in SCR TS part I MCR 1011p TS part I MCR MCR 4 In the calculation of CAR for an accelerated serious illness policy we are assuming that CAR is just equal to the accelerated sum assured. Capitalatrisk is defined as the sum of financial strains for each policy on immediate death or disability where it is positive. The financial strain on immediate death or disability is the amount currently payable on death or disability of the insured and the present value of annuities payable on death or disability of the insured less the net technical provisions (not including the risk margin) and less the increase in reinsurance recoverables which is directly caused by death or disability of the insured. As a starting point, the calculation should be based on a policybypolicy approach, but reasonable actuarial methods and approximations may be used. 1011q TS part I MCR MCR 4 Should unit linked business with investment guarantees be included in category TP life 3 or TP life 4? Including it with TP life 3 would allow for consistency with the QRTs. However, if it is felt that this does not give the desired result, then a separate category for unit linked business with guarantees would be required in order to avoid some lack of consistency with the QRTs. All unitlinked and indexlinked business should be included in TP life 3, even where guarantees apply. TS part I Group 1003 TS part I Group Coverage G13 Wen looking at G13 (as on the right), what does it mean The LTGA exercise is conducted on solo level. All participating undertakings are to use the LTGA Technical Specifications concretely, that any EEA subgroup should follow SST rules or that to determine the capital requirements regardless wether they are part of a noneea Group or not. I.e. G13 is not relevant the applied ultimate group SST calculation done is sufficient. for this assessment. TS part II Scenarios 1012 TS part II Scenarios Reference Date 2.1 Do we have to use the reference date of 31 December 2011 in the LTG calculatiosn or could 31 December 2012 be used instead. All participant are to use 31 December 2011 as the base reference date underlying the scenarios 09, even if more recent data would be available. Page 4

5 ID Document Topic No. Question 1017 TS part II Scenarios 10,11 and Scenarios 10,11,12 : The undertakings should use the YE11 liability and asset portfolios, only applying the relevant adjustments to yield curves/ market prices as provided by EIOPA. Is it possible to use as simplification duration based adjustment to liabilities or is it required do make full cashflow recalculation. The other question regards the adjustment to prices of assets covering UnitLinked liabilities where significant share have UCIT funds, where undertaking often do not know exact holdings and the risks are born by policyholders, are there adjustments to market prices needed and if yes are approximations allowed? While gathering information on the cashflows is an important part of this exercise, it is all ultimately to be completed on a best efforts basis. Any simplification applied should please be disclosed in submissions in case it is not a simplification explicitly provided by EIOPA in the Technical Specifications or dedicated approximation/ simplification documents (on historical B/S and SCR). The adjustments to the asset portfolios to arrive at proxies for 2004 and 2009 should in principle also be applied be unit linked assets, though undertakings may consider applying simplifications where the impact of the riskfree rate adjustments being tested is insignificant. TS part II Discount curves 1021h TS part II Discount Curves How should you discount Index Linked liability cashflows? Undertakings may have different ways of determining the real discount rates implied by the nominal riskfree rates provided. For the purposes of the LTGA no single method will be prescribed. Undertakings should however ensure consistent treatment where a matching adjustment or countercyclical premium is applied to such liabilities; the impact of applying these adjustments should not be arbitrarily affected by inconsistent methods TS part II Discount Curves Are the published risk free curves annual compounding or continuous compounding? All curves are annually compounded. TS part II Transitional measure 1010 TS part II Transitional measure When reading the specifics relative to the scope of the transitional measure (see column P of the technical specifications part II), it is not entirely clear how to interpret the conditions e.g. the "and" and the reference towards different directives (life, nonlife and reinsurance). As a consequence we have the following questions: Is the transitional measures only applicable for life insurance provisions or both for life and nonlife provisions? In case the transitional measure is (not) applicable for nonlife insurance provisions, what should be done for the nonlife provisions? E.g. how to interpret the calculation of the weighted average and how to interpret the solvency I rate for nonlife? It only applies to life insurance. TS part II CCP 1013 TS part II CCP 3.4 We would like to ask if the interest rate stress for the scenarios including CCP are to be performed based on the Basic riskfree interest rate curve excluding CCP or on the adapted curve including CCP. The description in the technical specifications part II says that the CCP should be added to the swap rates and The interest rate stresses apply to the basic riskfree rate only, so any applicable countercyclical premium or matching adjustment should be ignored. The interest rate stresses should be consistently applied for liabilities and corresponding assets. Where the transitional applies to the liabilities, this entails stressing the assets according to a change in the riskfree rate based on the transitional. the resulting rates are the input to the SWmethod outputting the An example of how this may be done is given below, though undertakings may of course apply more sophisticated zero curves. In interaction with the standard formula is methods. described, however there is no description of how the interest rate Consider a bond with an outstanding duration of 2 years and a market value of 95. There is a coupon payment of 3 in stress is to be applied. If the stress is to be performed excluding the CCP (and then after the stress adding the CCP only to the liquid part of the curve before extrapolating once more), this will in practice mean that only the liquid part of the curve is explicitly stressed. one year, and a redemption payment of 100 in two years. The gross redemption yield for this bond is 4.2%. Suppose further that the basic risk free rate over the next year is 3%, and over the next two years is 3.2%. This means that the spread over the next year is 1.2% and over the next two years is 1%. Keeping the spread fixed and applying the interest rate shocks to the basic risk free rates only, leads to the shocked interest rates developing as follows: Year GRY RFR Spread Up stress Down stress % 3% 1.20% 3%* %=6.3% 3%* %=1.95% % 3.20% 1.00% 3.2%*1.7+1%=6.44% 3.2%*0.35+1%=2.12% In principle, all assets and liabilities comprising a fixed future cash flow element should be considered interest rate sensitive, especially bonds and loans with a fixed coupon, interest rate derivatives, technical provisions, and employee benefits. The interest exposure to property and equity is already covered in the property and equity submodules, so they fall outside of the scope. As part of this impact assessment, the stressed curve to be used, after applying the shock on the basic riskfree rate term structure only, includes the relevant adjustment where applicable. Guidance on how this may be performed is provided in the helper tabs (see EIOPA Helper tab Cashflow discounting tool ). Page 5

6 ID Document Topic No. TS part II Matching Adjustment Question 1016 TS part II Fundamental spread Sect 4 & App MA2 I have a practical question relating to the fundamental spread calculations. Some things seem to be open to interpretation and I would like to check my understanding with you and/or relevant EIOPA experts. Let s take the example of a 10 year BBB corporate bond (say financial) yielding a coupon of 5%. The fundamental spread for this type of bond is for durations between 0 and 5 and for durations between 5 and 10 (I took the figures from one of the EIOPA spreadsheets). The question is the following: which of the two interpretations in the table below is the right one (or are the two interpretations acceptable): Interpretation 1 would allow companies to do calculations at a more aggregate level (as cash flows could be grouped across sectors) whereas interpretation 2 requires asset by asset calculations. The differences seem to be very small as you can see on this example. A third interpretation (not shown above) would be to do the calculation at portfolio level based on the average duration and weightings across sectors and ratings. It would be helpful to know if any of these approaches are acceptable and whether there is flexibility for companies to choose between these methods. Additionally, if interpretation 1 or 3 are applied, it would also be useful to know if duration or modified duration need to be used to choose the right duration band Undertakings are free to apply the calculation at the level most suitable to their internal data and methods. Where weighted averages are taken, these should be based on the product of the market value and the average duration of the asset. It should be noted though that the more granular the level at which the calculation is applied, the more accurate the result will be TS part II Fundamental spread Let s take the example of a 10 year BBB corporate bond (say financial) yielding a coupon of 5%. The fundamental spread for this type of bond is for durations between 0 and 5 and Undertakings are free to apply the calculation at the level most suitable to their internal data and methods. Where weighted averages are taken, these should be based on the product of the market value and the average duration of the asset. It should be noted though that the more granular the level at which the calculation is applied, the more accurate for durations between 5 and 10 (I took the figures from one the result will be. of the EIOPA spreadsheets). The question is the following: which of the two interpretations in the table below is the right one (or are the two interpretations acceptable): Interpretation 1 would allow companies to do calculations at a more aggregate level (as cash flows could be grouped across sectors) whereas interpretation 2 requires asset by asset calculations. The differences seem to be very small as you can see on this example. A third interpretation (not shown above) would be to do the calculation at portfolio level based on the average duration and weightings across sectors and ratings. It would be helpful to know if any of these approaches are acceptable and whether there is flexibility for companies to choose between these methods. Additionally, if interpretation 1 or 3 are applied, it would also be useful to know if duration or modified duration need to be used to choose the right duration band. 1021e TS part II Fundamental spread There is a requirement that the fundamental spread for assets of The Matching Adjustment for assets of credit quality step 3 is capped at he higher of that applicable to credit step 1 and credit quality step 3 be such that the matching adjustment in 2. respect of these assets does not exceed the matching adjustment Gilts should be considered as government bonds, so their fundamental Spread will depend on the country of issue. for assets of credit quality step 1 and 2. Does this imply that the Matching Adjustment for Credit Quality Step 3 (BBB) assets should be compared to the Matching Adjustment for Credit Step 1 (AAA and AA) and Credit Step 2 (A) in aggregate or should it be less than either the Matching Adjustment for Credit Step 1 or Credit Step 2 assets? Should Gilts be included in the AAA Matching Adjustment category? 1021l TS part II Risk Margin Can it be assumed that Spread SCRs are avoidable in the Risk Margin calculation where a Matching Adjustment is used? For the purpose of this assessment, the MA should not be taken into account for the calculation of the Risk Margin. See page 24 of the TS part II. Page 6

7 1015 TS part II Hybrid products In some markets there exist hybrid life insurance products where the policyholder has option to invest within one single policy both First, it should be noted that paragraph 1 of Section 4.4 of the techical specifications part II provides that "insurance contracts where market risk is borne by policy holder (i.e. unitlinked products) are not eligible for a matching in unit linked funds and in a withprofit reserve. Depending on the adjustment, whatever the form of the matching adjustment. As a consequence, the "classic" matching adjustment cannot product, the policyholder may have one of the following options: to reallocate unit linked funds into withprofit reserves/ to reallocate freely between withprofit assets and withprofit applied to hybrid life insurance products since the unitlined part of the insurance contract cannot be split from the with profit part, pursuant to paragraph 4 of Section 4.4. Furthermore, the right of the policy holder to reallocate freely his capital between the withprofit funds and the unitlinked funds is an options in the hand of the policy holder, which is not reserves/can matching adjustment together with application ratio allowed under the "classic" matching adjustment. On the other hand, the split of insurance obligations embedded in one be applied for such products? single policy is allowed when it comes to the "extended" matching adjustment as well as options for the policy holder. Therefore, the unitlinked part of the insurance contract and the reallocation option do not disqualify the rest of the contract for eligibility to the matching adjustment, provided that other requirements are met. The discontinuance in the withprofit insurance obligation that may result from the reallocation option should be treated via the risk of lapse in the application ratio. 1021a TS part II Matching requirement 4 In order to get a sensible result for the Matching Adjustment you As part of this impact assessment, no hypothetical portfolio of admissible asset should be quantitatively tested by the need to have enough sufficient eligible assets so that the cashflow participating undertakings. This means that, when running the scenarios, undertakings cannot assume the sale of actual mismatch between asset and liability cashflows does not give rise ineligible assets and the instantaneous purchase of hypothetical eligible assets in order to optimize the matching to a material risk. What do you do if you do not have enough adjustment. However, as part of the sensitivities (see Section 5 of the technical specifications part II), undertakings are assets at present? How should you treat ineligible assets? In encouraged to provide an estimation of the level of "extended" matching adjustment based on an "hypothetical" portfolio calculations to date, we have assumed the purchase of synthetic, that makes best use of the eligibility criteria (paragraph 1(d) of Section 5). For the quantitative scenarios (i.e. eligible assets to replace ineligible assets and to complete our irrespective of the sensitivity aforementioned), given that undertakings are not allowed to assume a change of the asset portfolio in order to get to an appropriate level of matching. composition, the application of the matching adjustment depends on the version being tested: Under the classic matching adjustment: where the undertaking does not hold sufficient admissible assets to cover all the eligible insurance obligations, the portfolio of insurance obligations should correspond to a subset of eligible insurance obligations composed in such a manner that the mismatching with the assigned portfolio of admissible assets is not material. The portfolio of insurance obligations should in any case meet all the eligibility criteria and, notably, it must be possible for the portfolio of insurance obligations as well as the portfolio of admissible assets to be ringfenced or managed separately from the rest of the business without possibility of transfer (pursuant to paragraph 1(b) of Section 4.6). If the undertaking cannot define such a subportfolio, the matching adjustment cannot apply. Under the extended standard matching adjustment: same as classic matching adjustment, but for the purpose of composing a subset, the undertaking may split the insurance contracts concerned by insurance obligations, as set out in paragraph 7 of Section 4.4 (Specifications part II). Under the extended alternative matching adjustment: the matching requirement does not apply and undertakings can apply the matching adjustment, even if admissible assets are not sufficient to cover the portfolio of insurance obligations, in accordance with the methodology provided in Section 4.6(2) and (3) and Section 4.7(6) and (7). Notwithstanding paragraph 1 of Section 4.5 and 1(a) of Section 4.6, it should be noted that, in the context of this impact assessment, the assigned portfolio of assets includes both admissible and nonadmissible assets. This means that, under the extended alternative matching adjustment, the assigned portfolio of assets to be ringfenced or separately managed without possibility of transfer may contain securities that do not meet the admissibility criteria such as equities. However, non admissible assets are not taken into account in the calculation of the matching adjustment. 1021b TS part II Matching requirement 4 In an older LTGA guidance, there is more detail provided on what is a material risk in terms of mismatching. The first requirement is that, for each cashflow interval up to the last liquid point, the sum of the cash inflows is larger than the sum of the cash outflows. Each cashflow interval is defined as monthly, quarterly, semiannually or annually. Is the choice of the time interval to use completely up to each individual company or does each of monthly, quarterly, semiannually or annually have to be considered? Can excess cashflows from prior intervals be carried over as a cash balance to the next time interval? 1021c TS part II General & Index Linked Should separate Matching Adjustments be calculated for different annuity blocks if assets are separately identifiable? Similarly, if Index Linked assets are held to back index linked liabilities, should a separate matching premium be calculated for non linked and index linked liabilities? Final Technical Specifications Part II reflect the following approach: For the purpose of the impact assessment there is no discretion on the length of the CFInterval it should always be one year. There is no different treatment of CFIntervals before/beyond the Last Liquid Point. Netting of CashFlows is not allowed, there the excess of prior interval cannot be carried over to the next interval. The effect of netting will be investigated in a variation analysis. If undertakings have two portfolios of eligible liabilities, each with their own admissible assets, they may choose whether to apply one MA to the combined portfolio, or to apply different MAs to the separate portfolios (assuming no further restrictions on the assets). For indexlinked assets and liabilities the same principle applies undertakings may choose whether or not to apply a separate MA to these liabilities, depending on the desired structure. 1021f TS part II General Is the Matching Adjustment applicable for the term of the liabilities? Yes, for the purpose of this assessment, the matching adjustment is applied as a parallel shift to the entire curve, i.e. also in the tail. 1021g TS part II General Is the Matching Adjustment applicable for cross border business? No, the activities on the insurance undertaking in relation to which the matching adjustment is applied shall be pursued only in the Member State where the undertaking has been authorised. Qualitative Page 7

8 1018 Q17 / Q23 The undertakings should provide an estimation of the relative This is right, as the asset cashflows shall be fixed under the "classic" matching adjustment, question 17 requests an standard deviation of each quarterly paid cash flows. As according estimation of the relative standard deviation of liability cashflows only. In question 23, which refers to the "extended" with the Technical Specifications part II the cashflows of the assets of the assigned portfolio of assets are fixed, should the estimation of cashflow involve only cash flows of liabilities and does it mean that there should be stochastic estimation of cash flows? matching adjustment, the request concerns the liability cashflows as well, as underlaid by the wording of the question : "the net cashflow being defined as the outgoing (claim) cashflow minus the incoming (premium) cashflows. Admittedly, one may point out that it would have been useful to request such an estimation for the asset cashflows in the case of the "extended" alternative, where floating cashflows are allowed. It should be noted that the difference between Q17 (reference to "paid cashflow") and Q23 (reference to "net cashflow") is justified by the allowance or not for future premiums under the "extended" respectively the "classic" matching adjustment. Besides, it is also right that the estimation of relative standard deviation of the cashflows needs a stochastic modelling Q21 Does the lapse rate include also surrender rate or lapse rate indicates only lapses without payout of surrender value? Lapse is defined in the Technical Specifications Part I, paragraph SCR.7.5., as the loss or adverse change in liabilities due to a change in the expected exercise rates of policyholder options. The relevant options are all legal or contractual policy holder rights to fully or partly terminate, surrender, decrease, restrict or suspend insurance cover or permit the insurance policy to lapse. Therefore the lapse rate does include the surrender rate. Page 8