Fifth Quantitative Impact Study of Solvency II (QIS5)

Transcription

1 Fifth Quantitative Impact Study of Solvency II (QIS5) Guidance on the treatment of German accident insurance with guaranteed premium repayment in the solvency balance sheet of QIS5 Introduction The UBR (Unfallversicherung mit garantierter Beitragsrückerstattung = accident insurance with guaranteed premium payback) is a specific product in Germany which combines an accident insurance and endowment insurance within one contract with the particularity that the endowment insurance assures the repayment demand at maturity or in case of death of the insured person. One characteristic of this insurance is that the risk of an accident and the risk of the premium repayment are jointly connected to the insurance product and that there is a pre-quantified guarantee for the repayment demand by the undertaking. The guidance specifies how UBR contracts could be unbundled into a life part and a nonlife part in line with the principle of substance over form. Such unbundling is described in relation to the valuation of technical provisions relating to such contracts, as well as to the calculation of the SCR standard formula. We consider that in relation to UBR contracts (which we note is solely sold in Germany) the requirements on segmentation and unbundling as implemented in the QIS5 Technical Specifications require further clarification to be sufficiently clear and precise. Furthermore, the calculation of discretionary benefits has to be consistent with the allowance of a pre-financing reserve that is common for these contracts under local statutory consideration. Therefore, a national guidance on the treatment of German UBR contracts is necessary to ensure a consistent application of the Solvency II framework to these contracts and is intended to accompany QIS5. The Framework Directive of the European Commission relating to Solvency II states that insurance and reinsurance undertakings shall segment their insurance and reinsurance obligations into homogeneous risk groups, and as a minimum by lines of business, when calculating their technical provisions. According to QIS5 Technical Specification (re)insurance obligations should be allocated to the line of business that best reflects the nature of the underlying risks. In particular, the principle of substance over form should be followed for the allocation. In other words, the segmentation should reflect the nature of the risks underlying the contract (substance), rather than the legal form of the contract (form). Where a contract includes life and non-life and life (re)insurance obligations, it should be unbundled into its life and non-life parts. Where a contract covers risks across the different lines of business for non-life (re)insurance obligations, these contracts should be unbundled into the appropriate lines of business. The national guidance on UBR contracts is intended to ensure that with regard to these contracts these specifications on segmentation and unbundling as contained in the Level 1 text and in the QIS5 specifications are consistently followed by the QIS5 participants.

2 Product description The accident insurance product with guaranteed premium repayment (UBR) combines an accident insurance and endowment insurance within one contract with the particularity that the endowment insurance assures the repayment demand at maturity or in case of death of the insured person. One characteristic of this insurance is that the risk of an accident and the risk of the premium repayment are jointly connected to the insurance product and that there is a pre-quantified guarantee for the repayment demand by the undertaking. The following product varieties are offered in the German market: UBR including a lump sum payment at maturity or death of the insured person to meet the repayment demand, UBR including payments in form of an annuity at maturity, where the actuarial assumptions to calculate the annuity are guaranteed Unit Linked UBR with the amount of the fund balance fulfilling the repayment demand UBR including a care protection As the first product variety is the most common form of the UBR, we are referring to it in this guidance as including an endowment insurance component. Nevertheless, we note that an analogous procedure should be followed in case the UBR includes an annuity insurance component or a care protection. Treatment of the UBR in the Solvency II Balance Sheet The following characteristics of the UBR have to be considered when setting up the Solvency II Balance Sheet: Segmentation of Technical Provisions: To allow for an adequate segmentation and disclosure within the Technical Provisions, the UBR has to be unbundled into an accident insurance and endowment insurance component. According to the Technical Specifications Segmentation of non-life insurance obligations, the accident insurance is considered a non-life insurance obligation and is assigned to the line of business medical expenses or income protection, depending on whether cover the provision of preventive or curative medical treatment or care including medical treatment or care due to illness, accident, disability and infirmity, or financial compensation for such treatment or care, or financial compensation in consequence of illness, accident, disability or infirmity. Anymore, the accident insurance component is then valued according to non-life techniques. Nevertheless, according to the Technical Specifications, the distinction between life and non-life insurance obligations should be based on the nature of the underlying risk. Therefore, when these accident insurances give rise to the payment of annuities, the technical provisions related to such annuities should be value separately from the technical provisions related to the remaining non-life obligations. Thus, these are considered life insurance obligations and have to be assigned to the 17 th line of business for life insurance and reinsurance obligations.

3 Calculation of Technical Provisions: One consequence of unbundling the contract is the necessity to separate premiums and benefits for the accident insurance component and the endowment insurance component to allow a separate calculation of Technical Provisions. Hence, the total premium has to be split into a premium for the risk of an accident and a premium for the endowment insurance. If in practice the undertaking uses parts of the premium for the accident insurance component to increase the premiums for the endowment insurance component that are considered in the local statutory provisions, then these increased premiums should be regarded as the premium for the endowment insurance component. Thus, the premium for the accident insurance component has to be lowered appropriately. For the calculation of technical provisions, undertakings should apply the approach that best reflects their way of managing business. For instance, there are two possible ways of separating acquisition expenses (including commissions) and administrative expenses (including investment management expenses and claims management expenses): Allocation of total amount of acquisition and administration costs to the endowment insurance component. Distribution between the accident and endowment insurance component, so that the accident insurance component includes an appropriate share of the costs comparable to an ordinary accident insurance. Furthermore, there are two possibilities to calculate Technical Provisions for the accident insurance and the endowment insurance part of the UBR within one nonlife insurance undertaking: The endowment insurance as part of the UBR is valued according to the valuation principles of life insurance products separately from the rest of the non-life insurance undertaking (including its assets). Allowance for the special treatment of the endowment insurance valued according to life principles within an integrated business model. The decision on an alternative calculation influences the allowance for diversification effects within the undertaking. Whereas those effects have to be explicitly allowed for in the first alternative when the lines of business are integrated within one undertaking, this is implicitly included in the second approach. In both cases, an allowance has to be made for the fact that the total undertaking is responsible for the repayment demand. Allowance for future discretionary benefits: Actuarial assumptions for the calculation of the premiums and the statutory reserves may vary. Thus, this can lead to the effect that the present value of the expected claims exceeds the present value of the expected premiums of the endowment insurance and thus leads to the necessity to pre-finance a reserve at inception of the contract under local statutory consideration. In the calculation of the Technical Provisions under Solvency II, only those discretionary benefits stemming from investment income should be considered, that are caused by the excess of the actually earned interest rate over the actuarial interest rate used in the calculation of the premiums. The reference

4 figure should then be the actuarial reserve that is financed by the policyholder s premiums without consideration of the pre-financing effects. Within the Balance Sheet according to local Statutory Regulation, there is a certain asset fund backing the Technical Provisions of the UBR contracts. This fund called Sicherungsvermögen should ensure securing policyholder claims in case of a Wind-up situation. Nevertheless, the whole undertaking not only the Sicherungsvermögen is liable to ensure that the repayment guarantees that are given to policyholders are paid. Furthermore, the investment income that can be assigned to the Sicherungsvermögen and the profits generated in the accident insurance part of the contract do not have to be solely dedicated to the UBR portfolio and the UBR portfolio can also participate in the investment income arising from the whole asset portfolio. There are two possibilities to allocate future discretionary benefits from investment income to the UBR portfolio: Allowance for the investment income that can be assigned to the Sicherungsvermögen of the UBR portfolio, Allowance of a proportionate share of the investment income of the whole undertaking. For the allowance of future discretionary benefits within technical provisions, undertakings should apply the approach that best reflects the way they manage their business. Thus, the proceeding that is followed by the undertaking has to be considered in the calculation of future discretionary benefits. The UBR portfolio being only one line of business within a non-life undertaking does not have a separate and attributable equity capital. There are two possibilities to allow for an adequate and comparable treatment of this fact: Identification of the excess of the Sicherungsvermögen as the difference between the current value of it s assets and the reserves of the endowment insurance to assess the part of the equity that is attributable to the UBR portfolio. Scaling of the assets of the Sicherungsvermögen to the size of the liabilities which results in an omission of equity capital for the UBR portfolio. The approach that is chosen to calculate future discretionary benefits should be in line with the assessment of shareholder s equity within the Solvency II Balance Sheet. Treatment of the UBR within the Standard Formula To allow for an adequate treatment of the risks inherent in an accident insurance product with guaranteed premium repayment, the unbundled parts of the UBR (accident insurance and endowment insurance component) have to be treated separately. Furthermore, the treatment of the UBR within the Standard Formula should be consistent to the valuation of Technical Provisions and the calculation of future discretionary benefits respectively. The main risk driver for the UBR, with exception of the unit linked UBR, is the market risk of the assets due to the long-term guarantees that are provided to the policyholders captured in the endowment insurance component. Nevertheless, also the underwriting risks have to be considered.

5 For this purpose, the accident insurance component should be treated according to any other accident insurance under Solvency II. For QIS5, the embedded underwriting risks are captured in the NSLT Health underwriting risk module. However, when these accident insurances give rise to the payment of annuities, the risks should then be captured in the SLT Health underwriting risk module, in analogy to the segmentation within the technical provisions. The following risks then have to be captured in accordance to the module where they are captured: In addition to the underwriting risks of the accident insurance component, the underwriting risks for the endowment insurance component also have to be calculated. The underwriting risks of the endowment insurance component have to be captured in the Life underwriting risk module that is similar to the SLT Health module as shown above. Depending on the respective product varieties, different underwriting risks have to be considered. As long as the endowment insurance component only covers a repayment demand at maturity or in case of death of the insured person that is paid as a lump sum, it is not exposed to any longevity, disability or revision risk. Certainly, mortality risk is then the main underwriting risk that has to be considered.