Page 1. LongTerm Guarantees Assessment EIOPA/13/067. Questions & Answers as of 13 Feb 2013

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1 LongTerm Guarantees Assessment s & s as of 13 Feb 2013 EIOPA/13/067 New questions and answers are marked with blue font. 13 February 2013 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 non(life 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 TS part I TP ( Segmentation TP 2.25( 2.56 TS part I TP Contract boundaries 1023 TS part I TP ( Contract boundaries TP.2.15( TP.2.22 and ANNEX D 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 cash(flow input required for the LTG stress spreadsheet (and also for QRT TP(F2) is the sum of the monthly cash(flows for that year and you will estimate the average timing of these cash flows? We have been analysing both TP.2.15(TP2.22 and Annex D and we still have doubts about the application of these provisions for life annual term contracts with the following features: (1)The entity has a legal right to make an individual risk assessment at renewal date (medical examination or survey) although these rights are not exercised in reality ever. (2) Fixed regular premiums for the full term; at maturity the policy is automatically renewed (tacit renewal), and the policyholder is notified of the new premium payable; premiums may be assessed annually under portfolio basis (never made at the level of the contract).(3) The entity has at future date a unilateral right to terminate the contract or to reject the premium although these rights are not exercised in reality ever. Can we understand that all future premiums belong to the contract? Would it be necessary to refuse formally either the unilateral right to terminate the contract, unilateral right to reject the premium or the right to make an individual risk assessment in the contracts/policies for this Impact Assessment? For the purpose of the setting of the contract boundaries, insurance contracts need to be currently compliant with the conditions set out in the Technical Specifications. It is not important whether these rights are exercised (often) in practice or not. The decisive factor is the existence of a unilateral right of the undertaking to amend premiums, terminate the contract etc.. Therefore, the contract boundary is the next renewal date when the undertaking has a unilateral right to terminate the contract, reject premiums or to amend the premiums in such a way that the premiums fully reflect the risks or to reject premiums TS part I TP ( Contract boundaries TP 2.16 c) graph TP2.16. c) states that if an insurance or reinsurance More detail on the features of these insurance products would be needed to give an answer to this question. Annex D contract: (i) does not provide compensation for a specified may help the participant assessing whether there is a financial guarantee of benefits or not. uncertain event that adversely affects the insured person, (ii) does not include a financial guarantee of benefits, any obligation that do not relate to premiums which have already been paid do not belong to the contract, unless the undertaking can compel the policy holder to pay the future premium. Can we consider that future regular premiums are included in the boundary of the contract for unit linked products or Universal Life? Page 1

2 1025 TS part I TP ( Contract boundaries TP 2.15( TP 2.22 ANNEX D 1026 TS part I TP ( Contract boundaries TP 2.15( TP2.22 ANNEX D We propose the following example in order to get more clarification on the application of the boundary of existing insurance contracts for life products that cover mortality risk (e.g. life annual renewal terms contracts(, with different types of premium (although it could be also extended to annual non(life insurance contracts) Example: (i)reference date: 31/12/2011; (ii) different policies with renewal date for both: 15/01/2012; (iii)premiums are paid every six months; (iv)type of premium Policy 1: Installment Premium; (v)type of premium Policy 2: Pro rata (fractional) Premium. Based on the above mentioned description, what minimum term could be projected for each of these policies (12 months, 6 months)? Certain life annual renewable contracts establish a "bonus" for the policyholders in case of continuance for multi(year periods e.g. the refund of a percentage of the premiums paid until a certain date or the reward with an interest rate on the total amount of premiums paid in the past. Is it correct to assume that this kind of guarantees prevent insurance undertakings to exercise their unilateral rights over the contract (e.g. to terminate the contract) and therefore it would enable the possibility of projecting cash( flows beyond the next renewal date? If the insurance undertaking has established these guarantees for the policyholders, is it correct to interpret that the way to recognize these guarantees in the calculation of the Best Estimate it would consist in projecting cash( flows, at least until the date that these guarantees should be paid? More detail would be needed on the features of the contracts. If the undertaking has not the unilateral right to terminate the contract, reject premiums or amend premiums before the renewal date, premiums and obligations occurring during the following 12 months after the renewal date for policy 1 and 6 months for Policy 2 belong to the contract. If the undertaking has the unilateral right to terminate the contract, reject premiums or amend premiums before the renewal date, premiums and obligations occurring after renewal date do not belong to the contract. More details on the features of the contracts would be needed to answer this question. However, if the contract includes a unilateral right to terminate a contract, the existence of this bonus cannot be assumed to invalidate that right and, therefore, the conditions for considering future obligations as part of an existing contract would not be met TS part I TP ( Contract boundaries TP ( Regarding recoverables from reinsurance contracts, which For the purpose of calculating the amounts recoverable from reinsurance contracts and special purpose vehicles, the cash( cashflows should be considered in the calculation of the flows include payments in relation to compensation of insurance events and unsettled insurance claims. The adjustments adjustment based on the probability of default of the counterparty take into account expected losses due to default of the counterparty and shall be calculated as the expected present (all cashflows or only inflows e.g. claims, profit sharing )? value of the change in cash(flows underlying the amounts recoverable from that counterparty, resulting from a possible default of the counterparty. 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? Page 2

3 1071 TS part I TP ( Recoverables TP2.146 Clarification (see previous question in comments tab) TP2.146 For reinsurance, our approach has been to increase our assumed exposure to reassurers by an amount equal to the additional investment costs we would incur if we had no reinsurance. This assumes that our reserves would be bigger without reinsurance and therefore we would have to hold additional assets and there would be a cost associated with this. Is this approach acceptable as it is more prudent than that proposed? The approach proposed should not be accepted in order to avoid implicit prudency margins which hinder the comparability of assets and liabilities. TP requires that calculation of amounts of recoverable from reinsurance contracts and special purpose vehicles should follow the same principles and methodology as for the calculation of other parts of the technical provisions (exception made for addition of a Risk Margin), therefore also in line with article 78.2 of the S2 Directive stating that the calculation of the best estimate shall be based upon up(to(date and credible information and realistic assumptions and be performed using adequate, applicable and relevant actuarial and statistical methods. 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 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 TP(F2) 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 TP ( 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. 1021m TS part I TP ( Risk Margin TP Can it be assumed that Spread SCRs are avoidable in the Risk Margin calculation where a grandfathered discount rate is used? TS part I SCR LAC & Deferred Taxes According to Article 308b(13) of the proposed Directive text the transitional discount rates should be used to calculate the best estimate. The transitional provision does not cover the whole calculation of technical provisions including the risk margin calculation, but only the calculation of the best estimate. For the risk margin calculation the basic risk free rates without application of the transitional should be used. The transitional discount rates do not apply to the risk margin calculation. Page 3

4 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? 1021p TS part I SCR ( Deferred Tax Asset 1. Can an allowance be made for a deferred tax asset arising as a result of an increase in Technical Provisions due to Solvency II implementation? 1028 TS part I SCR ( LAC SCR 2.4( SCR5.25 We have the following questions regarding the loss absorbing capacity of technical provisions: (i)for the calculation of the stressed scenario, should we maintain the value of cashflows related to FDB resulting from the non(stressed scenario? (ii)should the cashflows related to FDB be discounted using the risk free interest rate term structure? In accordance with SCR.2.25, the recognition of loss(absorbing 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 SCR(stress. The technical specifications foresee no time limit for the recoverability proof, however, limits according to local tax regimes should be observed. Criteria for the valuation and recognition of loss(absorbing 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. In these circumstances a deferred tax asset can only be recognised if: ( The Solvency II value of the liability is higher, based on a temporary difference, than the valuation in the tax balance sheet, which is not necessarily valued according to the current accounting basis. ( The IFRS recognition criteria apply. ( The insurance and reinsurance undertaking can demonstrate to the supervisory authority that it is probable that future taxable profit will be available against which the deferred tax asset can be utilised, taking into account any legal or regulatory requirements on the time limits relating to the carryforward of unused tax losses or the carryforward of unused tax credits. In accordance with SCR.2.4, when calculating the gross BSCR, undertakings should base the calculation on the following requirements: (i) the value of cashflows related to future discretionary benefits remains unchanged under the relevant scenario, (ii) where the relevant scenario affects the risk free interest rate term structure (especially the stress on the interest rate level) only the cashflows relating to guaranteed benefits should be rediscounted. The cashflows relating to future discretionary benefits should be discounted using the relevant risk free interest rate term structure TS part I SCR ( LAC From SCR 2.17 to SCR 2.31 We propose the following simple example in order to get more clarification on the calculation of the adjustment for loss absorbency of deferred taxes for the Impact Assessment purpose. (i)bscr= 900; (ii)scrop = 150; (iii) AdjTP= 0. If SCRshock= BSCR+ SCRop + AdjTP we would assume: SCRshock= 30%( (0)=315, which conditions have to be fulfilled to recognize a total adjustment of 315 in the final SCR? In order to recognise a total adjustment of 315 in the final SCR an undertaking would need to: 1) Justify that the 30% tax rate was either in accordance with: T SCR 2.22 (an average tax rate which avoids material misstatement); or T SCR 2.23 (the tax rate reflecting the relevant level of granularity in all applicable tax regimes). AND 2) Justify how the recognition criteria of SCR 2.25 are met. This requires to show a likely ability to set off the nominal tax loss against: T current or past tax liabilities (to the extent permitted in the relevant tax regime); or T deferred tax liabilities on the unstressed balance sheet (subject to the avoidance of double counting as required in SCR 2.26); or T likely future profits (subject to prevention of double counting as required by SCR 2.30 and SCR 2.31 and taking into consideration the future prospects of the undertaking post(stress as required by SCR 2.28 and 2.29 and considering the extent to which carry(forward is permitted in the relevant tax regime). TS part I SCR Operational Risk SCR 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 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 Page 4

5 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? how should the decrease of the spreads (in relative terms) of ( 75% be calculated? Yes, it is a mistake. It has been corrected in the latest TS(I) published on 28 January s TS part 1 SCR ( Market Risk ( Interest Rate SCR 5.22 The Technical Specifications state: The interpretation is correct, the shock should be calculated as follows: SCR Where an undertaking is exposed to interest rate b. max {Σc SCR(interest up,c) ; Σc SCR(interest down,c)} with c=currency. where shock for a currency resulting in an movements in more than one currency, the capital requirement for increase of basic own funds should be disregarded (floor of zero per currency). interest rate risk should be calculated based on the larger of the two capital requirements for interest rate risk after a downward and after an upward shock. This sentence could be interpreted as calculating the upward or downward shock for all currencies altogether. This would generate some diversification between currencies as it could be the upward shock that generates a capital requirement for the Canadian Dollar and the downward shock that generates a capital requirement for the US Dollar TS part I SCR ( Market Risk SCR.5.84( When defining Mktsp bonds it is unclear if there should be included All loans except for mortgage loans as defined in SCR.6.50 should be included in the spread risk module loans other than non(residential mortgage loans (SCR.5.84( SCR.5.86) or loans other than residential mortgage loans" (SCR.5.85(SCR.5.105). Which ones should be included? 1032 TS part I SCR ( Market Risk SCR.5.93 & SCR Are local authority (communal) bonds exempted from spread risk and market risk concentrations similarly to exposures guaranteed by national government of an EEA state? Exposures to regional governments and local authorities should be treated as exposures to the central government in whose jurisdiction they are established to the extent there is no difference in risk between such exposures because of the specific revenue(raising powers of the former, and the existence of specific institutional arrangements which should reduce the risk of default TS part I SCR ( Market Risk SCR.5.96 For impact assessment purposes, should we consider the If it means that two ratings are available, the rating generating the higher capital requirement shall be used. requirement of double credit rating for financial instruments based on repackaged loans? Page 5

6 1034 TS part I SCR ( Market Risk SCR.5.37 For the purposes of this impact assessment the symmetric adjustment of the equity risk sub(module has been established in ( 7%. Can this adjustment change? How often will this adjustment be recalculated? Equity dampener is not applied for LTGA. Please note that a transitional equity measure is applied instead TS part I SCR ( Market Risk SCR.5.65 What exchange rate should be used to assess the currency risk for an undertaking whose local currency is EUR ( ) and for investments in USD ($)? In case that rate $/ is used, the scenarios to be assessed are symmetric, otherwise the variation between upward and downward scenarios are not symmetric. Please, could you confirm that the rate to be used should be $/? 1036 TS part I SCR ( Market Risk SCR.5.91 When assessing the spread risk for bonds issued by insurers or reinsurers, the credit quality is determined based on the compliance of MCR. This information will be referred to an earlier time (at the time of assessing the risk, the compliance of MCR is not available). Is it acceptable to use a figure of an earlier time as updated market information? On the other hand, when they do meet the MCR, how should be the shock applied? The currency risk capital charge should be the higher for the capital requirement for the downwards and upwards shocks in the value of the foreign currency against the local currency. Therefore, it is confirmed that the rate should be $/ when the undertaking prepares its financial statement in EUR.The TS(I) 5.8 currency risk needs amendment on the calculation to be clearer. When the MCR is met, the capital requirement is calculated as specified in SCR 5.84 to SCR When compliance of the MCR is not available, it depends on the figure of an earlier time used TS part I SCR ( Market Risk SCR.5.98( Taking into account the tables presented, the maximum spread SCR.5.99 risk that can be generated by a structured product with credit quality "A" is 76%, while a "BBB" shall not exceed 40%? Does this make sense? From the second table it appears that a capital requirement greater than 100% of the value of a structured product can be generated. Does this make sense, or do we have to limit it to no more than 100%? If an asset causes a capital requirement of 100% of the valuation of that asset in a given sub( module (as in this case the spread sub(module), should we stop taking those assets into account in other market risk sub(modules, in order to avoid a shock above 100%? According to SCR.5.97, the spread risk stress on a structured product of credit quality step 3 with a duration of 4 years or more is 80%. For all maximum stress factors in SCR.5.97 a cap of 100% applies TS part I SCR ( Market Risk ( RFF SCR 10.18( and 1079 TS part II SCR ( Market Risk ( Equity dampener/ transitional 1080 TS part II SCR ( Market Risk ( Equity dampener/ transitional TS part I SCR Counterparty Default Risk 1005 h) TS part I SCR ( Counterparty Default Risk We have the following questions regarding the treatment of ring( fenced funds: (i)for the calculation of concentration risk (SCR 5.118), should we consider the total amount of assets of the undertaking exposed to that risk or only the assets exposed within Annexe U( the RFF? (ii)should the calculation of notional SCR with a partial V internal model be consistent with the assumptions taken into account to calculate the SCR for the undertaking as a whole? (iii)would it be necessary to calculate the capital requirement for operational risk for each RFF? (iv)we understand that MCR should be calculated for the undertaking as a whole (i.e. RFF+ remaining part of the undertaking) and not separately. Can you clarify if this is the correct approach? Is our assumption correct that the standard shocks (39%/49%) are used for the scenarios without transitionals? Is our assumption correct that the reduced shock (22%) can only be used for the transitional scenarios (i.e. 8, 9, and 11)? With regards to premium receivables (policyholders and intermediaries): Can you please clarify the treatment of (non(life) premium receivables, which cover exposure periods, which start prior to the valuation date and finish after the valuation date, and which are considered due under the terms of the policy agreement and are payable by the policyholder or intermediary within a specified period, based on a credit arrangement that goes beyond the valuation date? For such cases, we have the following questions: (i) As per SCR 10.18, "Where ring(fenced funds exist, a notional Solvency Capital Requirement has to be calculated for each ring(fenced fund, as well as for the remaining part of the undertaking, in the same manner as if those ring(fenced funds and the remaining part of the undertaking were separate undertakings". Therefore, for the calculation of concentration risk only the assets exposed within the RFF should be considered. (ii) There is no reason to consider that the calculation of a notional SCR with a partial internal model should not be consistent with the assumptions taken into account to calculate the SCR for the undertaking as a whole, as is already implied by paragraph SCR with regards to full internal model. (iii) Yes, paragraph SCR specifies that "The notional Solvency Capital Requirement includes a capital requirement for operational risk as well as any relevant adjustments for the loss(absorbing capacity of technical provisions and deferred taxes." (iv) This is correct. SCR specifies that it is only for the purpose of the calculation of the SCR that the RFF and the remaining part should be considered for separate undertakings. Therefore, the MCR must be calculated for the undertaking as a whole. No, in accordance with paragraph of the TS2, the equity stress to be applied is a shock of 22% for each type of equity in each scenario. see 1079 above (1) Balance Sheet: On the SII Balance Sheet are these considered Premiums which have fallen due and have not yet been received (regardless of whether a credit period exists or not) as part of the technical provisions? If yes, should they be allocated should be considered as assets on the Balance Sheet (i.e. not TP). Such assets will be counted accordingly with the to the claims provisions or the premium provisions? nature of the arrangement. Page 6

7 TP 2.25( (2) Future premiums (TP.2.25): Do these fall under the scope of 2.56 Future Premiums? No, premium receivables do not fall under the scope of future premiums but in the scope of earned premiums. SCR 6.6 3) Counterparty risk (SCR 6.41): Do these fall under the scope of Counterparty risk? This is right. Premium receivables are covered by the counterparty default risk module and should be treated as Type 2 exposures Policy holder debtors (see SCR 6.6) SCR 9.3 (4) Lapse risk (SCR 9.3): Do these fall under the scope of Lapse risk? No, this is not the case since the receivable will be due TS part I SCR ( Counterparty Default Risk SCR 6.29 Regarding the recovery rate for counterparty risk (SCR 6.25),a The recovery rate for counterparty default risk is pre(defined in the LGD(formulas (at a value of 50% or 90%); the rate stochastic method could be used to obtain the recovery rate (RR)? should not be modified. If it is not possible to obtain a reliable RR with this, according to TP.2.170, a 50% RR for both reinsurance agreements and derivatives can be used? 1068b TS part I SCR ( Counterparty Default Risk SCR 5.2 Although this paragraph is in the market risk section it states The effect of all market and counterparty risk scenarios should be properly reflected in the post(shock values of employee benefits. Given that counterparty risk is not scenario based and there is no mention of occupational pension schemes in the Counterparty Risk module, can we assume that only the market risk module should apply? Also, can it be assumed that the scope of SCR 1.8 is sufficiently wide to allow for management actions in relation to the pension scheme when calculating the impact of a stress? 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? In general, the counterparty default risk module covers all credit risky exposures which are not covered in the spread risk module. This may include counterparty risk stemming from contractual arrangements with an IORP or another insurance or reinsurance undertaking (e.g. deposits, receivables). The future management action plan as well as the loss(absorbing capacity of technical provisions are concepts defined in respect to technical provions only. Hence, no allowance for future management actions can be made when calculating the impact of a stress on employee benefits. 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. 1011o TS part I SCR ( Life underwriting SCR 7.7 For a joint life first death policy is the extra applied to each 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? The factor should be applied to each mortality rate used to calculate TP. TS part I SCR Non Life Underwriting Risk 1044 TS part I SCR ( Non Life underwriting SCR 9.3 According to the Technical Specifications (SCR 9.37, 9.38, 9.39) lapse risk in insurance non(life, it does not seem that the returns of premiums fall within this definition. Furthermore, its not be taken into account in this calculation. Is it correct? Refund of premiums should be considered in the shock of the non(life lapse risk because it results in an increase of technical provisions or a decrease of number of future contracts. Page 7

8 1078 TS part I SCR ( Non Life SCR 9.12 In SCR for the term FP_(existing,s) one has to exclude the underwriting premiums to be earned by the undertaking during the following twelve months where for FP_(future,s) one has to exclude the premiums to be earned twelve months after the initial recognition date of each contract. Is this distinction indeed intentional? TS part I SCR Health Underwriting SCR 1005d TS part I SCR Health Underwriting SCR 1.12 In relation to SCR.1.12(SCR.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. Yes. And the term FP_(existing,s) refers to existing contracts and FP_(future,s) refers to new contracts. 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 non(slt 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 non(life 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 SCR Health Underwriting SCR.8.61 In our opinion, more information would be needing to estimate FP(existing) should cover all premiums expected to be earned after the 12 following months, which belong to contracts FP(existing,s) and FP(future,s). If the policy is annually renewable, already existing at the calculation date. Premiums belong to a contract if they satisfy the criteria set in paragraphs TP how many periods do we need to collect the future premiums that 2.15 ( TP2.22. are not included in Ps? Until the end of the period beginning in the FP(future) corresponds to the same notion, applied to contracts expected to enter into force during the forthcoming year. following year (that part is reflected in the magnitude Ps) or, do we have to allow for the renewals estimated by the company? For the purpose of calculating the present value of future premiums in the context of this impact assessment, undertakings should use the relevant risk free rate curve (i.e. with the CCP where applicable). Moreover, to assess the present value, what would the curve be to use in the discount? The risk(free rate curve without margin or the curve including a countercyclical premium? 1041 TS part I SCR Health Underwriting SCR.8.5 The paragraphs SCR (SCRma), SCR (SCRac) and SCR (SCRp) when defining the relevant capital add the following comment: "Without deduction of recoverables from reinsurance amounts the contracts and SPV". Moreover, the paragraph SCR 8.92 states: Undertakings should take into account reinsurance and other mitigation instruments to estimate their net loss as specified below. Some clarification is needed since the Technical Specifications do not make any reference regarding how to consider reinsurance and other mitigation instruments so as to net down the estimation of their respective gross estimations. The formulas given in paragraphs (and similar) should be used to determine the gross amount of losses faced by the undertaking. In order to assess the actual impact on basic own funds of such a gross loss, undertakings should apply all relevant risk mitigation techniques. The way of applying risk mitigation techniques will be specific to each undertaking, depending for instance on their reinsurance program. For this reason it is difficult to give general guidance on the application of risk mitigation techniques TS part I SCR Health Underwriting SCR 8.96 The paragraph SCR 8.96 b) states that the accident concentration The proposed interpretation is correct : this scenario should actually exclude any individual income protection cover. risk sub(module shall apply to WC (re)insurance obligations and to group income protection (re)insurance obligations. According to this, shall the accident concentration risk sub(module exclusively apply to group income protection cover without allowing for individuals income protection covers? Page 8

9 1043 TS part I SCR Health Underwriting SCR SCR The paragraphs SCR and SCR make reference to There is indeed a mistake in the TS: the table to be used is the one presented in paragraph SCR The reference to events (type e) listed in ANNEX N. After looking through the Annex N is wrong (Annex N only contains the list of countries). ANNEX N there is not any table with the mentioned events (type e). Furthermore, if we compare the Technical Specifications with the EC draft Regulation, the latter includes an "event type e" table which matches up with the table shown in the Technical Specifications' paragraph SCR Some clarification is needed as is a modification in ANNEX N. TS part I SCR Participations SCR 1046 TS part I SCR ( Participations SCR Regarding the first point (i) of paragraph 14.10, what specific criteria must be met in order to demonstrate that the value of an equity investment is likely to be materially less volatile for the following 12 months than the value of other equities over the same period, taking into account that most of these participations are not listed? In case that the above criterion is met, which elements should be taken into account in order to prove that this less volatility is as a result of both the nature of the investment and the influence exercised by the participating undertaking? Some examples would be appreciated. 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. For the purpose of the LTGA, a level equity shock of 22% is applicable to all equity investments. Hence, a demonstration of the strategic nature of an equity investments is not necessary. Capital(at(risk 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 policy(by(policy 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 unit(linked and index(linked business should be included in TP life 3, even where guarantees apply. 1021j TS part I Ring Fenced Funds Own Funds Own Funds 2. If the assets are held in separate custody accounts in order to support reinsurance arrangements, do they constitute Ring( Fenced Funds? Whether or not such arrangements constitute a ring(fenced fund will depend on the rights and obligations of the contracting parties. If the assets involved are not restricted in their use as would be the case where there is an equal and corresponding liability then on the face of it a RFF would not arise. This assessment would therefore need to look at the facts of the arrangement. It is not imposed by Solvency II. 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 whether they are part of a non(eea Group or not. I.e. G13 is not the applied ultimate group SST calculation done is sufficient. relevant 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 calculations or could 31 December 2012 be used instead. All participant are to use 31 December 2011 as the base reference date underlying the scenarios 0(9, even if more recent data would be available 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 cash(flow recalculation. The other question regards the adjustment to prices of assets covering Unit(Linked 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 cash(flows 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 risk(free rate adjustments being tested is insignificant. TS part II Discount curves Page 9