SCR Interest Rate Down, Risk Margin, Macroprudential Tools, Illiquid Liabilities
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SCR Interest Rate Down
Solvency II interest rate risk in the SCR standard model is highly debated and there's clear evidence that the current model in the current discount rate set up has flaws. AAE did agree on the need for recalibration and model change in the 2017 SCR review but did not agree on the proposal on the timing as discount rate discussion was still open. In 2020 Review the SCR interest rate risk is on the table but can't be separated from the possible changes in the discount rate as the is a straight forward implication from one to another. Depending on the changes to UFR, LLP or interpolation, these all needs to be understood well before closing any position on how to calculate interest rate shock. The shock, and especially the down ward shock, will be difficult to calibrate as basically no good data exists and focus will be on possible macro economic scenarios and ECB actions. AAE needs to build good understanding of the interest rate risk taking into account these different aspects. Some technical ground work/evidence might be need in order to achieve this target even though AAE has for several year work to better understand the low yield environment. Also communication with EIOPA is utmost important as there is already a lot of ideas in the table which needs to be adjusted to how the discount rate will change.
The calculation of the risk margin in Solvency II is a topic of significant debate. Reasons include:
- The methodology chosen has a significant impact on the overall Solvency II balance sheet for many EU insurers
- Many commentators believe that the risk margin is too high, or even if pitched reasonably is too sensitive to e.g. interest rate movements
- EIOPA has previously indicated a reluctance to consider altering the methodology or relevant input parameters at the present time (but is expecting to review the risk margin as part of the wider review of Solvency II)
- The EU Commission would like EIOPA to review the methodology sooner rather than later
- The C-MOCE in the IAIS’s global ICS has an apparently similar aim but with somewhat different input parameters used
The aim is to contribute to this debate, ideally in time to discuss thoughts with EIOPA in mid-December or soon afterwards.
EIOPA has published 3 papers relating to systemic risk in insurance business. They have identified several macroprudential tools which are assumed to assess systemic risks like f.e. under-reserving. Some of these tools are proposed for further consideration and could even more be proposed as extensions of the Solvency II framework as part of the required forthcoming review process (Deadline End of 2020) which will be far more than a LTG-Review. This task requires a proactive approach in order to analyse the paper of EIOPA and the arguments that have led to the characterisation of the macroprudential tools.
First tools to deal with could be the following:
a) enhanced monitoring against market-wide under-reserving,
b) enhancement of own risk and solvency assessment (ORSA),
c) recovery plans and
d) resolution plans.
We will have to analyse EIOPA's results in order to assess the proposed tools and to check, if the undeniably required additional activities from undertakings are justified by the expected improvement of the risk assessment. The choice of the tools is preliminary. We are aiming at a first rough assessment and prioritisation of the tools until end of year 2018. The paper on macroprudential tools available with the following link will be the starting point for this workstreams. An overview can be found on pages 67, 68. https://eiopa.europa.eu/Publications/Reports/EIOPA%20Other%20potential%20macroprudential%20tools.pdf
At 29 October EIOPA has published a request for feedback on illiquid liabilities. Deadline for comments is 7 December 2018.
This is an important issue relating to extrapolation and is already part of the forthcoming LTG – review. It is related to Commission’s call for information from April 2018.
Therefore we aim at commenting on this paper.
If you have the chance to deal with (some of) the 35 questions in this paper, it would be great to have your feedback by 30 November 2018 the latest.