August 21st, 2009

Solvency II – Summary of CEIOPS March Consultation Papers: Technical Provisions – Assumptions about Future Management Actions

Posted at 1:00 AM ET

Financial Intelligence Team
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For Solvency II compliance, future management actions are primarily relevant in life insurance and should be reflected in the assessment of cash-flows (e.g., changes in asset allocations, bonus rates).

The list of assumptions made on management actions provided by QIS 4 participants was deemed “to be indicative but not comprehensive or useful” by CEIOPS and thus has not been incorporated into CP32.

The request made already in the QIS 4 technical specifications — i.e., that the assumed management actions should be “based on objective, reasonable, and verifiable bases” — is further specified by CP32. Objectivity should be demonstrated by means of both quantitative and qualitative methods:

  • “Clear trigger points and algorithms showing when and how management actions might be applied.”
  • Comprehensive documentation of all processes and plans and applications involved, signed-off by the management.

The company should not only consider it “both possible and also realistic that they will carry out such actions in the circumstances being considered,” but actions should be consistent with current principles and practices, taking into account the obligations to policyholders. Estimates of future cash flows should reflect the time it takes to implement actions, their costs, and likely changes in the behavior of policyholders.

Verifiability “should be interpreted as meaning that there should be sufficient evidence to demonstrate that management actions are objective and realistic.” This statement refers especially to the documentation requirements already mentioned above. An additional means of verifiability is a comparison of assumed future actions and “historical” actions made in previous years. Such a comparison should also be done for the assumptions of past and current evaluations.

Finally, “the level of justification required for a given management action may depend on the impact of that management action.”

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Contributors:

  • Susan Witcraft, Managing Director
  • Frank Achtert, Managing Director
  • Iain Boyer, Managing Director
  • Michelle Harnick, Managing Director
  • Dave Lightfoot, Managing Director
  • Scott Lohman, Managing Director
  • Don Mango, Managing Director
  • Eddy Vanbeneden, Managing Director
  • Jeff Bellmont, Senior Vice President
  • Gina Carlson, Senior Vice President
  • Debbie Griffin, Senior Vice President
  • David Flandro, Senior Vice President
  • Benoît Butel, Vice President
  • Sebastien Portmann, Vice President
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