February 2nd, 2010

Solvency II: CEIOPS Third Set of Advice, An Overview

Posted at 8:03 PM ET

Frank Achtert, Managing Director, Financial Intelligence Team

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published its final and third set of advice to the European Commission (EC) at the end of January. The advice notably excluded final advice on non-life underwriting risk.

CEIOPS Delivers Third Set of Final Advice: Summary

The new set of advice from CEIOPS incorporates the considerable feedback received from various stakeholders on CEIOPS’ third wave of consultation papers. The feedback dealt with the increase in calibration of the Solvency Capital Requirement (SCR) standard formula charges compared with Qualitative Impact Study (QIS) 4 charges.  Market risk, equity risk and correlation assumptions are addressed in this final advice.


  • The market risk charges seem to be based on a combination of the rigid approach suggested in the consultation papers (CP) issued by CEIOPS in November 2009 and the integration of feedback received from the industry. Thus, the interest rate stresses have been significantly lowered compared to the 2009 proposal and the volatility shock is now determined as volatility stresses of 12 percent in the upward direction and 3 percent in the downward direction, to be applied as additive stresses to implied volatility. Interest rate stresses and volatility shocks are assumed as non-correlated. Also credit risk spreads for corporate bonds have been diminished.
  • Concessions on the equity stress impact are marginal, retaining the 45 percent for “global” equities and a slight reduction in the stress assumptions from 60 percent to 55 percent for stocks categorized as “other.” The equity volatility stress test has been lowered.  
  • Diminished interest rate stresses and more favorable correlation parameters for market risk reduce the size of the capital charges for bonds from that of the November proposal.


Status Quo Non-Life Underwriting Risk

It is noteworthy that Non-Life Underwriting Risk is not covered in this final advice. Although CEIOPS has already undertaken a major effort to refine its calibration proposal by collecting data and revising its assumptions, it still needs to collect more data and to perform further evaluation of practical proposals. One area needing further refinement is more accurate reflection of non-proportional reinsurance in the standard formula. In this respect, more clarity on the underwriting risk calibration is expected by the end of March 2010, when the draft QIS 5 technical specifications are scheduled to be available.  Consequently, the trend towards increased capital requirements as suggested in CP71 “SCR Standard Formula – calibration of non-life underwriting risk,” appears to still apply to non-life underwriting risk. CP71 has substantially increased the premium and reserve risk factors for non-life insurance and reinsurance from the QIS 4 levels.


Factors for all classes of business have been massively increased and even doubled for non-proportional reinsurance resulting in an estimated increase of the underwriting capital charge by 35 percent on average compared to the charge with QIS 4. Catastrophe risk factors within the standard formula also have been strengthened by CP71.   Guy Carpenter will soon publish additional publications that will shed more light on these issues:

-          Solvency II – Rationale for the Capital Requirement Increase for Underwriting Risk

-          Higher Pressure on Cat Risk under Solvency II


Additional pressure on risk capital levels for non-life underwriting risk comes from the correlation assumption (0.25) between catastrophe and premium and reserve risk which was just re-confirmed by CEIOPS on its final advice regarding correlations as well as the abolishment of geographical diversification effects.



As QIS 5, the likely final all-embracing quantitative Solvency II exercise, is approaching, non-life carriers are still a bit uncertain as to how severe the calibration of the non-life module will be.  For the asset side, insurers and reinsurers now have a better understanding of the loadings.  They will be more severe than QIS 4, but less severe than initially suggested in 2009.  For non-life underwriting risk, more clarification is expected by the end of March.

Contact Information
This briefing was prepared by Guy Carpenter’s Financial Intelligence Team (FIT). Questions regarding this briefing may be directed to any of the FIT members, listed below.


Susan Witcraft, Managing Director, Minneapolis                   +1 952.832.2143

Frank Achtert, Managing Director, Munich                            +49

Eddy Vanbeneden, Managing Director, Brussels                  +32 2.674.98.11

David Flandro, Senior Vice President, London                      +44 (0)20 7357 3267

Benoît Butel, Vice President, Paris                                        +33

Sebastien Portmann, Vice President, Zurich                         +41 44.285.9322



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