EIOPA Proposes Solvency II Guide on Contracts and Technical Provisions

The proposed guidelines on contract boundaries are intended to promote consistent application of an insurance or reinsurance contract boundary. A contract boundary specifies whether the additional cover arising from policyholders’ options is regarded as existing or future business. The proposed guidelines provide further guidance on the existing requirements. They focus on the unbundling of an insurance and reinsurance contract and the assessment whether a financial guarantee or a cover has a discernible effect on the economics of the contract. In particular, the new guidance focuses on the aim of unbundling, ensuring that a contract has the same treatment regardless whether it is sold as one contract or as two independent contracts where both are equivalent in terms of risk. The guidelines help to determine which insurance or reinsurance obligations with regard to future premiums arise in relation to a contract in accordance with Articles 17 and 18 of Commission Delegated Regulation 2015/35; they are addressed to supervisory authorities under Solvency II. 

The proposed guidelines on valuation of technical provisions are intended to enhance consistency and convergence of professional practices for all types and sizes of undertakings across the EU member states and to support undertakings in calculating their technical provisions under Solvency II. The proposed guidelines introduce new guidance and amend the current guidance on topics that are relevant for the valuation of best estimate, including the use of future management actions and expert judgment; the modeling of expenses and the valuation of options and guarantees by economic scenarios generators; and modeling of policyholder behavior. EIOPA also identified the need for clarification in the calculation of expected profits in future premium. In the new and amended guidelines, EIOPA would clarify that, where contracts with material options and guarantees exist, undertakings are expected to use a valuation method that captures the time value of these contracts. The guidance on addressing expert judgement, a key component of the calculation of technical provisions, is being proposed based on the existing guidelines on the use of internal models, which were already applicable for technical provision valuation purposes. These guidelines are addressed to national competent authorities under Solvency II and will be ultimately applied both by actuaries and other professionals who may be appointed to perform tasks of the actuarial function.

Related Links

• Press Release
• Proposal on Contract Boundaries
• Proposal on Valuation of Technical Provisions

Comment Due Date: November 12, 2021

Keywords: Europe, EU, Insurance, Solvency II, Solvency II Review, Technical Provisions, Contract Boundaries, Supervisory Convergence, EIOPA