On 11 April, the Prudential Regulation Authority (PRA) issued a Consultation Paper in which it sets out its proposal to consider applications from internal model firms that include a Dynamic Volatility Adjustment. This proposal is relevant to Solvency II firms in the UK and the Society of Lloyd’s and its managing agents. It is also relevant to firms with, or seeking, Volatility Adjustment approval that use, or may develop in the future, a full or partial internal model to determine the Solvency Capital Requirement (SCR). Milliman’s Robert Bugg and Lyndsay Wrobel offer some perspective in this briefing note.
Organisations completing their second full year of Solvency II reporting are required to submit four additional reporting templates. These additional templates disclose the change in the excess of assets over liabilities over the 12-month period since the previous set of annual reporting templates were submitted to regulators. In this briefing, Milliman’s Barry Murphy and Cormac Gleeson discuss these templates and provide insight on how to approach them.
This report by Milliman consultants summarises the Solvency and Financial Condition Reports of the main players in the life and non-life insurance business in Luxembourg. It focusses on the largest insurance entities in Luxembourg as well as some large reinsurance entities and includes an overview of the factors determining the Solvency Capital Requirement ratio.
Solvency and Financial Condition Reports (SFCRs) and Quantitative Reporting Templates (QRTs) show that UK non-life and health insurers are overall well capitalised. However, it appears that undertakings using the Standard Formula (SF) have not utilised all possible ways available to better reflect their risk profiles, thereby missing out on potentially reducing their Solvency Capital Requirements and improving their solvency ratios. Milliman consultants Vincent Robert and Lamia Amouch provide more perspective in their article “Have you made the Standard Formula yours?“
On 6 November 2017 the European Insurance and Occupational Pensions Authority (EIOPA) released a consultation paper on its second set of advice to the European Commission on the Solvency II review. This follows on from an earlier consultation paper and subsequent report released by EIOPA in July and October, respectively, on its first set of advice on the Solvency II review.
The second consultation paper is very detailed and sets out EIOPA’s proposed advice on a number of areas including various Solvency Capital Requirement (SCR) risk modules (premium and reserve risk, mortality and longevity risk, catastrophe risk, market risk, counterparty default risk), the risk margin, own funds and the look-though approach.
We are currently reviewing the consultation paper in detail and plan to publish a briefing note outlining EIOPA’s proposals for each of the topics covered in the consultation paper in the coming weeks.
However in advance of that, we have highlighted a few key proposals in this blog post:
• EIOPA is proposing that the calibration of the standard formula mortality risk capital charge should increase from 15% to 25% (as set out in section 3 of the consultation paper).
• EIOPA is proposing changes to the methodology underlying the interest rate risk capital charge to take account of the low interest rate environment. Two options are proposed in the consultation paper (see section 7).
• EIOPA is proposing simplifications to the application of the ‘look through’ approach for the purposes of the SCR calculation (as set out in section 15).
• EIOPA is proposing to keep the cost of capital rate used in the calculation of the risk margin unchanged at 6% (as set out in section 18).
• EIOPA is proposing changes to the standard formula factors for the standard deviation of premium and reserve risk for some non-life lines of business, including medical expense insurance (see section 1). For medical expense insurance EIOPA is proposing to increase the factors for standard deviation of premium risk from 5.0% to 6.0% and for reserve risk from 5.0% to 6.6%.
The deadline for responses to the consultation is 5 January 2018. EIOPA is expected to provide final advice to the European Commission on the proposed changes on 28 February 2018.
On 10 October 2017, the new Dutch government Rutte III of the VVD, CDA, D66 and ChristenUnie presented their Coalition Agreement. In ‘Confidence in the future, Government Agreement 2017-2021,’ the government provides an overview of the intended objectives including expected budget.
Two proposals regarding the corporate tax will affect the solvency position of insurers under Solvency II. The first proposal is related to decreasing the corporate tax rate from 25% to 21%. The percentage decreases are in the table below:
||Corporate tax rate
Decreasing the corporate tax rate will have a decreasing effect on the level of Loss Absorbing Capacity of Deferred Tax (LAC DT), resulting in a higher Solvency Capital Requirement (SCR). In addition, the eligible own funds backing the SCR may decrease should an insurer have a Deferred Tax Asset (DTA) on the balance sheet.
The second proposal is related to mitigating the carryforward of taxable losses with future taxable profits. Currently, loss in corporate tax rules can be recovered by profit last year (carryback) and nine years into the future (carryforward). In the Coalition Agreement, the carryforward will be limited to six years. The government expects the first saving to be in 2028. The intended effective date of this rule is currently unknown. Given the first saving in 2028, our expectation is that the rule will commence between 2019 and 2022.
The second measure impacts the level of LAC DT as well. This is due to the opportunity of recovering tax receivables from the loss (SCR) as a result of the 1-in-200-year simultaneous shock with tax liabilities from future profits. Profits between the seventh and ninth years cannot be taken into account.
The same counts for the recovery of a DTA with tax liabilities from future profits. This will be more complicated.
Insurers need to realise these new corporate tax regulations when defining their capital policies and when managing stakeholder expectations on the level of the Solvency II ratio.