1.Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comDear member,Todaywewill start from a letter:EU to Gabriel Bernardino (EIOPA)Solvency ii Associationwww.solvency-ii-association.com

2. Solvency ii Associationwww.solvency-ii-association.com 3. Solvency ii Associationwww.solvency-ii-association.com 4. Solvency ii Associationwww.solvency-ii-association.com 5. The new UK Regulator:The Financial Conduct AuthorityTheFinancial ConductAuthority (FCA)will be thenew regulator whosevision it isto make marketswork well soconsumersget a fair deal.It will be responsibleforrequiringfirmsto put thewell-beingof their customersat theheart of how theyrun theirbusiness,promoting effectivecompetitionand ensuring thatmarketsoperatewithintegrity.TheFCA will start work in2013,when it will receivenewpowersfrom theFinancialServicesBill that is currentlygoingthrough parliament.TheJourney to theFCAsetsouthow wewill approach ourregulatoryobjectives, how weintendto achievea fair deal infinancial servicesfor consumersand whereweare on thisjourney.Changesto authorisationsTheUK regulatorystructure will be changingin 2013, when the FSAwillsplit intotworegulatorybodies theFinancial Conduct Authority (FCA)andthePrudential RegulationAuthority (PRA).In April 2012,Supervisionadoptedthe internal-twin peaksstructure, andnowAuthorisationsare implementingasimilar structure, withSolvency ii Associationwww.solvency-ii-association.com 6. assessmentscarriedout by both the Prudential BusinessUnit (PBU) andtheConduct BusinessUnit (CBU).This changewill onlyaffect firmsthat will be dual regulatedin future.Theapplication submission processwill not change and wewillcontinuetoseek to meet our statutorydeadlines.What will change is how the applicationis processedinternally.There will be a CBU caseofficer and a PBU supervisor responsibleforeach applicationand theywill coordinateto minimiseduplication or theimpact on applicant firmsand individuals.Thefinal decision will need tobe agreedby both the PBU and theCBUtoensurea singleFSAdecisionduring transitionto the new regulatorystructure.Thesechangeswill allowusto start to deliver, asfar aspossible, a modelthat will mirror the future authorisationproceduresin thePRA and theFCA.What is happening to the FSAHandbook?At legal cutover, the FSA Handbook will be split between the FCA andthe PRA to form two new Handbooks, one for the PRA and one for theFCA.Most provisionsin the FSAHandbook will be incorporatedintothePRAsHandbook, theFCAsHandbook, or both, in linewitheach newregulatorsset of responsibilitiesand objectives.Usersof the Handbook will be abletoaccessthe followingonline:1. ThePRAHandbook, displaying provisionswhich applyto PRA-regulated firms2. TheFCA Handbook, displaying all provisionswhichapplytoFCA-regulated firms; andSolvency ii Associationwww.solvency-ii-association.com 7. 3. Tosupport thetransition, a central version which will show theprovisionsof both Handbooks,with clearlabelsindicatingwhichregulator appliesa provision tofirms.Thenew Handbookswill reflect the new regulatory regime (forexample,referencestotheFSAwill be replaced withthe appropriateregulator), and in some areasmore substantivechangeswill be made toreflect theexistenceof the tworegulators, their rolesand powers.(This is likely toincludesuch aspectsasthe future processesforpermissions,passporting, controlledfunctions,threshold conditionsandenforcement powers.)Themore substantivechangeswill be consulted on beforethePRA andtheFCA acquire their legal powers.Changesto theFSAHandbook asa result of EU legislationand FSApolicy initiativeswill continuethroughout this work.After acquiringtheir powers, theFCA and the PRA will amend their ownsuitesof policy material asindependent bodies in accordancewiththeprocesseslaid down in the Financial ServicesBill, includingcooperationbetweenthem and external consultation.What doesthismean for firms?This approachtotheHandbooksfor theFCAand the PRA hasbeenplannedto ensure a safetransition for firmsand thenew regulatorsasthenew regime isintroduced.Firms will have a new regulator or regulators,and will consequentlyneedtoassesshow the new Handbooksof thesebodieswill applytothem.Dual regulated firms will need to look to both the PRA and theFCAHandbooks, and FCAregulated firmsto the FCA Handbook.Solvency ii Associationwww.solvency-ii-association.com 8. When will the changesbe in the Handbook?We expect topublish thenew Handbooks beforelegal cutover.This will allowfirms and otherstime toadjust to theapplicationof thenew Handbooksbeforethe FCA and the PRA arefullyoperational.Thenew Handbookswill not be availablein detail beforethis.Alongside thepublication, wewill publish material on howtointerprettheapplicationof theHandbooks, wherethisis not dealt within theHandbooksthemselves.TheFSAwill continue to make changestoitsHandbook in accordancewith the normal procedure, until thenew bodiesacquire their legalpowers.TheFSAHandbook will remain in force until the FCA and PRA acquiretheir legal powers.Solvency ii Associationwww.solvency-ii-association.com 9. Launch of the Journey to the FCASpeech by Martin Wheatley - ManagingDirector, FSA, and CEO Designate, FCA at theLaunchof the Journeytothe FCAeventGood morning. I wouldlike to thank theMinisterGregClark for joiningustoday, for his supportivewords and for demonstrating the Governmentscommitment toworkingalongsideusto deliver better conduct regulation. I wouldalsolike to thank Thomson-Reutersfor hosting this morning.Todayis a big step forwardon the roadtobecoming the newregulator,and I am gladthat you are all here tojoin us aswelaunch theJourneytotheFCA.TheFCA offersa hugeopportunity for theregulator and firmsto startafresh, and workin partnership to reset how wedeal withconduct infinancial services.We see it asthe role of the regulator to not only make the relevantmarketswork well but also to help firms get back to putting theircustomersat theheart of how theydo business.Regulation hasa huge impact on the peopleand businessesthat rely onfinancial services, and weshould never forget this.We have approachedthe creation of theFCA in athoughtful andconsideredway, asthe document wearesharing withyou today shows.We will regulate oneof our most successful industries, central to thehealth of our economy and a provider of two millionUK jobs.This makesour joban important one, and it will mean that wecarryoutour workin a waythat is asopen and accountableaspossible.We spent the summer engaging with consumer organisations, and 500firms from all areas of financial services, as we developed our thinkingon the FCA.Solvency ii Associationwww.solvency-ii-association.com 10. This allowedustogather useful feedback and wewill continue this openworkingin the FCA.We aim in theJourneytotheFCA todemonstrate what our neworganisationwill mean for the firms weregulate and the consumersweare here to help protect.I encourageyou all to readit, and togive us your views.We are clear about the type of regulator wewant tobecome, and wewanttoworkwithall of our stakeholderstoget there and deliver regulation thatworksbetter.You have not yet had a chanceto read the document, solet me explain abit more about what theFCAis going to be about.TheFCA hasbeen set up to workwithfirms to ensuretheyputconsumersat theheart of their business.Underliningthis are three outcomes:1.Consumersget financial servicesand productsthat meet their needsfrom firmstheycantrust.2.Firms competeeffectivelywiththe interestsof their customersand theintegrityof themarket at the heart of how they run their business.3.Marketsand financial systems are sound, stableand resilient withtransparent pricing information.Reforming regulation is not just good for consumers, it will alsobe goodfor firms. The industrysstanding hassufferedasthemis-sellingscandalsand other problemshave takentheir toll.This hasdamaged the reputationof firmsacrossthe industry, whetherdirectlyinvolved or not. We need towork withyou toput that right.While much of what wewill do is new,wewill alsobuild on what hasworked well under the FSA.We will keep up our policy of credibledeterrence, pursuing enforcementcasesto punish wrongdoing.Solvency ii Associationwww.solvency-ii-association.com 11. And our marketsregulation will continueto promote integrityand carryon theFSAs fight against insider dealing, whichhassecured 20criminalconvictionssince2009.We will continuetokeepunauthorised firms from trying totakeadvantageof consumers.We will set high expectationsfor thosefirms that want to enter financialservices, while still allowinginnovation and good ideastoflourish.And wewill take forward a strong interestin the fair treatment ofcustomers an agenda that hasbeen around for many years, but is stillkey to theFCA.There will, however,be important changes,and our approach will bemore forward-looking, better informed, and wewill have a greaterappetitetoget thingsdone.Anew department will act asthe radar of our new organisationcombining better researchintowhat ishappeningin the market, andanalysisof the riskstoour objectives.This will then feed into our policymaking and our supervision of firms.We want to really understand what is happening to your customers, thedeal theyare gettingand the issuestheyface.This will includegettinga better understandingof whyconsumersact inthewaytheydo, sowecan adapt our regulation to their commonbehavioural traits.Fewer firmswill have regular direct contact withsupervisors,asweshiftresourcestoallowusto deal more quicklyand effectivelywithemergingissues,and run more cross-industryprojectstoget totheroot causeofproblems.We will have new partnersto work with and our relationship with thenew Prudential RegulationAuthority will be crucial, and driven by acultureof cooperation.Solvency ii Associationwww.solvency-ii-association.com 12. We will aim tobringour expertiseto international debates,sothat EUand international policymaking worksfor UK consumers and firms.All of this will be delivered by a new culture in theFCA. We willencourageour staff tobe more confident in makingbold, firm andpredictabledecisions.Tohelp usdoour job, the Government intendstogive theFCAnewtoolstoensurethat consumersget productsthat meet their needs.This buildson one of the key lessonsfrom past problems, whichis thatregulation is oftenmore effectiveif it stepsin earlyto pre-empt andprevent widespreadharm.We will reflect this in our supervision work whenwelook at how firmsdesignand sell their products.But a key new power will mean that wecan step in and ban the saleofproductsthat poseunacceptableriskstoconsumersfor up to 12months,without consultingfirst.We will alsobe abletoban misleadingadvertising.We will usethesenew toolsin a measured way and while wewill actsooner, and more decisively, our approach will be based on a properunderstandingof the issuesand a full considerationof the potentialsolutions.Sowhilst there may be timeswhenwehavetoact rapidly, this is notsomethingthat firmsshould be afraid of.Firms sellingthe right products, in the right way, tothe right consumershavelittletofear.Our new approachwill mean that wewill take competitionintoaccountin all our work.We will weigh up theimpact on competition of new measureswepropose.Solvency ii Associationwww.solvency-ii-association.com 13. We will alsoconsider whethercompetitioncould lead to better resultsthan other action wecould take.In our workhere, and in other areas,I am very consciousthat wehavetoworkwith firms.Makingregulation workbetter for usis alsoabout allowingfirms roomtotry new ideasand develop their business.Promoting competition will play an important part in this.We are not here tostand in thewayof progressthat will be of benefit toconsumers.Our goalsasthe FCAare clear:wewill workfor an industrythat is betterat servingtheneedsof itscustomers.I seethis asan opportunity not just for usbut for the industry.We can do our job better if weworkwithyou, and I am pleasedthat somanyof the chief executivesthat I speak to are talkingthe samelanguageand have committedto rebuildingconfidenceand trust, andreconnectingwiththeir customers.It is great hearingabout thesegood intentions,but thedifficult bit for usall is to make sure this changeactuallyhappens.There arechallengesand opportunitiesfor both ustheregulator, andyou theindustry.It is a journeywehave to walk together,asweput consumersback at theheart of what wedo.Solvency ii Associationwww.solvency-ii-association.com 14. Technical Specificationsfor theSolvency II valuation and SolvencyCapital Requirements calculations(Part I)NoteThis technical specificationisa workingdocument proposedby EIOPAto be used by insuranceand reinsuranceundertakingsparticipatingin anyquantitativeassessment tobeundertaken until new update is available.As there areessential parts of thevaluationframeworkstill under politicaldiscussions, i.e. the discount ratesfor the technical provisionscalculations,thisdocument is not intendedto be a completeset oftechnicalspecificationsfor theSolvency2 balance sheet valuation nor fortheSolvencyCapital Requirementscalculations.Howsoevertheseessentialpartsare not included at thisstagebut willfollowin duecourse.Not even whenthe specificationof discount ratesfor TP calculationsarefinallyadded, the resultingtechnical specificationsshould be seenasacompleteimplementationof the SolvencyII framework, sincefor thepurpose of feasibilityof testingexercises, shortcutsand ad hocsimplificationshavebeen included.In particular, relevant parts of theSCR calculationsuch asinternalmodelssection, undertakingspecific parameters section and within thegroup section:the combination method, thetreatment ofParticipations,Ring Fencedfundsand internal model for groupcalculation havebeendeliberatelynot included in the current technicalspecifications,asthesewerenot consideredby EIOPAasprovidingkeyinformation for thepurposesof thequantitativeteststhat may belaunched in the comingmonths.Solvency ii Associationwww.solvency-ii-association.com 15. However, thisshould not be interpretedasan EIOPAspeculationon itsinclusionin the final Solvency II framework.This technical specificationisinspired by the knowledgethat EIOPAhason the current statusof the negotiationson Omnibus2Directive, theworkingdocumentson implementingmeasuresand itsownworkin thedevelopment of TechnicalStandards and Guidelines.EIOPA plansto incorporate the relevant elementsof thetechnicalprovisionsvaluation, once theoutcome of the OMDII negotiationsisstabilised.Important partsIAS 39 Financial Instruments: Recognition and MeasurementIAS 39establishesprinciplesfor recognisingand measuringfinancialassets,financial liabilitiesand some contractstobuy or sell non-financialitems.For thepurposeof measuringa financial assetafter initialrecognition, thisStandard classifiesfinancial assetsintothefollowingfour categoriesdefinedin paragraph 9:(a) Financial assetsat fair valuethrough profit or loss;(b)Held-to-maturityinvestments;(c) Loansand receivables;and(d) Available-for-salefinancial assets.Thesecategories applyto measurement and profit or lossrecognitionunder this Standard.Theentitymay useother descriptorsfor thesecategoriesor othercategorisationswhenpresentinginformationin the financial statements.Solvency ii Associationwww.solvency-ii-association.com 16. After initial recognition, an entityshall measure financialassets,includingderivativesthat areassets, at their fairvalues,without anydeduction for transaction costsit may incur onsaleor other disposal,except for the followingfinancial assets:(a)Loansand receivables, which shall be measured at amortisedcostusingthe effectiveinterest method(b)Held-to-maturityinvestments, whichshall be measured at amortisedcost using theeffectiveinterestmethod(c)Investmentsin equity instrumentsthat do not have a quotedmarketprice in an activemarket and whosefair value cannot be reliablymeasured and derivativesthat arelinkedto and must be settledbydeliveryof suchunquoted equityinstruments,whichshall be measuredat cost.SolvencyII framework:Fair value measurement principlesareconsideredtobe consistent witharticle 75 of Directive2009/ 138/EC, except for subsequent adjustmentstotake account of thechangein own credit standing of the insuranceor reinsuranceundertakingafter initial recognition in the measurement of financialliabilities.Technical ProvisionsIntroductionTP.1.1.The reportingdatetobe usedby all participantsshould be 30June.TP.1.2.SolvencyII requires undertakingsto set up technicalprovisionswhichcorrespond to the current amount undertakingswouldhavetopayif theyweretotransfer their (re)insuranceobligationsimmediately toanotherundertaking.Solvency ii Associationwww.solvency-ii-association.com 17. Thevalueof technical provisionsshould be equal to the sum of a bestestimateand a risk margin.However, under certain conditionsthat relate to thereplicabilityof thecash flowsunderlying the (re)insuranceobligations,best estimateandrisk margin shouldnot be valued separately but technical provisionsshould be calculatedasa whole.TP.1.3.Undertakingsshould segment their (re)insuranceobligationsintohomogeneousriskgroups, and asa minimum by lineofbusiness,when calculatingtechnical provisionsTP.1.4. The best estimate should be calculated gross, without deductionof the amounts recoverable from reinsurance contracts and SPVs. Thoseamountsshould be calculatedseparately.TP.1.5.The calculationof the technical provisionsshould takeaccountof the time valueof money byusing therelevant risk-freeinterestrateterm structure.TP.1.6.The actuarial and statisticalmethodstocalculatetechnicalprovisionsshould be proportionate tothenature, scaleand complexityoftheriskssupported by theundertaking.V.2.1. SegmentationGeneral principlesTP.1.7.Insurance and reinsuranceobligationsshould be segmented asaminimum by lineof business(LoB) in order tocalculatetechnicalprovisions.TP.1.8.The purposeof segmentation of (re)insuranceobligationsistoachievean accuratevaluation of technical provisions.For example, in order toensurethat appropriateassumptionsare used, itis important that the assumptionsarebasedon homogenousdata toSolvency ii Associationwww.solvency-ii-association.com 18. avoid introducingdistortionswhichmight arisefrom combiningdissimilar business.Therefore, businessis usuallymanaged in more granular homogeneousrisk groupsthanthe proposed minimum segmentationby linesofbusinesswhereit allowsfor a more accurate valuationof technicalprovisions.TP.1.9.Undertakingsin different MemberStatesand even undertakingsin thesame MemberStateoffer insuranceproductscoveringdifferentsetsof risks.Thereforeit is appropriate for each undertakingtodefinethehomogenousriskgroup and the level of granularity most appropriatefortheir businessand in themanner needed to derive appropriateassumptionsfor the calculationof thebest estimate.TP.1.10.(Re)insuranceobligationsshould be allocatedto thelineofbusinessthat best reflectsthenature of therisksrelating to theobligation.In particular, theprincipleof substanceover form should be followedfortheallocation.In other words,the segmentation should reflect thenature of the risksunderlying the contract (substance), rather than the legal form of thecontract (form).TP.1.11.The segmentationintolinesof businessdistinguishesbetweenlife and non-life insurance obligations.This distinction does not coincide with the legal distinction between lifeand non-life insurance activities or the legal distinction between life andnon-life insurancecontracts.Instead, thedistinctionbetweenlife and non-life insuranceobligationsshould be basedon thenature of the underlying risk:- Insuranceobligationsof businessthat ispursued on a similartechnical basis tothat of life insuranceshould be consideredaslifeSolvency ii Associationwww.solvency-ii-association.com 19. insuranceobligations,even if theyare non-life insurancefrom a legalperspective.- Insuranceobligationsof businessthat isnot pursued on a similartechnical basis tothat of life insuranceshould be consideredasnon-life insuranceobligations,even if theyare life insurance from a legalperspective.TP.1.12. In particular, annuities stemming from non-life insurancecontracts (for example for motor vehicle liability insurance) are lifeinsuranceobligations.TP.1.13.The segmentation should be applied toboth componentsof thetechnicalprovisions(best estimateand riskmargin). It should alsobeappliedwheretechnical provisionsare calculatedasa whole.Segmentation of non-life insurance and reinsurance obligationsTP.1.14.Non-life insuranceobligationsshould be segmentedintothefollowing12 linesof business:Medical expensesinsuranceThis line of businessincludesobligationswhichcover theprovisionofpreventiveor curativemedical treatment or care includingmedicaltreatment or care dueto illness, accident, disabilityand infirmity, orfinancial compensation for suchtreatment or care, wheretheunderlyingbusinessisnot pursued on a similar technical basisto that of lifeinsurance,other than obligationsconsideredasworkers compensationinsurance;Income protection insuranceThis line of businessincludesobligationswhichcover financialcompensation in consequenceof illness,accident, disabilityor infirmitywherethe underlying businessisnot pursued on a similar technical basistothat of life insurance, other than obligationsconsideredasmedicalexpensesor workers compensation insurance;Solvency ii Associationwww.solvency-ii-association.com 20. Workerscompensation insuranceThis line of businessincludeshealth insurance obligationswhichrelate toaccidentsat work,industrial injury and occupational diseasesand wheretheunderlying businessis not pursued on a similar technical basistothatof life insurancecovering:- theprovision of preventiveor curativemedical treatment or carerelatingtoaccident at work, industrial injury or occupationaldiseases;or- financial compensation for suchtreatment;- or financial compensation for accident at work, industrial injuryoroccupational diseases;Motor vehicle liability insuranceThis line of businessincludesobligationswhichcover all liabilitiesarisingout of theuse of motor vehicles operatingon land (includingcarriers liability);Other motor insuranceThis line of businessincludesobligationswhichcover all damageto orlossof land vehicles,(includingrailway rollingstock);Marine, aviation and transport insuranceThis line of businessincludesobligationswhichcover all damageor losstoriver, canal, lake and sea vessels, aircraft, and damagetoor lossofgoodsin transit or baggageirrespectiveof the form of transport.This line of businessalsoincludesall liabilitiesarisingout of use ofaircraft, ships, vesselsor boatson the sea, lakes,riversor canals(includingcarriersliability).Solvency ii Associationwww.solvency-ii-association.com 21. Fire and other damage to property insuranceThis line of businessincludesobligationswhichcover all damageto orlossof propertyother than motor, marineaviationand transport due tofire, explosion, natural forcesincludingstorm, hail or frost, nuclearenergy, land subsidenceand any event such astheft;General liability insuranceThis line of businessincludesobligationswhichcover all liabilitiesotherthan those includedin motor vehicle liability and marine, aviation andtransport;Credit and suretyship insuranceThis line of businessincludesobligationswhichcover insolvency, exportcredit, instalment credit, mortgages, agricultural credit and direct andindirect suretyship;Legal expensesinsuranceThis line of businessincludesobligationswhichcover legal expensesand cost of litigation;Assistance insuranceThis line of businessincludesobligationswhichcover assistanceforpersonswhoget intodifficultieswhile travelling, whileawayfrom homeor while awayfrom their habitual residence;Miscellaneousfinancial lossinsuranceThis line of businessincludesobligationswhichcover employmentrisk, insufficiencyof income, bad weather, lossof benefits,continuinggeneralexpenses,unforeseen tradingexpenses, lossof market value, lossof rentSolvency ii Associationwww.solvency-ii-association.com 22. or revenue, indirect tradinglossesother thanthosementionedbefore, other financial loss(not-trading) aswell asany other risk ofnon-life insurancebusinessnot coveredby the linesof businessalreadymentioned.TP.1.15.Obligationsrelatingto acceptedproportional reinsuranceshould be segmented into12linesof businessin the same wayasnon-life insuranceobligationsare segmented.TP.1.16.Obligationsrelatingto acceptednon-proportional reinsurancein non-life should be segmentedinto4 linesof businessasfollows:- Health: non-proportional reinsuranceobligationsrelatingtoinsuranceobligationsincluded in the followinglines:medicalexpenses,income protection and workerscompensation.- Property: non-proportional reinsuranceobligationsrelatingtoinsuranceobligationsincluded in the followinglines:other motorinsurance,fire and other damage to property, credit andsuretyship, legal expenses, assistance, miscellaneousfinancial loss.Casualty: non-proportional reinsuranceobligationsrelatingtoinsuranceobligationsincluded in the followinglines:motor vehicleliability and general liability.- Marine,aviation and transport: non-proportional reinsuranceobligationsrelatingtoinsurance obligationsincluded in thelinemarine, aviation and transport insuranceSegmentation of life insurance and reinsurance obligationsTP.1.17.Life insuranceobligationsshould be segmented into6 linesofbusiness.Solvency ii Associationwww.solvency-ii-association.com 23. Health insuranceHealth insuranceobligationswheretheunderlying businessis pursuedon a similar technical basistothat of life insurance, other than thoseincluded in thefollowinglineof businessAnnuitiesstemming fromnon-life insurancecontractsand relatingto health insuranceobligations.Life insurance with profit participationInsuranceobligationswithprofit participationother than thoseobligationsincludedin the annuitiesstemmingfrom non-lifeinsurancecontracts.Index-linkedand unit-linked insuranceInsuranceobligationswithindex-linkedand unit-linkedbenefits otherthan those includedin the annuitiesstemming from non-lifeinsurance.Other life insuranceobligationsother than obligationsincludedin anyof the other life linesof business.Annuitiesstemmingfrom non-life insurancecontractsand relatingtohealth insuranceobligations(annuitiesstemming from non-lifecontractsand NSLT health insurance).Annuitiesstemmingfrom non-life insurancecontractsand relatingtoinsuranceobligationsother thanhealth insuranceobligationsTP.1.18.Obligationsrelatingto acceptedreinsurancein life shouldbesegmentedinto4 linesof businessasfollows:Solvency ii Associationwww.solvency-ii-association.com 24. Health reinsuranceReinsuranceobligationswhichrelateto the obligationsincluded in linesof businesshealth insuranceand Annuities stemming from non-lifeinsurancecontractsand relatingtohealth insuranceobligations.Life reinsuranceReinsuranceobligationswhichrelateto the obligationsincluded in linesof businessLife Insurancewithprofit participation, Index-linkedandunit-linkedinsurance, Other life insurance and Annuitiesstemmingfrom non-life insurancecontractsand relatingtoinsuranceobligationsother thanhealth insurance obligations.TP.1.19.There could be circumstanceswhere,for a particularlineofbusinessin the segment "lifeinsurancewithprofit participation"(participatingbusiness),the insuranceliabilitiescan, from theoutset, not be calculatedin isolation from thoseof the rest of thebusiness.For example, an undertakingmay have management rulessuchthatbonusrateson one lineof businesscan be reduced to recoup guaranteedcostson another lineof businessand/ or wherebonusratesdepend on theoverall solvencyposition of the undertaking.However,even in thiscaseundertakingsshould assign a technicalprovision to each lineof businessin a practicablemanner.Health insurance obligationsTP.1.20.Health insurance coversone or both of thefollowing:- Theprovision of preventiveor curativemedical treatment or careincludingmedical treatment or caredue to illness, accident, disabilityand infirmity, or financial compensation for such treatment or care;Solvency ii Associationwww.solvency-ii-association.com 25. - Financial compensationin consequenceofillness, accident, disabilityor infirmity.TP.1.21.In relationtotheir technical nature twotypesof healthinsurancecan be distinguished:- Health insurancewhichis pursued on a similartechnical basistothat of life insurance(SLT Health)- Health insurancewhichis not pursued on a similar technical basistothat of life insurance(Non-SLT Health)TP.1.22.Health insurance obligationspursued on a similar technicalbasisto that of life insurance (SLT Health) are thehealth insuranceobligationsfor whichit isappropriatetouse life insurancetechniquesfor the calculationof thebest estimate.Health insuranceobligationsshould be assignedtolife insurancelinesof businesswheresuch obligationsare exposed tobiometrical risks (i.e.mortality, longevityor disability/morbidity) and wherethe commontechniquesused toassesssuch obligationsexplicitlytake intoconsiderationthebehaviour of the variablesunderlying these risks.Whereinsuranceor reinsurancehealth obligationsare calculatedaccordingtothe conditionsset out in Article 206of Directive2009/ 138/ EPC theyshould be assigned toSLT health insurancelinesofbusiness.TP.1.23.SLT health insuranceobligationsshouldbe allocatedto one ofthefour followinglinesof businessfor life insuranceobligationsdefinedin subsection V .2.1:- Insurancecontractswith profit participation wherethemain riskdriver isdisability/ morbidity risk- Index-linkedand unit-linkedlife insurancecontractswherethe mainrisk driver is disability/morbidityriskSolvency ii Associationwww.solvency-ii-association.com 26. - Other insurancecontractswherethemain risk driver isdisability/morbidityrisk- Annuitiesstemmingfrom non-life contracts.TP.1.24.With regard to thelineof businessfor annuitiesstemming fromnon-life contractsor health insuranceincludesonlyannuitiesstemmingfrom Non-SLT health contracts(for exampleworkers compensationandincomeprotection insurance).Insuranceor reinsuranceobligationsthat, although stemmingfromNon-Lifeor NSLT health insurance,and originallysegmentedintoNon-Lifeor NSLT healthlinesof business, asa result of thetrigger of an eventarepursued on a similar technical basisto that of life insurance, should beassigned tothe relevant life linesof businessassoon asthere is sufficientinformation toassessthoseobligationsusing life techniques.TP.1.25.Non-SLT health obligationsshould be allocated toone of thethreefollowinglinesof businessfor non-life insuranceobligations:- Medical expense- Incomeprotection- Workers compensationTP.1.26.The definitionof health insuranceapplied in theQuantitativeAssessment may not coincidewith national definitionsof healthinsuranceused for authorisationor accountingpurposes.TP.1.27.The granularity of thesegmentation of insuranceor reinsuranceobligationsshould allowfor an adequatereflectionof the nature of therisks.For thepurposeof calculationof the technicalprovisions,thesegmentationshould consider the policyholdersright to profitparticipation, optionsand guaranteesembedded in the contractsand therelevant risk driversof the obligations.Solvency ii Associationwww.solvency-ii-association.com 27. Unbundling of insurance and reinsurancecontractsTP.1.28.Where a contract includeslifeand non-life (re)insuranceobligations,it should be unbundled intoits life and non-life parts.TP.1.29.Where a contract covers risksacrossthedifferent linesofbusinessfor non-life (re)insuranceobligations,thesecontractsshould beunbundled intotheappropriatelinesof business.TP.1.30.Acontract coveringlife insurance risksshould alwaysbeunbundled accordingto the followinglinesof business- SLT- Lifeinsurancewithprofit participation- Index-linkedand unit-linkedlife insurance- Other life insuranceTP.1.31.Where a contract givesrise to SLT health insuranceobligations,it should be unbundled intoa health part and a non-healthpart whereit is technicallyfeasibleand whereboth parts are material.Notwithstandingtheabove, unbundlingmay not be required whereonlyoneof the riskscovered by a contract is material.In thiscase,the contract may be allocated accordingto themain risk.Best estimateV.2.2.1. Methodology for the calculation of the best estimateAppropriate methodologiesfor the calculation of the bestestimateTP.2.1. The best estimateshould correspond tothe probabilityweightedaverageof future cash-flowstakingaccount of the time valueof money.Solvency ii Associationwww.solvency-ii-association.com 28. TP.2.2. Therefore,the best estimatecalculationshould allowfor theuncertaintyin the future cash-flows.Thecalculationshould consider thevariabilityof the cash flowsin ordertoensurethat the best estimaterepresentsthe mean of the distributionofcashflowvalues.Allowancefor uncertaintydoesnot suggest that additional marginsshould be includedwithin the best estimate.TP.2.3. The best estimateis theaverageof the outcomesof all possiblescenarios, weightedaccordingtotheir respectiveprobabilities.Although, in principle,all possiblescenariosshouldbe considered, itmay not be necessary, or evenpossible, toexplicitlyincorporate allpossiblescenariosin thevaluation of the liability, nor to develop explicitprobabilitydistributionsin all cases, dependingon the type of risksinvolvedand the materialityof the expectedfinancial effect of thescenariosunder consideration.Moreover, it is sometimespossibletoimplicitlyallowfor all possiblescenarios, for examplein closedform solutionsin life insuranceor thechain-ladder techniquein non-life insurance.TP.2.4. Cash-flowcharacteristicsthat should, in principleand whererelevant, be taken intoconsideration in theapplication of thevaluationtechniqueincludethefollowing:a)Uncertaintyin thetiming, frequency and severityof claim events.b)Uncertaintyin claimsamounts, includinguncertaintyin claimsinflation, and in theperiod needed tosettleand pay claims.c) Uncertaintyin theamount of expenses.d)Uncertaintyin the expected future developmentsthat will have amaterial impact on the cashin- and out-flowsrequired to settletheinsuranceand reinsuranceobligationsthereof(e.g. thevalue of anindex/ marketvaluesused to determine claim amounts).For this purposefuture developmentsshall includedemographic,legal, medical, technological, social, environmental andeconomicdevelopmentsincludinginflation.Solvency ii Associationwww.solvency-ii-association.com 29. e)Uncertaintyin policyholder behaviour.f)Path dependency, wherethe cash-flowsdepend not onlyoncircumstancessuchaseconomicconditionson the cash-flowdate, butalsoon thosecircumstancesat previousdates.Acash-flowhavingnopath dependencycan be valued by, forexample, using an assumed value of the equitymarket at a future pointin time.However, a cash-flowwithpath-dependencywouldneed additionalassumptionsasto how the level of theequitymarket evolved (the equitymarkets path) over time in order tobe valued.g) Interdependencybetweentwoor more causesof uncertainty.Somerisk-driversmay be heavily influencedby or evendeterminedbyseveral other risk-drivers(interdependence).For example, a fall in market valuesmay influencethe(re)insuranceundertakingsexerciseof discretion in future participation, whichin turnaffectspolicyholder behaviour.Another examplewouldbe a changein the legal environment or theonset of a recessionwhichcould increasethe frequencyor severityofnon-life claims.TP.2.5. Undertakings should use actuarial and statistical techniques forthe calculation of the best estimate which appropriately reflect the risksthat affect the cash-flows.Thismay includesimulation methods, deterministictechniquesandanalytical techniques.TP.2.6. For certainlife insurance liabilities,in particular the futurediscretionarybenefitsrelatingtoparticipatingcontractsor othercontractswithembedded optionsand guarantees, simulationmay leadtoa more appropriateand robust valuation of the best estimate liability.Solvency ii Associationwww.solvency-ii-association.com 30. TP.2.7. For theestimationof non-life best estimateliabilitiesaswellaslife insuranceliabilitiesthat donot need simulationtechniques,deterministicand analytical techniquescan be moreappropriate.Cash-flow projectionsTP.2.8. The best estimateshouldbe calculatedgross,without deductionof the amountsrecoverable from reinsurancecontractsand specialpurpose vehicles.Recoverablesfrom reinsuranceand Special PurposeVehiclesshould becalculatedseparately.In the caseof co-insurancethecash-flowsof each co-insurershould becalculatedastheir proportion of the expectedcash-flowswithoutdeduction of theamountsrecoverable from reinsuranceand specialpurpose vehicles.TP.2.9. Cash-flowprojectionsshould reflect expected realisticfuturedemographic, legal, medical, technological, socialor economicdevelopments.TP.2.10.Appropriate assumptionsfor future inflation shouldbe built intothecash-flowprojection.Careshould be taken to identify thetype of inflationtowhichparticularcash-flowsare exposed(i.e. consumer priceindex, salaryinflation).TP.2.11.The cash-flowprojections,in particularfor health insurancebusiness,should takeaccount of claimsinflation and any premiumadjustment clauses.It may be assumed that theeffectsof claims inflation and premiumadjustment clausescancel each other out in thecash flowprojection, provided this approachundervaluesneither the bestestimate, nor therisk involved withthehigher cash flowsafter claimsinflationand premium adjustment.Solvency ii Associationwww.solvency-ii-association.com 31. Recognition and derecognition of (re)insurance contracts forsolvency purposesTP.2.12.The calculationof the best estimateshould onlyincludefuturecash-flowsassociatedwithobligationswithintheboundary of thecontract.TP.2.13.Areinsuranceor insuranceobligationshould be initiallyrecognised by insuranceor reinsuranceundertakingsat whicheveris theearlier of thedate theundertakingbecomesa party tothe contract thatgivesrisetothe obligationor thedate theinsuranceor reinsurancecoverbegins.TP.2.14.Acontract should be derecognisedasan existingcontract onlywhenthe obligationspecified in thecontract is extinguished, dischargedor cancelledor expires.The boundary of an existing (re)insurance contractTP.2.15.The definitionof the contract boundary should be applied inparticular todecidewhetheroptionstorenew the contract, toextend theinsurancecoveragetoanother person, to extend theinsuranceperiod, toincreasetheinsurancecover or to establishadditional insurancecovergivesrisetoanew contract or belongs tothe existingcontract.Wherethe option belongsto theexistingcontract the provisionsforpolicyholder optionsshould be taken intoaccount.TP.2.16. For the purpose of determining which insurance or reinsuranceobligations arise in relation to an insurance or reinsurance contract, theboundariesof the contract shall be definedin the followingmanner:(a) Where the insuranceor reinsuranceundertaking hasat a future date:(i)Aunilateral right toterminatethe contract,(ii) Aunilateral right to reject premiumspayable under the contract, or(iii)Aunilateral right to amend thepremiumsor thebenefitspayable underthecontract in such a waythat the premiumsfullyreflectthe risks,Solvency ii Associationwww.solvency-ii-association.com 32. anyobligationswhichrelate toinsuranceor reinsurancecover whichmight be provided by the undertaking after that date do not belong tothecontract, unlesstheundertaking can compel thepolicyholder topaythepremium for thoseobligations;(b)Where the insuranceor reinsuranceundertaking has a unilateral rightasreferred toin point (a) that relatesonlyto a part of thecontract, thesameprincipleasdefined in point (a) shall be appliedto this part;(c)Notwithstandingpoints (a) and (b), wherean insuranceorreinsurancecontract:(i)Doesnot providecompensation for a specified uncertain event thatadverselyaffectstheinsuredperson,(ii)Doesnot includea financial guarantee of benefits,anyobligationsthat do not relate topremiumswhichhave alreadybeen paid do notbelong tothe contract, unlesstheundertakingcan compel thepolicyholder topaythe future premium;(d)Notwithstandingpoints (a) and (b), wherean insuranceorreinsurancecontract can beunbundled intotwopartsand whereone oftheseparts meetsthe requirementsset out in points(c)(i) and (ii), anyobligationsthat do not relate tothepremiumsof that part and whichhavealreadybeen paid do not belong to the contract, unlesstheundertakingcan compel thepolicy holder topayfuture premium of thatpart;(e)All other obligationsrelatingtothe contract, includingobligationsrelatingtounilateral rightsof theinsuranceor reinsuranceundertaking torenew or extend thescope of the contract and obligationsthat relate topaid premiums, belong tothe contract.TP.2.17.Where an insuranceor reinsuranceundertaking hastheunilateralright toamend thepremiumsor benefitsof a portfolio ofinsuranceor reinsurance obligationsin such a waythat the premiumsoftheportfolio fullyreflect the riskscovered by the portfolio, theundertakingsunilateral right to amend thepremiumsor benefits ofthoseobligationsshall be regarded ascomplying withthe condition setout in paragraph TP.2.16(a).Solvency ii Associationwww.solvency-ii-association.com 33. TP.2.18.Premiums shall be regarded asfullyreflectingtheriskscoveredbya portfolio of insurance or reinsuranceobligations,onlywherethereisnoscenariounder whichthe amount of thebenefitsand expensespayableunder the portfolio exceedsthe amount of the premiumspayable undertheportfolio;TP.2.19.Notwithstandingparagraph TP.2.17, in the caseof life insuranceobligationswherean individual risk assessment of theobligationsrelatingtotheinsured personof thecontract iscarried out at theinceptionof thecontract and that assessment cannot be repeatedbeforeamendingthepremiumsor benefits,the assessment of whetherthepremiumsfullyreflect the risk in accordancewiththe condition set out inparagraph 1(a) shall be made at thelevel of thecontract.TP.2.20. For thepurposeof points(a) and (b) of paragraphTP.2.16,restrictionsof theunilateral right and limitationsof theextentby whichpremiumsand benefits can be amendedthat have nodiscernibleeffecton the economicsof the contract, shall be ignored.TP.2.21.For thepurposeof points(c) and (d) of paragraphTP.2.16,coverageof eventsand guaranteesthat havenodiscernibleeffect on theeconomicsof the contract, shall be ignored.TP.2.22.Annex D includesseveral examplesthat illustratetheapplicationof thedefinitionof the contract boundary.Time horizonTP.2.23. The projection horizon usedin the calculationof best estimateshould cover the full lifetimeof all the cashin- and out-flowsrequiredtosettle theobligationsrelated to existinginsuranceand reinsurancecontractson thedate of thevaluation, unlessan accuratevaluation canbeachieved otherwise.TP.2.24.The determination of the lifetimeof insurance and reinsuranceobligationsshould be basedon up-to-dateand credibleinformation andrealisticassumptionsabout when theexistinginsuranceand reinsuranceobligationswill be dischargedor cancelledor expired.Solvency ii Associationwww.solvency-ii-association.com 34. Grosscash in-flowsTP.2.25. To determinethebest estimatethefollowingnon-exhaustivelist of cash in-flowsshould be included:- Future premiums; and- Receivablesfor salvageand subrogation.TP.2.26. The cash in-flowsshould not take into account investmentreturns(i.e. interestsearned, dividends).Grosscash out-flowsTP.2.27. The cash out-flowscould be dividedbetweenbenefitstothepolicyholders or beneficiaries,expensesthat will be incurred in servicinginsuranceand reinsuranceobligations,and other cash-flowitemssuch astaxationpaymentswhichare charged topolicyholders.BenefitsTP.2.28. The benefit cash out-flows(non-exhaustivelist) should include:- Claimspayments- Maturitybenefits- Death benefits- Disabilitybenefits- Surrenderbenefits- Annuity payments- Profit sharing bonusesExpensesTP.2.29. In determiningthe best estimate, theundertakingshould takeintoaccount all cash-flowsarising from expensesthat will be incurredinservicingall recognisedinsuranceand reinsuranceobligationsover thelifetimethereof. Thisshould include(non-exhaustivelist):Solvency ii Associationwww.solvency-ii-association.com 35. - Administrativeexpenses- Investment management expenses- Claimsmanagement expenses/ handlingexpensesTP.2.30. Expensesthat are pertinent to thevaluation of technicalprovisionswouldusuallyincludeboth allocated and overhead expenses.Allocated expensesare thoseexpenseswhichcould be directlyassignabletothe source of expensethat will be incurred in servicinginsuranceand reinsuranceobligations.Overhead expensescomprise all other expenseswhichtheundertakingincursin servicing insuranceand reinsurance obligations.TP.2.31. Overhead expensesinclude, for example, expenseswhich arerelatedtogeneral management and servicedepartmentswhichare notdirectlyinvolved in newbusinessor policymaintenanceactivitiesandwhichare insensitiveto either the volume of new businessor the level ofin-forcebusiness.Theallocationof overhead expensestohomogeneousrisk groupsor thepremium provisionsand theprovisionsfor claims outstandingshall bedone in a realisticand objectivemanner and on a consistent basisovertime.Thesame requirementsshall applyto theallocation of overheadexpensesto existingand futurebusiness.TP.2.32.Administrative expensesare expenseswhichareconnected withpolicy administrationincludingexpensesin respect of reinsurancecontractsand special purposevehicles.Someadministrativeexpensesrelatedirectlyto insurancecontract orcontract activity(e.g. maintenancecost) such ascostof premium billing,cost of sendingregular informationtopolicyholders and cost of handlingpolicy changes(e.g. conversionsand reinstatements).Solvency ii Associationwww.solvency-ii-association.com 36. Other administrativeexpensesrelate directlytoinsurancecontractsorcontract activitybut are a result of activitiesthat cover more than onepolicy such assalariesof staff responsiblefor policy administration.TP.2.33. Investment management expensesare usuallynot allocated ona policy by policybasisbut at the level of a portfolio of insurancecontracts.Investment management expensescould includeexpensesofrecordkeeping of theinvestmentsportfolio, salariesof staff responsiblefor investment, remunerationsof external advisers,expensesconnectedwith investment tradingactivity(i.e. buying and sellingof theportfoliosecurities)and in some casesalsoremunerationfor custodial services.Investment management expenseshave to be basedon a portfolio ofassetsappropriatetocover their portfolio of obligations.In casethe future discretionarybenefitsdepend on the assetsheld by theundertakingand for unit-linkedcontractsthe undertaking should ensurethat the future investment management expensesallowfor theexpectedchangestothe future aforementionedportfolio of assets.In particular, a dynamic expenseallowanceshould be usedtoreflect adynamic asset strategy.TP.2.34. Usuallyinvestment management expensesdiffer regardingdifferent assetsclasses.Toensure that investment management expenseswill properlyreflectthecharacteristicsof theportfolio, investment management expensesinrelationtodifferent assetswill be basedon existingand predicted futuresplit of assets.TP.2.35. Investment management expensesare considered ascash out-flowin the calculationof the best estimate sincediscounting is madewith a yield curve grossof investment expenses.Solvency ii Associationwww.solvency-ii-association.com 37. TP.2.36. Claims management expensesare expensesthat will be incurredin processingand resolving claims, includinglegal and adjustersfeesandinternal costsof processing claimspayments. Some of theseexpensescould be assignabletoindividual claim (e.g. legal and adjustersfees), othersarea result of activitiesthat cover more than oneclaim (e.g.salariesof staff of claims handlingdepartment).TP.2.37.Acquisition expensesincludeexpenseswhichcanbe identifiedat the level of individual insurancecontract and havebeen incurredbecausethe undertaking hasissued that particular contract.Theseare commission costs,costsof selling, underwritingand initiatingan insurancecontract that hasbeen issued.TP.2.38. Overhead expensesincludesalariesto generalmanagers,auditingcostsand regular day-to-day costsi.e. electricitybill, rent for accommodations,IT costs.Theseoverhead expensesalsoincludeexpensesrelated tothedevelopment of new insuranceand reinsurancebusiness, advertisinginsuranceproducts, improvement of theinternal processessuch asinvestment in system required to support insuranceand reinsurancebusiness(e.g. buying new IT system and developing new software).TP.2.39. Expensesconnectedwith activitieswhicharenot linkedwithservicinginsuranceand reinsuranceobligationsare not taken intoaccount whencalculatingtechnical provisions.Such expensescould be for examplecompanypension schemedeficits,holding companiesoperational expensesconnected withexpenseslinkedtoentitieswhich arenot insuranceor reinsuranceundertakings.TP.2.40. Undertakingsshould valueand take intoaccount chargesforembedded optionsin the valuation of thetechnical provisionswherepossible.Solvency ii Associationwww.solvency-ii-association.com 38. For life insurance contracts with embedded options it is rather commonthat for the cost of the embedded option only a minor charge is made upfront and that the remainder isdue in an extended period of time.This doesnot necessarilyhave to bethetotal timeuntil maturity and isin general not necessaryfixed or knownexactlyin advance.Chargesfrom embedded optionsare taken intoaccount in the bestestimatevaluationof technicalprovisionsand theyare kept separatelyfrom expenseloadings.For examplea surrender charge could possiblybe seen asacharge tooffset theuncollectedchargesin average, but could alsobe seen asa waytoforce thepolicyholder tocontinuethecontract and hence it wouldnotdirectlybe related to the cost of embeddedoptions.TP.2.41. To theextent that future premiumsfrom existinginsuranceandreinsurancecontractsare taken intoaccount in thevaluationof thebestestimate,expensesrelatingtothesefuture premiumsshould be takenintoconsideration.TP.2.42. Undertakingshould consider their ownanalysisof expensesand any relevant data from external sourcessuch asaverage industry ormarket data.Undertakings should assess the availability of market data on expensesby considering the representativeness of the market data relative to theportfolio and the credibility and reliabilityof thedata.TP.2.43. Where averagemarket information isused, consideration needstobe given astotherepresentativenessof the data used to form thataverage.For example, market informationisnot deemed to be sufficientlyrepresentativewherethemarket information hasmaterial dispersion inrepresentativenessof the portfolioswhosedata have been used tocalculatesuchmarket information.Solvency ii Associationwww.solvency-ii-association.com 39. Theassessment of credibility considersthe volume of data underlyingthemarket information.TP.2.44.Assumptionswithrespect to future expensesarisingfromcommitmentsmade on or prior to thedateof valuation have tobeappropriateand take intoaccount thetype of expensesinvolved.Undertakingsshould ensure that expenseassumptionsallowfor futurechangesin expensesand such an allowancefor inflation isconsistentwith the economicassumptionsmade.Future expensecashflowsare usuallyassumed tovary withassumedratesof general level of expense inflationin a reasonablemanner.TP.2.45. Relevant market data needstobe used to determineexpenseassumptionswhichincludean allowancefor future cost increase.Thecorrelation betweeninflationratesand interest ratesare taken intoaccount.An undertakingneedstoensure that theallowancefor inflationisconsistent withthe economic assumptionsmade, which could beachieved if the probabilitiesfor each inflationscenario are consistentwith probabilitiesimplied by market interest rates.Furthermore, expenseinflation must be consistent with thetypesofexpensesbeingconsidered(e.g. different levelsof inflationwouldbeexpectedregarding office spacerents, salariesof different typesofstaff, IT systems, medical expenses, etc.).TP.2.46.Any assumptionsabout theexpected cost reduction should berealistic,objectiveand based on verifiabledata and information.TP.2.47. For theassessment of thefuture expenses, undertakingsshouldtake intoaccount all the expensesthat are directlyrelated tothe on-goingadministrationof obligationsrelatedto existinginsuranceandSolvency ii Associationwww.solvency-ii-association.com 40. reinsurancecontracts,together witha shareof the relevant overheadexpenses.Theshare of overheadsshould be assessedon the basisthat theundertakingcontinuestowritefurther new business.Overhead expenseshavetobe apportionedbetweenexistingand futurebusinessbasedon recent analysesof theoperationsof the businessandtheidentification of appropriateexpensedriversand relevant expenseapportionment ratios.Cash flow projectionsshould include, ascash out-flows, the recurrentoverheadsattributableto theexistingbusinessat the calculationdateofthebest estimate.TP.2.48. In order todetermine whichexpensesbest reflect thecharacteristicsof theunderlying portfolio and toensurethat thetechnicalprovisionsare calculatedin a prudent, reliableand objectivemanner, insuranceand reinsuranceundertakingsshould consider theappropriatenessof both market consistent expensesand undertakingspecific expenses.If sufficientlyreliable,market consistent expensesare not availableparticipantsshould useundertaking-specific information todetermineexpensesthat will be incurredin servicinginsuranceand reinsuranceobligationsprovidedthat theundertaking-specific informationisassessedto be appropriate.TP.2.49.Expenses, that are determinedby contractsbetweentheundertakingand third partieshave to betaken intoaccount basedon thetermsof the contract.In particular, commissionsarising from insurancecontractshave tobeconsideredbasedon thetermsof the contractsbetween theundertakingsand thesalespersons,and expensesin respect ofreinsuranceare taken intoaccount based on the contractsbetweentheundertakingand itsreinsurers.Solvency ii Associationwww.solvency-ii-association.com 41. Tax paymentsTP.2.50.In determiningthe best estimate, undertakingsshould takeintoaccount taxation paymentswhich are charged to policyholders.Onlythosetaxationpaymentswhicharesettledby theundertakingneedtobe taken intoaccount.Agrosscalculationof the amountsduetopolicyholders sufficeswheretax paymentsare settledby the policyholders;TP.2.51. Different taxationregimesexist acrossMember Statesgivingrise to a broadvarietyof tax rulesin relation toinsurancecontracts.Theassessment of theexpectedcash-flowsunderlying thetechnicalprovisionsshould take into account anytaxation paymentswhicharecharged to policyholders, or which wouldbe required to bemade by theundertakingtosettletheinsuranceobligations.All other tax paymentsshould be takenintoaccount under other balancesheet items.TP.2.52. The followingtax paymentsshould be included in thebestestimate:transaction-basedtaxes(such aspremium taxes,value addedtaxesand goodsand servicestaxes) and levies(such asfire serviceleviesand guaranteefund assessments)that arise directlyfrom existinginsurancecontracts,or that can be attributed tothe contractson areasonableand consistent basis.Contributionswhichwerealready includedin companiesexpenseassumptions(i.e. levies paid by insurancecompanies to industryprotectionschemes) should not be included.TP.2.53. The allowance for tax payments in the best estimate should beconsistent with the amount and timing of the taxable profits and lossesthat are expectedtobe incurred in the future.In caseswherechangestotaxationrequirementsare substantiallyenacted, the pendingadjustmentsshould be reflected.Solvency ii Associationwww.solvency-ii-association.com 42. TP.2.54. Homogeneous risk groupsof life insurance obligationsThecash-flowprojectionsused in the calculationof best estimatesforlife insuranceobligationsshall be made separatelyfor each policy.Wherethe separatecalculationfor each policy wouldbe an undueburdenon theinsuranceor reinsuranceundertaking, it may carryout theprojectionby grouping policies,provided that the groupingcomplies withthefollowingrequirements:(1)There are nosignificant differencesin the nature and complexityoftherisksunderlying thepoliciesthat belongto thesame group;(2)Thegrouping of policiesdoesnot misrepresent the riskunderlyingthepoliciesand doesnot misstate their expenses;(3)Thegroupingof policiesis likelytogive approximatelythe sameresultsfor the best estimatecalculationasa calculation on a per policybasis,in particular in relationto financial guaranteesand contractualoptionsincludedin thepolicies.TP.2.55. In certain specificcircumstances,the best estimateelement oftechnicalprovisionsmay be negative(e.g. for some individual contracts).This is acceptableand undertakingsshould not set tozero thevalue of thebest estimatewithrespect to thoseindividual contracts.TP.2.56. No implicit or explicit surrender valuefloor should be assumedfor the amount of the market consistent value of liabilitiesfor a contract.This meansthat if thesum of a best estimateand a risk margin of acontract islowerthan thesurrender valueof that contract there is noneed to increasethevalue of insuranceliabilitiestothe surrender valueof the contract.Solvency ii Associationwww.solvency-ii-association.com 43. Non-life insurance obligationsTP.2.57. The valuation of the best estimate for provisionsfor claimsoutstandingand for premium provisionsshould be carriedoutseparately.With respect to thebest estimatefor premium provisions,thecash-flowprojectionsrelate toclaim eventsoccurringafter the valuation date andduringthe remainingin-forceperiod (coverageperiod) of thepoliciesheld bythe undertaking(existingpolicies).Thecash-flowprojectionsshould comprise all future claim paymentsand claimsadministrationexpensesarisingfrom these events, cash-flowsarisingfrom theongoing administrationof the in-forcepoliciesand expected future premiumsstemmingfrom existing policies.TP.2.58.The best estimateof premium provisionsfrom existinginsuranceand reinsurancecontractsshould be given asthe expectedpresent value of future in- and out-goingcash-flows,beingacombination of, inter alia:- cash-flowsfrom future premiums;- cash-flowsresultingfrom future claimsevents;- cash-flowsarisingfrom allocatedand unallocatedclaimsadministrationexpenses;- cash-flowsarisingfrom ongoing administration of the in-forcepolicies.There is no need for the listed itemsto be calculatedseparately.TP.2.59. With regard to premium provisions,the cashin-flowscouldexceedthe cash out-flowsleading to a negativebest estimate.Solvency ii Associationwww.solvency-ii-association.com 44. This is acceptableand undertakingsare not required to set tozero thevalueof thebest estimate.Thevaluation should take account of thetimevalueof moneywhererisks in the remainingperiod wouldgiverise to claims settlementsintothefuture.TP.2.60.Additionally, the valuation of premium provisionsshould takeaccount of future policyholder behaviour such aslikelihoodof policylapseduring the remainingperiod.TP.2.61. With respect to thebest estimatefor provisionsfor claimsoutstanding, the cash-flowprojectionsrelate to claim eventshavingoccurred beforeor at the valuation date whethertheclaimsarisingfrom theseeventshave been reported or not (i.e. all incurredbut notsettledclaims).Thecash-flowprojectionsshould comprise all future claim paymentsaswell asclaimsadministration expensesarisingfrom theseevents.TP.2.62. Where non-life insurancepoliciesgive riseto thepayment ofannuities, theapproach laid down in thefollowingsubsection onsubstanceover form should be followed.Consistent withthis, for premium provisions,itsassessment shouldincludean appropriatecalculation of annuityobligationsif a materialamount of incurredclaims isexpected togive rise tothepayment ofannuities.Principle of substance over formTP.2.63. When discussingvaluation techniquesfor calculatingtechnicalprovisions, it iscommon torefer toa distinctionbetweena valuationbased on life techniquesand a valuationbased on non-life techniques.Solvency ii Associationwww.solvency-ii-association.com 45. The distinctions between life and non-life techniques are aimed towardsthe nature of the liabilities (substance), which may not necessarily matchthelegal form (form) of thecontract that originatedthe liability.Thechoice betweenlife or non-life actuarial methodologies should bebased on thenature of theliabilitiesbeing valuedand from theidentificationof riskswhichmateriallyaffect theunderlying cash-flows.This is theessenceof the principleof substanceover form.TP.2.64. Traditional life actuarial techniquestocalculate thebestestimatecan be described astechniquesthat are based on discountedcash-flowmodels, generallyapplied on a policy-by-policy basis, whichtake intoaccount in an explicit manner riskfactorssuch asmortality, survival and changesin thehealth statusof the insuredperson(s).TP.2.65. On theother hand, traditional non-life actuarial techniquesincludea number of different approaches.For examplesome of the most common being:- Methodologiesbased on the projectionof run-off triangles,usuallyconstructedon an aggregate basis;- Frequency/ severitymodels,wherethe number of claimsand theseverityof each claim is assessed separately;- Methodologiesbased on the estimation of the expected lossratio orother relevant ratios;- Combinationsof thepreviousmethodologies;TP.2.66. There is one key differencebetweenlife and non-life actuarialmethodologies:life actuarial methodologies consider explicitlytheprobabilitiesof death, survival, disabilityand/ or morbidityof theinsuredpersonsaskeyparameters in themodel, while non-life actuarialmethodologiesdonot.Solvency ii Associationwww.solvency-ii-association.com 46. TP.2.67. The choicebetweenlife or non-life actuarial methodologiesshould be basedon thenature of the liabilitiesvalued and on theidentificationof riskswhichmateriallyaffect theunderlying cash-flows.TP.2.68. In practice, in themajorityof casestheform will correspond tothesubstance.However, for examplefor certain supplementarycoversincludedin lifecontracts(e.g. accident) may be better suitedfor an estimationbased onnon-life actuarial methodologies.TP.2.69. The followingprovidesadditional guidancefor the treatment ofannuitiesarisingin non-life insurance.Theapplication of theprincipleof substanceover form impliesthat suchliabilitiesshould be valued using methodologies usuallyapplicableto thevaluation of life technicalprovisions,Specifically, guidanceis provided in relation to:- therecognitionand segmentationof insuranceobligationsfor thepurpose of calculatingtechnical provisions(i.e. the allocationofobligationstotheindividual linesof business);- thevaluation of technical provisionsfor such annuities;and- possiblemethodsfor the valuation of technical provisionsfor theremainingnon-life obligationsTP.2.70. The treatment proposed in these specificationsfor annuitiesshould be extendedtoother typesof liabilitiesstemming from non-lifeandhealth insurancewhosenature is deemed similar to life liabilities(such aslife assistancebenefits), takingintoconsiderationthe principlementioned in the previousparagraph.Solvency ii Associationwww.solvency-ii-association.com 47. Allocation to the individual lines of businessTP.2.71. Where non-life and Non-SLT health insurancepoliciesgive risetothe payment of annuitiessuch liabilitiesshould bevalued usingtechniquescommonlyused to value life insuranceobligations.Suchliabilitiesshould be assignedtothe linesof businessfor annuitiesstemmingfrom non-life contracts.Valuation of annuities arising from non-life and Non-SLThealth insurance contractsTP.2.72. Undertakingsshould valuethetechnicalprovisionsrelatedtosuch annuitiesseparatelyfrom thetechnicalprovisionsrelated to theremainingnon-life and health obligations.Theyshould applyappropriatelife insurancevaluation techniques.Thevaluation should be consistent withthevaluation of life insuranceannuitieswith comparable technical features.Valuation of the remaining non-life and health insuranceobligationsTP.2.73.The remainingobligationsin the undertakingsnon-life andNon-SLT healthbusiness(whichare similar in nature to non-lifeinsuranceobligations)havetobe valuedseparatelyfrom therelevantblockof annuities.TP.2.74. Where provisionsfor claimsoutstandingaccording tonationalaccountingrulesare comparedto provisionsfor claimsoutstanding ascalculatedabove, it should be taken intoaccount that the latterdo notincludethe annuityobligations.TP.2.75. Undertakingsmay use,whereappropriate, one of the followingapproachestodeterminethe best estimate of claimsprovisionsfor theremainingnon-life or health obligationsin a given non-life or Non-SLThealth insurancelineof businesswhereannuities are valuedseparately.Solvency ii Associationwww.solvency-ii-association.com 48. Separate calculation of non-life liabilitiesTP.2.76. Under thisapproach, therun-off trianglewhich isused asa basisfor the determinationof thetechnical provisionsshould not includeanycash-flowsrelatingto the annuities.An additional estimate of theamount of annuitiesnot yet reported andfor reported but not yet agreed annuitiesneedstobe added.Allowance of agreed annuities assingle lump-sum payments inthe run-off triangleTP.2.77. This approach alsoforeseesa separatecalculationof the bestestimate,wherethesplit isbetweenannuitiesin payment and theremainingobligations.TP.2.78. Under thisapproach, therun-off trianglewhich isused asabasisfor the determinationof thetechnical provisionsof the remainingnon-life orhealth obligationsin a lineof businessdoesnot includeanycash-flowsrelatingtotheannuitiesin payment.This meansthat claimspaymentsfor annuitiesin payment are excludedfrom therun-off triangle.TP.2.79. However, paymentson claims beforeannuitisation1andpaymentsat thetimeof annuitisation remain included in therun-offtriangle.At thetime of annuitisation, the best estimateof the annuity(valuedseparatelyaccordingto life principles) is shownasa singlelump-sumpayment in the run-off triangle, calculatedasat thedate of theannuitisation.Whereproportionate, approximationsof the lump sumscould be used.Solvency ii Associationwww.solvency-ii-association.com 49. TP.2.80. Where theanalysisis based on run-off trianglesof incurredclaims, thelump sum payment should reducethecasereservesat thedateof annuitisation.TP.2.81. On basisof run-off trianglesadjustedasdescribed above, theparticipant may applyan appropriate actuarial reservingmethod toderivea best estimateof the claimsprovision of theportfolio.Due to the construction of therun-off triangle,thisbest estimatewouldnot includethe best estimaterelatedtothe annuitiesin payment whichwouldbe valued separatelyusing life principles(i.e. there wouldbe nodoublecounting in relationto theseparate life insurancevaluation), but it includesa best estimatefor not yet reported and forreported but not yet agreedannuities.Expert judgementTP.2.82. Insuranceand reinsuranceundertakingsshall chooseassumptionsbasedon the expertiseof personswithrelevantknowledge,experienceand understandingof the risksinherent in theinsuranceor reinsurancebusinessthereof (expert judgment).In certain circumstancesexpert judgement may be necessarywhencalculatingthe best estimate, among other:- in selectingthe data touse,correctingits errorsand decidingthetreatment of outliersor extreme events,- in adjustingthedata to reflect current or future conditions,andadjustingexternal data toreflect theundertakingsfeaturesor thecharacteristicsof therelevant portfolio,- in selectingthe time period of thedata- in selectingrealistic assumptionsSolvency ii Associationwww.solvency-ii-association.com 50. - in selecting the valuation techniqueor choosingthemostappropriatealternativesexistingin each methodology- in incorporatingappropriatelytothecalculationstheenvironmentunder whichthe undertakingshave to run itsbusiness.TP.2.83. In the caseof non-life insuranceand non-life reinsuranceobligations,participantsshould allocatethe expensesintohomogenousrisk groups, asa minimum by lineof businessaccordingtothesegmentationof their obligationsused in the calculationof technicalprovisions.Undertakings should allocate the expenses of non-life insurance andreinsurance obligations to premium provisions and to provisions forclaims outstanding.Obligations in different currenciesTP.2.84. The probability-weighted averagecash-flowsshould take intoaccount the time value of money.Thetime value of money of future cash-flowsin different currenciesiscalculatedusing risk-freeterm structure for relevant currency.Thereforethebest estimateshould be calculatedseparatelyforobligationsof different currencies.Valuation of optionsand guaranteesembedded in insurancecontractsTP.2.85. When calculatingthe best estimate, insuranceand reinsuranceundertakingsshall identify and take intoaccount:1.All financial guaranteesand contractual optionsincluded in theirinsuranceand reinsurancepolicies;Solvency ii Associationwww.solvency-ii-association.com 51. 2.All factorswhichmay materiallyaffect thelikelihoodthat policyholderswill exercisecontractual optionsor the value of theoption orguarantee.Definition of contractual optionsand financial guaranteesTP.2.86.Acontractual option is definedasa right tochangethebenefits2,to be taken at the choiceof itsholder (generallythepolicyholder), on termsthat are establishedin advance.Thus, in order totrigger an option, a deliberatedecisionof itsholder isnecessary.TP.2.87. Some (non-exhaustive) examplesof contractual optionswhichare pre-determined in contract and donot require again the consent oftheparties torenewor modify thecontract includethe following:- Surrender value option, where the policyholder has the right to fullyor partially surrender the policy and receive a pre-defined lump sumamount;- Paid-uppolicy option, wherethe policyholder hasthe right tostoppaying premiumsand changethepolicy toa paid-up status;- Annuity conversion option, wherethepolicyholder hasthe right toconvert a lump survival benefit intoan annuityat a pre-definedminimum rateof conversion;- Policy conversion option, wherethepolicyholder hastheright toconvert from one policy to another at pre-specific termsandconditions;- Extended coverageoption, wherethe policyholder hasthe right toextend the coverageperiod at theexpiry of the original contractwithout producingfurther evidenceof health.Solvency ii Associationwww.solvency-ii-association.com 52. TP.2.88.Afinancial guaranteeispresent whenthere isthe possibility topasslossesto the undertakingor toreceiveadditional benefitsasa resultof the evolution of financial variables(solely or in conjunction withnon-financial variables)(e.g. investment return of the underlying assetportfolio, performanceof indices, etc.).In the caseof guarantees,the trigger isgenerallyautomatic(themechanism wouldbe set in thepolicys termsand conditions) and thusnot dependent on adeliberatedecisionof the policyholder / beneficiary.In financial terms, a guaranteeislinked tooption valuation.TP.2.89. The followingis a non-exhaustivelist of examplesof commonfinancial guaranteesembedded in life insurancecontracts:- Guaranteed investedcapital- Guaranteed minimum investment return- Profit sharingTP.2.90. There are alsonon-financial guarantees, wherethebenefitsprovided wouldbe driven by theevolution of non-financialvariables, such asreinstatement premiums in reinsurance, experienceadjustmentstofuture premiumsfollowinga favourableunderwritinghistory (e.g. guaranteed no-claimsdiscount).Wheretheseguaranteesarematerial, thecalculationof technicalprovisionsshould alsotake intoaccount their value.Valuation requirementsTP.2.91. For each type of contractual option insurersare required toidentify the risk driverswhichhave the potential tomateriallyaffect(directlyor indirectly) the frequencyof option take-up ratesconsideringa sufficientlylargerangeof scenarios,includingadverseones.Solvency ii Associationwww.solvency-ii-association.com 53. TP.2.92. The best estimateof contractual optionsand financialguaranteesmust capture the uncertaintyof cash-flows,takingintoaccount the likelihood and severityof outcomesfrom multiplescenarioscombining therelevant riskdrivers.TP.2.93. The best estimateof contractual optionsand financialguaranteesshould reflect both the intrinsicvalueand thetime value.TP.2.94. The best estimateof contractual optionsand financialguaranteesmay be valuedby usingone or more of the followingmethodologies:- Astochastic approach usingfor instancea market-consistent assetmodel (includesboth closed form and stochasticsimulationapproaches);- Aseriesof deterministic projectionswithattributed probabilities;and- Adeterministicvaluation basedon expected cash-flowsin caseswherethis deliversa market-consistent valuation of the technicalprovision, includingthecost of optionsand guarantees.TP.2.95. For thepurposesof valuingthebest estimateof contractualoptionsand financial guarantees, a stochasticsimulation approachwouldconsist of anappropriatemarket-consistent asset model forprojectionsof asset pricesand returns(such asequityprices,fixedinterest rate and property returns), together withadynamic modelincorporatingthecorrespondingvalueof liabilities(incorporatingthestochasticnature of anyrelevant non-financial risk drivers) and theimpact of any foreseeableactionstobe taken by management.TP.2.96. For thepurposesof the deterministic approach, a range ofscenarios or outcomesappropriatetoboth valuing theoptionsorguaranteesand theunderlying asset mix, together withtheassociatedprobabilityof occurrenceshouldbe set.Solvency ii Associationwww.solvency-ii-association.com 54. Theseprobabilitiesof occurrenceshould be weightedtowardsadversescenariosto reflect market pricing for risk.Theseriesof deterministic projectionsshould be numerousenough tocapture a widerangeof possibleout-comes(and, in particular, it shouldincludevery adverseyet possiblescenarios)and take intoaccount theprobabilityof each outcomes likelihood(whichmay, in practice, need toincorporatejudgement).Thecostswill be understatedif onlyrelatively benign or limitedeconomicscenariosare considered.TP.2.97. When the valuation of the best estimateof contractual optionsand financial guaranteesis not beingdone on a policy-by-policy basis, thesegmentation considered should not distort thevaluation of technicalprovisionsby, for example, forming groupscontainingpolicieswhichare"in themoney" and policieswhichare "out of themoney".TP.2.98. Regardingcontractual options, the assumptionsonpolicyholder behaviour should be appropriately founded in statisticaland empirical evidence,totheextent that it isdeemedrepresentativeofthefuture expectedbehaviour.However, whenassessingthe experienceof policyholdersbehaviourappropriateattention basedon expert judgementsshould be given tothefact that whenan option is out of or barelyin the money, thebehaviour ofpolicyholdersshould not be considered to be a reliableindicationof likelypolicyholdersbehaviour whentheoptionsare heavily in-the- money.TP.2.99.Appropriate considerationshould alsobe given toan increasingfuture awarenessof policy optionsaswell aspolicyholderspossiblereactionsto a changedfinancial positionof an undertaking.In general, policyholdersbehaviour should not be assumedtobeindependent of financial markets, a firms treatment of customersorSolvency ii Associationwww.solvency-ii-association.com 55. publicly available informationunlessproper evidenceto support theassumption can be observed.TP.2.100.Where material, non-financial guaranteesshould be treatedlike financial guarantees.Valuation of future discretionary benefitsTP.2.101.In calculatingthebest estimate, undertakingsshould takeintoaccount future discretionarybenefitswhich are expected to bemade, whetheror not thosepaymentsare contractuallyguaranteed.Undertakingsshould not takeinto account paymentsthat relate tosurplusfundswhichpossessthe characteristicsof Tier 1basicownfunds.Surplusfundsare accumulatedprofits whichhavenot been madeavailablefor distributionto policyholdersand beneficiaries.(Cf. Article91of the SolvencyII Framework Directive.)TP.2.102.When undertakingscalculate thebest estimateof technicalprovisions, thevalueof future discretionarybenefitsshould be calculatedseparately.TP.2.103.Future discretionarybenefitsmeansbenefits of insuranceorreinsurancecontractswhichhave one of the followingcharacteristics:- Thebenefitsare legallyor contractuallybased on oneor several ofthefollowingresults:- Theperformanceof a specified pool of contractsor a specifiedtypeof contract or a singlecontract;- Realised or unrealisedinvestment return on a specifiedpool of assetsheld bythe insuranceor reinsuranceundertaking;- Theprofit or lossof the insuranceor reinsuranceundertakingor fundthat issuesthe contract that givesrise tothebenefits;Solvency ii Associationwww.solvency-ii-association.com 56. - Thebenefitsarebased on a declarationof the insuranceorreinsuranceundertaking and thetiming or the amount of thebenefitsis at itsdiscretion.TP.2.104.Index-linkedand unit-linkedbenefitsshould not be consideredasdiscretionarybenefits.TP.2.105.The distributionof future discretionary benefits isamanagement actionand assumptionsabout it should beobjective,realisticand verifiable.In particular assumptionsabout thedistribution of future discretionarybenefitsshouldtake the relevant and material characteristicsof themechanism for their distributionintoaccount.TP.2.106.Some examplesof characteristicsof mechanismsfordistributingdiscretionarybenefitsare thefollowing.Undertakings should consider whether they are relevant and material forthe valuation of future discretionary benefits and take them into accountaccordingly, applying the principleof proportionality.- What constitutesa homogenousgroup of policyholdersand what arethekeydrivers for thegrouping?- How is a profit dividedbetweenownersof theundertakingand thepolicyholders and furthermore betweendifferent policyholders?- How is a deficit dividedbetweenownersof theundertakingand thepolicyholders and furthermore betweendifferent policyholders?- How will the mechanism for discretionarybenefitsbe affected by alargeprofit or loss?- How will policyholders be affected by profits and lossesfrom otheractivities?Solvency ii Associationwww.solvency-ii-association.com 57. - What is thetarget return level set bythefirms ownerson theirinvestedcapital?- What are the keydriversaffectingthe level of discretionarybenefits?- What is an expected level (inclusiveof any distributionof excesscapital, unrealisedgainsetc.) of discretionarybenefits?- How are the discretionarybenefitsmade available for policyholdersand what are the key driversaffectingfor examplethesplit betweenreversionaryand terminal discretionarybenefits,conditionality, changesin smoothing practice, level ofdiscretionarybytheundertaking, etc.- How will the experiencefrom current and previousyears affect thelevel of discretionarybenefits?- When is an undertakings solvencypositionsoweakthat declaringdiscretionarybenefitsis considered by theundertakingtojeopardizea shareholdersor/and policyholdersinterest?- What other restrictionsare in place for determining thelevel ofdiscretionarybenefits?- What is an undertakings investment strategy?- What is the asset mix drivingthe investment return?- What is thesmoothingmechanism if used and what is the interplaywith a largeprofit or loss?- What kind of restrictionsare in placein smoothing extra benefits?- Under what circumstanceswouldone expect significant changesinthecreditingmechanism for discretionarybenefits?- Towhat extent isthe creditingmechanismfor discretionarybenefitssensitivetopolicyholdersactions?Solvency ii Associationwww.solvency-ii-association.com 58. TP.2.107. Where the future discretionary benefits depend on the assetsheld by the undertaking, the calculation of the best estimate should bebased on the current assetsheld by theundertaking.Future changesof theasset allocationshould be taken intoaccountaccordingtothe requirementson future management actions.TP.2.108. The assumptions on the future returns of these assets, valuedaccording to the subsection V.1, should be consistent with the relevantrisk-freeinterestterm structure for theQuantitativeAssessment.Wherea risk neutral approach for thevaluation isused, the set ofassumptionson returns of future investmentsunderlying thevaluation ofdiscretionarybenefitsshouldbe consistent withthe principlethat theyshould not exceed the level givenby theforwardratesderived from therisk-freeinterestrates.Assumptions underlying the calculation of the best estimateAssumptions consistent with information provided by financialmarketsTP.2.109.Assumptionsconsistent withinformationabout or provided byfinancial marketsinclude(non-exhaustivelist):- relevant risk-freeinterest rateterm structure,- currencyexchangerates,- market inflation rates(consumer price index or sector inflation) and- economicscenario files(ESF).TP.2.110.When undertakingsderiveassumptionson future financialmarket parametersor scenarios, theyshould be abletodemonstrate thatSolvency ii Associationwww.solvency-ii-association.com 59. thechoice of theassumptionsis appropriateand consistent with thevaluation principlesset out in subsection V.1;TP.2.111. Where theundertakingusesa model to producefutureprojectionsof market parameters(market consistent asset model, e.g. aneconomicscenario file), such model should comply with the followingrequirements:i.It generatesasset pricesthat areconsistent with deep, liquid andtransparent financial markets4;ii.It assumesno arbitrageopportunity;TP.2.112.Thefollowingprinciplesshould be taken intoaccount indeterminingthe appropriatecalibrationof a market consistent assetmodel:a)Theasset model should be calibratedtoreflect thenature and term oftheliabilities,in particularof thoseliabilitiesgiving rise tosignificantguaranteeand option costs.b)Theasset model should be calibratedtothecurrent risk-freetermstructureused to discount the cash flows.c)Theasset model should be calibratedtoa properly calibratedvolatilitymeasure.TP.2.113.In principle,the calibration processshouldusemarket pricesonlyfrom financial marketsthat are deep, liquid and transparent.If the derivation of a parameter isnot possibleby meansof prices fromdeep, liquid and transparent markets,other market pricesmay be used.In thiscase,particular attention shouldbe paid to any distortionsof themarket prices.Solvency ii Associationwww.solvency-ii-association.com 60. Correctionsfor thedistortionsshould be made in a deliberate, objectiveand reliablemanner.TP.2.114.Afinancial market isdeep, liquid and transparent, if it meetstherequirementsspecifiedin thesubsection of thesespecificationsregardingcircumstancesin which technicalprovisionsshould becalculatedasawhole.TP.2.115.Thecalibrationof the abovementionedassetsmodelsmay alsobebased on adequateactuarial and statistical analysis of economicvariablesprovidedtheyproducemarket consistent results.For example:a)Toinform the appropriatecorrelationsbetweendifferent asset returns.b)Todetermineprobabilitiesof transitionsbetweenratingclassesanddefault of corporatebonds.c)Todetermineproperty volatilities.As there isvirtuallyno market in property derivatives,it is difficult toderiveproperty implied volatility. Thusthe volatilityof a property indexmay oftenbe used instead of property implied volatility.Assumptions consistent with generally available data oninsuranceand reinsurancetechnical risksTP.2.116.Generallyavailable data referstoa combination of:- Internal data- External data sourcessuchasindustry or market data.TP.2.117.Internal data refers toall data whichis availablefrom internalsources.Solvency ii Associationwww.solvency-ii-association.com 61. Internal data may beeither:- Undertaking-specificdata:- Portfolio-specific data:TP.2.118.All relevant availabledata whetherexternal or internaldata, should be taken intoaccount in order toarrive at theassumptionwhichbest reflectsthecharacteristicsof theunderlying insuranceportfolio.In the caseof usingexternal data, onlythat whichtheundertakingcanreasonablybe expectedtohaveaccesstooshould be considered.Theextent towhichinternaldata is taken intoaccount should be basedon:- Theavailability, qualityand relevanceof external data.- Theamount and qualityof internal data.TP.2.119.Where insuranceand reinsuranceundertakingsuse data from anexternal source, theyshould derive assumptionson underwritingrisksthat are based on that data accordingto the followingrequirements:(a)Undertakings are able to demonstrate that the sole use of data whichare available from an internal source are not more suitable than externaldata; and(b)Theorigin of thedata and assumptionsor methodologies used toprocessthem is known to the undertakingand theundertakingis abletodemonstratethat theseassumptionsand methodologiesappropriatelyreflect the characteristicsof theportfolio.Solvency ii Associationwww.solvency-ii-association.com 62. Policyholders behaviourTP.2.120.Undertakingsare required toidentify policyholdersbehaviour.TP.2.121.Any assumptionsmade by insurance and reinsuranceundertakingswithrespect tothelikelihoodthat policyholderswillexercisecontractual options,includinglapsesand surrenders,should berealisticand basedon current and credibleinformation.Theassumptionsshould takeaccount, either explicitlyor implicitly, oftheimpact that futurechangesin financial and non-financial conditionsmay have on theexercise of those options.TP.2.122.Assumptionsabout the likelihoodthat policy holderswillexercisecontractual optionsshouldbe basedon analysisof pastpolicyholder behaviour.Theanalysis should take intoaccount thefollowing:(a)How beneficial the exercise of the options was or would have been tothe policyholders under past circumstances (whether the option is out ofor barelyin the money or is in the money),(b)Theinfluenceof past economicconditions,(c)Theimpact of past management actions,(d)Where relevant, howpast projectionscomparedtotheactualoutcome,(e)Any other circumstancesthat are likelyto influencea decisionwhetherto exercisetheoption.TP.2.123.The likelihoodthat policyholders will exercisecontractualoptions,includinglapsesand surrenders,should not be assumed tobeindependent of theelementsmentioned in points(a) to (e) in theSolvency ii Associationwww.solvency-ii-association.com 63. previousparagraph, unlessproper evidencetosupport such anassumption can be observed or wheretheimpact wouldnot bematerial.TP.2.124.In general policyholdersbehaviour should not be assumed tobeindependent of financial markets,of undertakingstreatment ofcustomersor publicly available information unlessproper evidencetosupport the assumption can be observed.TP.2.125.Policyholder optionsto surrender are oftendependent onfinancial marketsand undertaking-specific information, in particular thefinancial positionof the undertaking.TP.2.126.Policyholdersoption to lapseand alsoin certain casestosurrender are mainlydependent on the changeof policyholdersstatussuch asthe abilityto furtherpaythepremium, employment, divorce, etc.Management actionsTP.2.127.The methodsand techniquesfor the estimation of future cash-flows, and hencetheassessment of the provisionsfor insuranceliabilities,shouldtake account of potential future actionsbythemanagement of theundertaking.TP.2.128.As examples,the followingshould be considered:- changesin asset allocation, asmanagement of gains/lossesfor differentassetclassesin order togain thetarget segregated fund return;management of cash balanceand equitybacking ratiowith the aim ofmaintaininga defined target asset mix in theprojection period;management of liquidityaccordingto theasset mix and durationstrategy; actionsto maintaina stableallocationof theportfolio assetsinterm of duration and product type, actionsfor thedynamic rebalancingof the assetsportfolioaccordingtomovementsin liabilitiesand changesin market conditions;Solvency ii Associationwww.solvency-ii-association.com 64. -changesin bonusrates or product changes,for exampleon policieswith profit participation tomitigatemarket risks;-changesin expense charge, for examplerelated to guaranteecharge, orrelatedtoan increasedchargingon unit-linkedor index-linkedbusiness;TP.2.129. The assumptionson future management actionsused in thecalculationof thetechnical provisionsshould be determined in anobjectivemanner.TP.2.130.Assumed future management actionsshould be realisticandconsistent withthe insuranceor reinsuranceundertakingscurrentbusinesspractice and businessstrategy unlessthere issufficient currentevidencethat the undertakingwill changeitspractices.TP.2.131.Assumed future management actionsshould be consistent witheach other.TP.2.132.Insuranceand reinsuranceundertakingsshould not assumethat future management actionswouldbe takenthat wouldbe contrarytotheir obligationstowardspolicyholdersand beneficiariesor tolegalprovisionsapplicableto the insuranceand reinsuranceundertakings.Theassumed future management actionsshouldtake account of anypublic indicationsby the insuranceor reinsuranceundertakingasto theactionsthat it wouldexpect to take, or not takein thecircumstancesbeingconsidered.TP.2.133.Assumptionsabout future management actionsshould takeaccount of the time needed to implement the management actionsandanyexpensescaused by them.TP.2.134.Insuranceand reinsuranceundertakingsshould be abletoverify that assumptionsabout future management actionsare realisticthrough a comparison of assumed future management actionswithmanagement actionsactuallytaken previouslyby the insuranceorreinsuranceundertaking.Solvency ii Associationwww.solvency-ii-association.com 65. International Association of Insurance SupervisorsIAISReleasesProposed Policy Measures forGlobal Systemically Important InsurersPublicconsultationtocontinuethrough 16 December 2012Basel The InternationalAssociation of InsuranceSupervisors(IAIS)todayreleaseditsproposedpolicy measuresfor global systemicallyimportant insurers,or G-SIIs.Thepaper wasendorsedfor consultationby the Financial Stability Board(FSB), whichis coordinatingthe overall project toreducethemoralhazard posedby global systemically important financial institutions.Supervisors,insurersand other interestedpartiesare encouragedtosubmit commentson the proposedpolicy measuresthrough 16December.Theseproposed policy measuresare intendedtoredu