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					CEA - Consultation - Solvency II - QIS4 Draft Technical Specifications

The Commission released on the 21 December 2008 the QIS4 package for public consultation until 15 February 2008. The QIS4 Co
http://ec.europa.eu/internal_market/insurance/solvency/index_en.htm#qis4
          1. Cover note
          2. Draft Call for Advice (CfA)
          3. Draft QIS4 technical specifications (TS)
          4. Draft questionnaire on Operational Risk (ORQ)

The CEA has put together comments and drafting suggestions for QIS4 Draft TS based from input from its member National Assoc

We have provide both the rationale and drafting suggestions for each of the issues raised:
          Drafting suggestions include the original text with changes proposed being underlined.
          Explanations/ Rationale for the suggestions put forward do not all fit in the spreadsheet. Some issues have required th
                      Our comments to the QIS4 Draft Technical Specifications and the CfA constitute a package which includes:
                      -    Annex 1 to ECO 8041 - CEA Response to EU Commission’s Draft Call for Advice on QIS4
                      -    Annex 2 to ECO 8041 – CEA detailed comments and re-drafting suggestions on QIS4 Draft TS.xl
                      -    Annex 3 to ECO 8041 – CEA Marketability Paper
                      -    Annex 4 to ECO 8041 – CEA Guidance on duration approach for the QIS4 interest risk sub-module
                      -    Annex 5 to ECO 8041 – CEA Simplifications for calculating risk margins using the cost-of-capital appro

The template has also been designed to match the output of the web tool put in place by the EC to collect feedback on the draft t
nsultation until 15 February 2008. The QIS4 Consultation package comprises four documents all available on the EC website:




ed from input from its member National Associations, Industry and Working Groups




he spreadsheet. Some issues have required the CEA to the attach papers/notes explaining in more detail the alternatives approaches put forward by th
d the CfA constitute a package which includes:
 on’s Draft Call for Advice on QIS4
 drafting suggestions on QIS4 Draft TS.xl

oach for the QIS4 interest risk sub-module
ng risk margins using the cost-of-capital approach

ce by the EC to collect feedback on the draft technical specifications.
on the EC website:




the alternatives approaches put forward by the industry. Annexes include:
5/1/2010                                                                                                                                                                       6:58 PM                                                             WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                  Explanation / Rationale
         Sub-     Paragraph                                        Drafting suggestion                                                                                                                                                  priority
 area                                                                                                                                                                      for changes
        section   reference
                                                                                                                                  This paragraph states that the calculation of technical provisions shall be based on their “current
                                                                                                                                  exit value”. This term has been adopted from the current discussion in the IASB and is not
  II       A          2       The calculation of the technical provisions shall be based on their current exit value                                                                                                                    Medium
                                                                                                                                  specified any further in the text. This approach does not take into account that the discussion
                                                                                                                                  process is by far not completed and that the corresponding assessment concept is still pending.
                              "Future cash flows from obligations towards policyholders and beneficiaries on insurance
                              contracts are hedgeable if they can be replicated using financial instruments for which a           Links to TS.II.D.49, which explains how a stochastic simulation approach is generally preferable
  II       A         18       market value is directly observable on a deep, liquid and transparent market. Where an                                                                                                                    Medium
                                                                                                                                  for material groups or classes of profit-sharing business.
                              insurer has an appropriate model (e.g. a Monte Carlo simulation model) these may be valued
                              using a „mark to model‟ approach."
                              A perfect hedge or replication is one that completely eliminates the risk exposure arising from
                              the liability. In practise perfect hedges are expected to be relatively rare. If in practice the
                                                                                                                                  The basis risk should only be in respect of market risk as risk margins using the cost of capital
  II       A         20       hedge is not perfect but the remaining basis risk is immaterial If in practice the hedge is not                                                                                                            High
                                                                                                                                  approach will be held in respect of other risks.
                              perfect but the basis risk in respect of the risk being hedged is immaterial, in the interest of
                              proportionality the undertaking may consider the risks as hedgeable.
                              For a hedged portfolio or replication the non-arbitrage principle implies that the market-
                                                                                                                                  Link to TS.II.D.60 and 61 As correctly described in TS.II.D.60 stochastic simulation models
  II       A         22       consistent value of the hedgeable cashflow should be acceptably close equal to the market                                                                                                                  High
                                                                                                                                  cannot exactly replicate all observable market values and this should be reflected here.
                              value of the relevant hedge …

                              Simplified methods may be applied in the valuation of the insurance liabilities where the
                              criteria set in TS.II.A.32 are met.where the result so produced is not material or not
                                                                                                                                  Link to TS.II.A.32 Materiality is defined in TS.II.A.32 and the requirement to compare the results
  II       A         31       materially different from that which would result from a more complex valuation process.                                                                                                                   High
                                                                                                                                  with a more complex calculation defeats the object of the simplification.
                              The risk of the approximation error, resulting from the use of simplified approaches, may
                              implicitely lead to a degree of conservatism, necessary to reach the same confidence level.


                              TS.II.A.31. Simplified methods may be applied in the valuation of the insurance liabilities
                              where the result so produced is not material or not materially different from that which would
                              result from a more complex valuation process.. /// TS.II.A.32. Simplified actuarial
                                                                                                                             The CEA supports the availability of simplified methods and testing them in QIS4. However, the
                              methods and statistical techniques may be used if: the criteria outlined below are satisfied.
  II       A        31, 32                                                                                                   CEA needs to see the results of QIS4 before commenting on specific simplifications and the                  High
                              These criteria are required to be applied where they are expected to be met. For the
                                                                                                                             suitability of restricting their use via relative and/or absolute criteria.
                              avoidance of doubt and any circularity, it is not necessary to calculate best estimate values
                              using the standard approach in order to determine whether the absolute / relative criteria (to
                              the overall technical provisions) are met - they are to be applied on a best efforts basis.

                              The logical order of the criteria should be the following :
  II       A         32        "…" and "…" and "…" and    [ "…" or ( "…" and "…" ) ]                                              More clarity.                                                                                          High


                              … The valuation of techncial provisions as current exit value does not necessarily correspond
  II       B          1                                                                                                           See comment to TS.II.A.2                                                                              Medium
                              directly to local GAAP figures.
                              …For some cash-flows, the link may be to consumer prices, but there are other links such as
                              salary inflation, which tends to exceed consumer price inflation. The base underlying inflation Link to TS.II.B.14 In order to obtain market-consistent prices you need to use assumptions
  II       B         10       assumptions (i.e. before allowing for specific features) used should be consistent with that    consistent with market prices, which applies to inflation rates as well as other assumptions such         Medium
                              implied by the market prices of relevant financial instruments.Standard actuarial techniques    as risk free rates.
                              may be used to extrapolate to the inflation relevant to the undertaking.

                              For QIS4 purposes, the prescribed risk-free interest rate term structure for cash-flows             There is no justification for CEIOPS necessarily moving from a swaps based risk free rate to a
                              denominated in Euro is the Euro area yield curve published by the European Central Bank             government bond based risk free rate. The (valid) liquidity arguments that imply the use of swap
                              (ECB)...For QIS4 purposes, risk-free interest rates could be set by taking into account yields      rates before (e.g. QIS3) apply equally today. Other than for very short terms (e.g. 6 months),
  II       B         12       on government bonds, where available and appropriate. In some markets it could however be           which are not relevant for the purposes of valuing technical provisions (and which can be        Very High
                              more appropriate due to illiquidity or/and insufficient selection of maturities to use swap rates   adjusted, e.g. using SONIA/EONIA rather than LIBOR/EURIBOR at these terms), the spread
                              as proxies for risk-free interest rates. If so, appropriate considerations related to possible      between government bond rates and swap rates has not significantly changed. They have been
                              illiquidity or insufficient credit quality in the swap rates should be given......                  largely unaffected by the so called "liquidity crunch".
                                                                                                                              Concerning the suggestion for TS.II.B.27 , it is necessary to consider that future expenses are
                                                                                                                              financed in many ways depending on the product type. Usually Management Fees, Net
                                                                                                                              Investment returns from assets backing insurance liabilities and foreseeable by using the par
                               Expenses related to future deposits or premiums to future deposits or renewal premiums, to yield curve, surrender penalties, face the renewal and lapses expenses. Conversely a share of
                              the extent they are considered in the evaluation of best estimate, should usually be taken into loadings on future premiums (or/and a share of gross management fee for single premiums) has
  II       B       14 + 27                                                                                                                                                                                                    Medium
                              consideration. "Expenses related to the cash flows due to future premiums are excluded if the the aim to recover the entity from the initial acquisition costs and they therefore could not be
                              latter are excluded from the evaluation of the best estimate. "                                 used for the scope of the additional liability.
                                                                                                                              Relating to future premiums it is necessary to clarify that renewal monoannual premiums
                                                                                                                              belonging to pluriannual programme should be take into account, consistently with the Life
                                                                                                                              European Embedded Value valuation.
                              Taxation payments or compulsory contributions required to meet policyholder liabilities should
                              be allowed for on the basis that currently applies.whereas The allowance for any deferred tax
                              liability (i.e. where this is not subordinated to policyholders) should be consistent with this
                              treatment, i.e. there should be no double counting. In cases where changes to taxation
  II       B         15                                                                                                       It should be made clear that there is no double counting.                                          High
                              requirements have been agreed (but not yet implemented), the pending adjustments should
                              be reflected in the calculations. The recognition of taxation on the best estimate should be
                              consistent with the amount and timing of the profits and losses that are expected to be
                              incurred in the future.

                              The best estimate of the liabilities should show the value of the cash-flows gross of           Link to TS.II.B.17 The aim should be to reduce the value reinsurance asset for the market-
                              reinsurance. The reinsurance asset should include the change in the value of the                consistent cost of future possible defaults.
                              undertaking‟s liability cash-flows from holding the reinsurance. The reinsurance asset should
  II       B         16       be adjusted to allow for the market-consistent cost of future possible counterparty defaults to                                                                                                            High
                              allow for expected counterparty default. A similar principle applies to cash-flows from a SPV.
                              However, care should be taken not to double count risk already assessed as part of the SCR
                              for Counterparty Default Risk, at least for the first year.                                     Care is needed not to double count the Counterparty Default Risk in the SCR, with the part
                                                                                                                              captured within the Best Estimate calculation of the Reinsurance assets.
5/1/2010                                                                                                                                                                                  6:58 PM                                                            WORKING DRAFT


          TS            TS
  TS                                                                                                                                                                             Explanation / Rationale
         Sub-       Paragraph                                               Drafting suggestion                                                                                                                                                   priority
 area                                                                                                                                                                                 for changes
        section     reference
                                       In certain types of reinsurance, the timing of recoveries and that of direct payments might
                                       markedly diverge, and this should be taken into account when valuing the reinsurance asset.
  II       B             17            The adjustment to the reinsurance asset in respect of possible future default should            Link TS.II.B.16 The adjustment should be the associated market-consistent cost.                            Medium
                                       theoretically be on a market-consistent basis. In practice this can seldom be observed directly
                                       from the market and so it needs to be estimated.
                                       The adjustment for counterparty default shall be based on an assessment of the probability of
                                                                                                                                     Need to also take into account the duration of the liabilities when estimating the market-
  II       B             18            default of the counterparty and average loss resulting from such default (loss-given-default)                                                                                                              Medium
                                                                                                                                     consistent cost.
                                       and the duration of the reinsured liabilities.
                                       The assessment of the probability of default shall implicitly take into account that the
                                       probability of default may increase under adverse circumstances. This reflects that fact that
                                       investors are risk adverse and will demand a market-consistent price of default risk which is         Need of Guidance
                                       higher than the expected costs. If the probability of default of the counterparty significantly
  II       B             20                                                                                                                                                                                                                         Low
                                       depends on the amount payable to the insurance or reinsurance undertaking under the                   This requirement may be relevant for companies using stochastic simulations for the best
                                       reinsurance contract or special purpose vehicles, the average probability of default should be        estimate liabilities.
                                       used. The average shall be weighted with the product of the amount payable and the
                                       probability that the amount will be payable.

                                       Contractual recurring premiums should be taken into account, with allowance given for the
                                       expected renewal premiums that are not included within the current insurance contract if, and
                                       only if, at least one of the following criteria is met:                                               Link to TS.XI.E.1       This change seems to be motivated by a desire to align with the IFRS
                                       a. the policyholder must pay the premiums to retain guaranteed insurability (a right that             project. However, in doing so it results in an approach that is inappropriate for both financial
                                       permits continued coverage without reconfirmation of the policyholder‟s risk profile and at a         reporting and solvency purposes as it departs from the economic approach /// it excludes a
                                       price that is contractually constrained).                                                             potentially significant source of economic value, i.e. the value associated with future expected
  II       B             27            b. the insurer can compel the policyholder to pay the premiums.                                       premiums. The risk that experience is not as expected (i.e. less future premiums are paid than      Very High
                                       c. including the premiums and the resulting policyholder benefits will increase the                   expected) should be reflected in the capital amounts, i.e. by assuming a lower persistency rate
                                       measurement of the liability.                                                                         for future premiums. /// For further details, please refer to CEA response to QIS 4
                                       Future premiums expected from existing contracts and any existing ongoing obligation to               CfA. and to the presentation made at the 11 feb 08 QIS4 Stakeholders' meeting on
                                       service policyholders.                                                                                this issue.
                                       Any uncertainty surrounding the payment of such future premiums should be reflected via an
                                       appropriate probability assumption (i.e. persistency rate) being applied to these cashflows.

                                                                                                                                             Link to TS.II.B.27. If the re-drafting for TS.II.B.27 is accepted these paragraphs will be
  II       B      28 to 30 inclusive                                                DELETE                                                                                                                                                       Very High
                                                                                                                                             redundant.
                                                                                                                                             We believe the QIS3 treatment was more appropriate, using the SCR calculation arising at the
                                       “The calculation of technical provisions is based on their current exit value, using the SCR
  II       C              3                                                                                                                  end of the 1-year time horizon. This recognises that the risks assesses will crystallise over the     High
                                       capital calculated at the end of the 1-year time horizon (denoted by t = 1).”
                                                                                                                                             period and will not all occur at t = 0.
                                                                                                                                        We believe this more accurately reflects the basis on which the risk margin will be calculated by
                                       "The risk margin is calculated on a net-of–reinsurance basis only and after reduction for profit
  II       C              6                                                                                                             the market. This point is made in a section on simplification (II.C.23) but should more                    High
                                       sharing."
                                                                                                                                        appropriately be included in the earlier sections as a high level principle.

                                                                                                                                             This does not give you an economic cost of capital because some level of diversification would
                                       Aggregation of Technical Provisions calculated per segment /// To reach to the overall value
                                                                                                                                             be anticipated in the market place. It is inconsistent with the SCR where diversification is
  II       C             13            of technical provisions, participants should assume that no diversification benefits arise from                                                                                                             High
                                                                                                                                             allowed between lines of business. The calculation of the capital requirements for risk margin
                                       the grouping of technical provisions calculated per segment.
                                                                                                                                             purposes should as far as possible be the same as the SCR itself but excluding hedgeable risks.

                                       The main practical difficulty of the method is deriving the SCR for future years. The
                                       calculation of the different risk charges for the future SCRs can either be done by the direct        Link TS.II.C.17 to C.27 inclusive. For most companies, especially profit sharing companies, even
                                       application of the SCR formulae or by simplifications. In the following paragraphs there is a         the so called "simplified methods" outlined in QIS4 will be unnecessarily complex and costly to
  II       C             16                                                                                                                                                                                                                        High
                                       list of the risks to be taken into account and a short description of possible simplifications that   perform. The re-drafting (which is the method used in the QIS3 spreadsheet) strikes the
                                       could be used.Reflecting this companies may derive future SCR values using t=0 SCR figures            appropriate balance between accuracy and cost-effectiveness.
                                       and the ratio of best estimate liabilities at future time periods with that at t=0.
                                                                                                                                             Link TS.II.C.16. The "simplified methods" outlined are not simply and instead are overly
                                       DELETE and replace using methods outlined in the CEA cost of capital paper dated
  II       C      17 to 27 inclusive                                                                                                         complex. For appropriate simplified methods please refer to the CEA's cost of capital                 High
                                       dd/mm/2007
                                                                                                                                             paper dated 03/12/2007.
                                                                                                                                             Such a segmentation will be almost impossible for companies to perform. Also, it will not give
                                                                                                                                             you an economic cost of capital because some level of diversification would be anticipated in the
  II       D            1 to 5         DELETE                                                                                                market place. It is inconsistent with the SCR where diversification is allowed between lines of       High
                                                                                                                                             business. The calculation of the capital requirements for risk margin purposes should as far as
                                                                                                                                             possible be the same as the SCR itself but excluding hedgeable risks.
                                       It is important to consider whether policyholders options could materially to change the terms
                                       of the contract, i.e. where they have an option enabling this. In such circumstances and           Companies should not be forced to adopt complex calculation approaches where an alternative
  II       D             11                                                                                                                                                                                                                        High
                                       where the effect of doing is expected to be material, cash-flow projections should take            simpler approach will give acceptably accurate results.
                                       account of the proportion of policyholders ...
                                                                                                                                          Invariably allowing for management actions reduces the technical provisions. As such companies
                                       Future management actions may should be reflected in the projected cash-flows and any the
                                                                                                                                          should not be forced to allow for them and in turn be forced to develop complex calculation
  II       D             16            items taken into account should be consistent with the firm's current principles and practices                                                                                                              High
                                                                                                                                          systems, especially where simpler alternative calculations methods give acceptably accurate
                                       to run the business. Any the assumptions used ...
                                                                                                                                          results.
                                       The use of stochastic simulation is preferable for material groups or classes of with-profits
                                       insurance contracts. unless it can be shown that However, for insurers (or lines of business) The criteria should be framed around producing appropriate technical provisions rather than the
                                       with a small risk profile - in line with the criteria defined in TS.II.A.32 - it is allowed to use methods used. If an alternative method and calibration is expected to produce appropriate
  II       D             49            more simplistic or alternative methods are both appropriate and sufficiently robust. When          results with the same level of confidence as a sophisticated method then companies should be             High
                                       using a simpler or alternative method undertakings should ensure that the calibration used is allowed to use this and not be forced into developing unnecessarily complex and costly
                                       that expected to reach the same level of confidence in the estimation as would be achieved         projection systems.
                                       when using a more sophisticated approach (model error).
5/1/2010                                                                                                                                                                                  6:58 PM                                                              WORKING DRAFT


          TS             TS
  TS                                                                                                                                                                             Explanation / Rationale
         Sub-        Paragraph                                              Drafting suggestion                                                                                                                                                     priority
 area                                                                                                                                                                                 for changes
        section      reference
                                       For the purposes of the deterministic approach, a series with an appropriate number of                The original specification "…, where each deterministic projection corresponds to a possible
                                       deterministic projections of the values of the underlying assets and the corresponding                economic scenario or outcome" might lead to the conclusion that at least the same number of
                                       liabilities should be made, where each deterministic projection corresponds to a possible             projections should be made like in a stochastic simulation approach. This would not make any
  II       D              53           economic scenario or outcome. As described in TS.II.A.49, the criteria for determining                sense.                                                                                                  High
                                       whether a deterministic approach (and its calibration) is appropriate should be whether it is
                                       expected to reach the same level of confidence in the estimation as a more sophiticated               To avoid any misunderstanding a range of "x to y projections" could be given (see also II.D.55:
                                       method (model error).                                                                                 "the series of deterministic projections should be numerous enough ...").

                                                                                                                                             Clarification / guidance. Financial instruments such as derivatives typically have two variants:
                                       For the valuation of technical provisions the implied volatility is the relevant volatility measure   future returns on the underlying assets are assumed to only comprise of price returns (e.g. the
                                       for financial instruments. Total return (as opposed to price return) financial instruments            reflecting the change in the FTSE 100 index but NOT any dividends paid on the shares
  II       D              63           should be used where insurers will receive the total return achieved on their underlying              comprising the index); and where future returns assume both price return and dividend return.          Medium
                                       assets, with price return instruments being used where no income/dividend will be received            For longer term financial instruments the implied volatility levels on these two variants can be
                                       on the underlying assets.                                                                             significantly different and in order to replicate the appropriate market price it is important that
                                                                                                                                             the right financial instrument is chosen.
                                       Concerning policyholders' option to surrender, surrendering is not independent of financial
  II       D              70           markets and firm specific information.. However, for the purpose of QIS 4, it may be assumed          Clarification                                                                                          Medium
                                       that the process of surrendering is independent …
                                       In practice, certain types of liabilities, although stemming from claims covered by non-life
                                       insurance contracts, may be similar in nature to liabilities commonly observed in life insurance      It should be made clear that, even though, "life" actuarial techniques are used for a non-life
  II       E               5           business. These claims should be valued based on their nature, i.e. life insurance principles.        product, that the results are not disclosed within the life business but within the non-life            High
                                       For the avoidance of any doubt, life techniques may be used for the valuation purposes, but           business.
                                       the results of these liabilities should be disclosed within the non-life LOBS as specified in
                                       TS.II.E.1
                                       Participants should use statistical methods compatible with current actuarial 'best practice'
                                       and should take into account all factors that might have a material impact on the expected
                                       future claims experience. Typically, this will require the use of claims data on an occurrence        It is important to emphasise that, especially for the longer tailed lines of business, incurred
                                       year basis or an underwriting year basis or an accident year basis for the run-off triangles.         claims triangles are required as well if available. For the longer-tailed LOBs, estimates based on
  II       E              10                                                                                                                                                                                                                         High
                                       These run-off triangles should preferably include cumulative paid claims as well as incurred          paid data only, will most likely lead to poor estimates, regardless the number of methods that
                                       claims data (if available). Other data which is useful would include for example triangles with       are being used.
                                       number of claims reported and/or number of open claims. In addition, some exposure
                                       measures such as number of policies would be useful as well.

                                                                                                                                   Due to unforeseen events and due to typical volatility in claims (regarding frequency and size),
                                       Goodness-of-fit tests should be applied to all methods considered to see whether the method
  II       E              13                                                                                                       there can be deviations between actuals versus expected. These differences should be explained                   Medium
                                       applied is still appropriate. and those showing a poor quality of fit should be rejected.
                                                                                                                                   and MAY lead to a change of method. This should however be decided by the company.

                                       As a simplified approach, the "Expected Loss Based Proxy" (See Crossreference TS.IV.F) could
                                       be used with a combined ratio estimated from the firm's own data and other information. The
                                       combined ratio is the sum of the loss ratio and the expense ratio. The loss ratio for
                                                                                                                                      The current description is not clear (i.e. what is the definition of year y: is it calendar year y or
                                       accident/underwriting/occurrence year y is defined as the ratio for of estimated ultimate
  II       E              17                                                                                                          accident year y) and seems not to incorporate the most-up-to date data/information. /// The                   Medium
                                       claims over earned premiums for a given LoB. The estimated ultimate claims can be derived
                                                                                                                                      method itself is a sophisticated method and not a simplification.
                                       from the actuarial techniques which are used to derive the best-estimate of the technical
                                       provisions. The expense ratio is the ratio of expenses (other than claims expenses) to written
                                       premiums and the expenses are those attributable to the written premiums.

                                       ... To guarantee that the insurer controls both model and parameter errors, some general
                                       principles are suggested: The best estimate should in general be assessed using at least two
  II       E              20           different methods … A most appropriate method is a technique which is part of best practice           Companies should not be forced to use two different methods.                                          Very High
                                       and which captures the nature of the liability most adequately ...


                                                                                                                                      It is unclear what is meant here, but it seems that there is a circularity. The total claims
                                                                                                                                      provisions equal the sum of the RBNS claims and the IBNR claims. If you already have an
                                       A simplified method for calculating the IBNR claims could be based on the total of paid claims estimate of the claims provisions, you do not need to calculate the RBNS and IBNR separately.
                                       and the RBNS-amount (e.g. as a given percentage of this total) or on an estimate of the total /// If you cannot estimate the total claims provisions, you need to calculate the RBNS
  II       E              23                                                                                                                                                                                                                        Medium
                                       claims costs(e.g. as a residual given by the difference between the estimated overall claims   (TS.II.E.22) and the IBNR separately. /// There are 2 options: apply the approaches described
                                       cost and the total paid claims and the RBNS-amount).                                           in section TS.IV to estimate the total claims provisions or estimate the RBNS and IBNR
                                                                                                                                      separately. Approaches/simplifications for the estimation of the IBNR would then need to be
                                                                                                                                      developed.

                                      Where deferred tax liabilities are subordinated to policyholders they should be excluded. The
                                      treatment under IAS 12 is considered an acceptable proxy for valuation on an economic value            TS.III.A, TS.V.B.4 and TS.VIII.C5 are inconsistent and confusing. It is essential that the
                                      basis. To the extent that QIS 4 asset and liability values are different from the accounting           treatment of deferred tax is clarified. Deferred tax liabilities that are subordinated to
  III      A      Deferred tax assets values and the consequent net tax effect is significant, firms should restate their deferred tax       policyholders should not be included in the liabilities. The risk absorbing features of deferred tax Very High
                                      figure for the purposes of QIS 4. If a different valuation basis is used, full explanation must        liabilities that are not subordinated should be fully recognised. /// For further details, please
                                      be provided. When performing capital calculations using a scenario approach the change in              refer to CEA response to QIS 4 CfA.
                                      deferred tax liabilities should be allowed for.
                                                                                                                                             Need to avoid presenting QIS4 as requiring IFRS figures as this will deter smaller participants
                                       Annex 1: Accounting IFRS Solvency adjustments for valuation of assets and other liabilities
  III   Annex 1                                                                                                                              from participating. It should be presented as using accounting figures as a proxy, with IFRS           Medium
                                       under QIS4
                                                                                                                                             figures being an example.
                                       Include following text "The following tables provide guidance on how to use IFRS values as a Need to avoid presenting QIS4 as requiring IFRS figures as this will deter smaller participants
  III                                  proxy for economic values. It would also be appropriate to use local GAAP figures with       from participating. It should be presented as using accounting figures as a proxy, with IFRS                    Medium
                                       suitable adjustments where this results in an appropriate proxy for economic value."         figures being an example.

                                      Where deferred tax liabilities are subordinated to policyholders they should be excluded. The
                                      treatment under IAS 12 is considered an acceptable proxy for valuation on an economic value            TS.III.A, TS.V.B.4 and TS.VIII.C5 are inconsistent and confusing. It is essential that the
                                      basis. To the extent that QIS 4 asset and liability values are different from the accounting           treatment of deferred tax is clarified. Deferred tax liabilities that are subordinated to
  III      A      Deferred tax assets values and the consequent net tax effect is significant, firms should restate their deferred tax       policyholders should not be included in the liabilities. The risk absorbing features of deferred tax Very High
                                      figure for the purposes of QIS 4. If a different valuation basis is used, full explanation must        liabilities that are not subordinated should be fully recognised. /// For further details, please
                                      be provided. When performing capital calculations using a scenario approach the change in              refer to CEA response to QIS 4 CfA.
                                      deferred tax liabilities should be allowed for.
5/1/2010                                                                                                                                                                                 6:58 PM                                                             WORKING DRAFT


          TS             TS
  TS                                                                                                                                                                           Explanation / Rationale
         Sub-        Paragraph                                              Drafting suggestion                                                                                                                                                   priority
 area                                                                                                                                                                               for changes
        section      reference

                                       GOODWILL ON ACQUISITIONS - Goodwill should be valued at nil for solvency purposes.
                                       Nevertheless, in order to quantify the issue, participants are requested, for information only,
                                                                                                                                           Linked to comment on TS.V.F.1 & TS.VI.D.1                         We believe that the economic value
                                       to provide, when possible, t The treatment under IFRS 3 and IFRS 4 (that is considered an
                                                                                                                                           of all assets must be included. Given that all risks are explicitly allowed for when determining
                                       acceptable proxy for valuation on an economic value basis ). If a different valuation basis is
                                                                                                                                           capital amounts there would be an element of double counting if certain assets were excluded.
                      Goodwill on      used, full explanation must be provided.           ///      INTANGIBLE ASSETS - Intangible
                                                                                                                                           We recommend that for the purposes of QIS4 exercise that the economic value of intangible
  III      A        acquisitions and   assets should be valued at nil for solvency purposes. Nevertheless, in order to quantify the                                                                                                             Very High
                                                                                                                                           assets is taken into account and companies are asked to separately identify, quantify and
                   intangible assets   issue, participants are requested, for information only, to provide, when possible, t The
                                                                                                                                           describe the valuation process of any intangible assets so that the potential scale of the
                                       treatment under IAS 38 is consider an acceptable proxy for valuation on an economic value
                                                                                                                                           economic value associated with these assets can be assessed. /// For further details,
                                       basis, to the extent that the revaluation option and not the cost model is used (such a
                                                                                                                                           please refer to CEA response to QIS 4 CfA.
                                       treatment is considered an acceptable proxy for valuation on an economic value basis). If a
                                       different valuation basis is used, full explanation must be provided.

                                                                                                                                           Not including own creditworthiness would be very onerous. In the economic environment one
                    Other financial
  III      A                           The own creditworthiness should still be recognised when measuring the financial liabilities        pays additional spreads reflecting the own creditworthiness. It would be very difficult to separate     High
                       liabilities
                                                                                                                                           the credit spread when considering a quoted price.
                  Property, plant and When the balance sheet amount is reflecting the revalued amount, the insurer should adjust           If property is to be treated equally regardless whether it is direct, indirect or in own use, the
  III      A                                                                                                                                                                                                                                       High
                      equipment       the value for amortisation already recognised.                                                       amortisation should be reversed.
                                       Where deferred tax liabilities are subordinated to policyholders they should be excluded. The       Link TS.V.B.4 Solvency II is neutral and agnostic with regard to any issue concerning general
                                       treatment under IAS12 is considered an acceptable proxy for valuation on an economic basis.         financial statements or tax issues. As a consequence, QIS4 should not be understood as
                     Deferred tax
  III      B                           When performing capital calculations using a scenario approach the change in deferred tax           impacting current accounting or taxation rules. /// Link TS.IX When determining the SCR               Very High
                      liabilities
                                       liabilities should be allowed for. If a different valuation basis is used a full explanation must   market risk module changes in deferred tax asset values (and liabilities) need to be reflected.
                                       be provided.                                                                                        /// For further details, please refer to CEA response to QIS 4 CfA.

                                       All financial liabilities should be valued on a market-consistent basis. Where reliable market
                    Other financial                                                                                                      Link TS.I.B.2 It needs to be made clear that debt issued by a company should be valued in line
                                       values are available these should be used in the first instance. Where this is not the case it is
  III      B         liabilities and                                                                                                     with market prices and not say by discounting using risk free rates and making no adjustment            Very High
                                       likely to be appropriate to value the liabilities at fair value in accordance with the guidance
                        payments                                                                                                         for own credit risk as this would place a higher value on the liability than the market value.
                                       provided in IAS39. If a different valuation basis is used, a full explanation must be provided.
                                       The treatment under IAS19 is considered an acceptable proxy for valuation on an economic
                  Post employment                                                                                                          No decision has been taken on whether Solvency II should be applied to pension schemes and
                                       value basis. If a different valuation basis is used a full explanation must be provided. For the
  III      B        benefits (incl.                                                                                                        QIS4 should pre-empt this by effectively requiring Solvency II to be applied in respect of              High
                                       avoidance of doubt, there is no need to revalue this liability when determining the NAV for
                      pensions)                                                                                                            undertakings own pension schemes.
                                       any of the market risk sub-modules.
  III      B                           Other Liabilities                                                                                   Typo on the title of the table                                                                           Low

                                       Moreover, it seems likely that some of the proxy techniques described below (particularly
                                                                                                                                           We consider that a proxy that is judged as inconsistent with Solvency II framework must not be
  IV       A               3           those induced by a lack of actuarial expertise) will not be fully compatible with Solvency II                                                                                                               High
                                                                                                                                           tested.
                                       framework but are nonetheless tested for QIS4 purposes.

                                                                                                                                           It is important to emphasise that, especially for the longer tailed lines of business, incurred
                                       …"evolution of paid claims and incurred claims…."       Ai,j= gross cumulative amount of            claims triangles are required as well to calculate the best estimate of the claims provisions (see
  IV       B               1                                                                                                                                                                                                                       High
                                       claims paid / gross incurred claims …..                                                             comment II.E.20).      /// We agree that the evolution of paid claims is required to estimate
                                                                                                                                           payment patterns /// Calculations in TS.IV.B.4 should be etxended to incurred claims triangles.

                                                                                                                                           The method described is in line with one of the sophisticated best-practice methods, with the
                                                                                                                                           difference being that benchmarks are applied rather than development factors based on own
                                       As a proxy, apply market-development patterns to development methods on paid claims and
  IV       B                                                                                                                               data. This should be made more clear in the description: the method itself is not a proxy but          Medium
                                       incurred claims when these are available.
                                                                                                                                           applying the benchmark is the proxy (for example being applied because the company does not
                                                                                                                                           have sufficient data or because the data is not stable)
                                                                                                                                           The method described is in line with one of the sophisticated best-practice methods, with the
                                                                                                                                           difference being that market data (i.e. frequency and average claims) are applied rather than
  IV       C                           Applying market data to the frequency-severity proxy method                                         frequencies and average claims based on own data. This should be made more clear in the                Medium
                                                                                                                                           description: the method itself is not a proxy but applying the benchmark is the proxy (for
                                                                                                                                           example being applied because the company does not have sufficient data or because the data
                                                                                                                                           is not stable)
                                                                                                                                           The method described is in line with one of the sophisticated best-practice methods and is not a
  IV       D                           Bornhuetter-Ferguson-based proxy method                                                                                                                                                                    Medium
                                                                                                                                           proxy. Having the description is useful, but it should not be seen as a proxy method.

                                                                                                                                           The method described is in line with one of the sophisticated best-practice methods, with the
                                                                                                                                           difference being that market loss ratios are applied rather than own estimates of the loss ratios
  IV       F                           Applying the market loss ratio to the expected Loss Based proxy method                              based on own data/experience. This should be made more clear in the description: the method            Medium
                                                                                                                                           itself is not a proxy but applying the benchmark is the proxy (for example being applied because
                                                                                                                                           the company does not have sufficient data or because the data is not stable)

                                                                                                                                     The chain ladder method is mechanical in nature and will in almost all cases lead to
                                                                                                                                     unsatisfactory results. Mechanical extrapolations on irregular data patterns will automatically
                                       As an interim measure and for the purposes of QIS4, a simple chain ladder proxy approach      lead to erroneous results and it is expected that data patterns are irregular in most cases,
                                       may be used. However, it should be noted that this method can lead to unsatisfactory results, especially for smaller companies because of inherent volatility (see TS.IV.G.5). /// To
  IV       G               1                                                                                                                                                                                                                       High
                                       especially where there are irregular data patterns, which is often the case. Where possible   assess the data, there should always be an element of judgement applied to select factors
                                       companies are encouraged to use appropriate approaches.                                       (either based on own data or based on benchmarks). /// Besides, it is acknowledged that this
                                                                                                                                     method will most likely not be regarded as an appropriate method in the future Solvency II
                                                                                                                                     regime. /// Hence, we would recommend to delete the method, to avoid further confusion.

  IV       I               8           TS.IV.I.8 TS.IV.J                                                                                   A new method is introduced and should preferably start with a new sub-section (new labels)               Low

  IV       J               7           TS.IV.J.7 TS.IV.K.1                                                                                 Numbering should be consistent with header                                                               Low
                                                                                                                                           Basing these ratios on cumulative paid claims will lead to poor estimates of the ceded reserves,
                                                                                                                                           as reinsurance payments are typically delayed (especially for those long tailed LOBs) compared
  IV       J              16           Additional formula should be developed to reflect the usage of incurred claims.                     to gross payments. We would therefore recommend the same approach, whereby incurred                     High
                                                                                                                                           claims are applied. /// We do however agree that paid claims are required to derive payment
                                                                                                                                           patterns.
  IV       J                           Proxy for applying a discount rate factor                                                           Title is missing.                                                                                        Low




                                                                                                        -Durmod
5/1/2010                                                                                                                                                                           6:58 PM                                                              WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                     Explanation / Rationale
         Sub-     Paragraph                                         Drafting suggestion                                                                                                                                                      priority
 area                                                                                                                                                                         for changes
        section   reference
                              Let CF0, …, CFn be the undiscounted cash flow of the life insurance obligations determined in Small companies may not be able to project cashflows since they use commutation factors to
  IV       M       TS.IV.M                                                                                                                                                                                                                    High
                              line with Article 20 of the current life directive 2002/83/ec                                 calculate the best estimate of technical provision.

                              Durmod estimate of the modified duration of TP

                                                                                                                                     The formula provides a better approximation to the Best Estimate of Life Technical Provisions.
  IV       M       TS.IV.M                                 rsolvency1        (1- (1+rriskfree ) -Durmod)                                                                                                                                      High
                                  guaranteed ≈
                                BE            TP.                       x                                                            Modified duration may be replaced by the average term at maturity.
                                                                            (1- (1+rsolvency 1)-Durmod )
                                                            rriskfree
                              Probability weight the guaranteed benefits and related future expense loadings for a given
  IV       M       TS.IV.M    point in time by assuming for the surrender process a constant Poisson hazard intensity and            We believe is much more easier to assume an average constant rate of lapsation.                         Medium
                              for the expected mortality a constant scaling factor of current mortality assumption in use.


                              If the amount of provisions is very small (e.g. < 1%) relative to the size of the provisions for
                              claims outstanding of the relevant Non-life LoB, Otherwise as a first proxy, it is suggested that
                              annuities are included in cash flows for claims outstanding. Thus the best estimate of claims
                              outstanding automatically includes the best estimate of annuities.
                                                                                                                                both proxies have advantages and disadvantages but their application is not depending on
  IV       L          1       As a second proxy proposal is proposed for those cases where the amount of provisions                                                                                                                           High
                                                                                                                                different boundaries for the size of the risk
                              relative to the size of the provisions for claims outstanding of the relevant Non-life LoB is
                              neither not negligible not very small but between these two limits (e.g. >= 1% and <= 10%).
                              (This may specifically apply for the workers‟ compensation business.) Here the following
                              formula is suggested:

                              GRANDFATHERING: New paragraph TS.V.A.3: Grandfathering of existing instruments on                      It is of the utmost importance that the issue of how to treat existing instruments under the new
  V        A        NEW       introduction of Solvency 2 is an acknowledged issue which will be dealt when formulating               Solvency II regime is explicitly considered and it may be necessary to have special criteria for         High
                              implementing measures.                                                                                 these instruments when formulating implementing measures.
                              The main concern about a particular eligible element is to what extent it meets the                    * The last bulletpoint seems not to be fully in accordance with the Framework Directive. The
                              characteristics set forth in the Framework Directive Proposal. In other words, elements are            last bulletpoint says : “no item is included in own funds if it is not available to absorb losses for
                              classified in relation to how well and when they absorb losses compared to paid-upordinary             the benefit of all policyholders”
                              share capital, or paid-up initial fund:                                                                * As we understand the framework directive there is a distinction between Tier 1 and Tier 2
                              • the excess of assets over liabilities is a tier 1 item;                                              capital dependant on the fact that a capital element is available on a going concern basis or
  V        B          2                                                                                                                                                                                                                      Medium
                              • a hybrid capital instrument, regardless of its legal form, can be a tier 1, tier 2 or tier 3 item;   solely in a winding up situation (Article 92). A capital element may clearly be available in a
                              • a subordinated liability can be a tier 1, tier 2 or tier 3 item;                                 •   winding up situation but not on a going concern basis because of restriction in use on a going
                              a promise to provide own funds can be a tier 2 or tier 3 item;                                         concern basis that no longer is valid in a winding up situation.
                              • no an item is included in own funds if it is not available under some circumstances to absorb        * The definition of a liability may differ from country to country. What we would appreciate is a
                              losses for the benefit of all policyholders.                                                           clarification of the term liability

                                                                                                                                     It is not clear what is meant by "if an insurer operates funds", an example and more guidance
                              If an insurer operates business that is "ring-fenced" in separate funds, the assets of which           would be helpful.
                              are not transferable to other parts of the insurer's business (i.e. they are unable to losses          Our drafting suggestion aims to clarify the issue, not to impose more restrictions than what was
  V        B          3       from other business), the then any related own funds above for this business in excess of the          originally meant by CEIOPS.                                                                  It is       High
                              SCR (for that business)calculated for each fund are should be excluded from the own funds of           important to point out that in some countries (e.g. Portugal) life insurance companies can have
                              the insurer.                                                                                           more than 20 funds. Therefore the proposals have to take this into consideration in particular
                                                                                                                                     making sure the process is operational and effective. Further work is needed.
                              The Solvency II project has prudential supervision as its exclusive purpose. Therefore,
                              Solvency II is neutral and agnostic with regard to any issue concerning general financial              TS.III.A, TS.V.B.4 and TS.VIII.C5 are inconsistent and confusing. It is essential that the
                              statements or tax issues. As a consequence, QIS4 should not be understood as impacting                 treatment of deferred tax is clarified. Deferred tax liabilities that are subordinated to
  V        B          4       current accounting or taxation rules.                                                                  policyholders should not be included in the liabilities. The risk absorbing features of deferred tax Very High
                              Therefore assets and liabilities that have or could have an economic value because of                  liabilities that are not subordinated should be fully recognised. /// For further details, please
                              generate cash-inflows or outflows should be considered taking into account current                     refer to CEA response to QIS 4 CfA.
                              accounting or taxation rules.
                              CEIOPS interpretation of "to a substantial degree" for characteristics 3 to 6 is that:
                              - for inclusion in tier 1 capital a hybrid capital instrument or subordinated liability must be
  V        C          7       able to be written down or converted into equity in times of stress, notwithstanding a possible        Clarification / guidance                                                                                Medium
                              later write up in case of subsequent profits;
                              - for inclusion in tier 2 capital (...)

                              The precise level of losses which would trigger conversion or write down of hybrid capital             The pre-determined trigger point should be linked to the MCR and not to the SCR, the latter
                              instruments and subordinated liabilities should be linked to the MCR.is still under discussion.        implying the likelihood to convert or write down would be higher. Currently, the trigger point in
  V        C          8                                                                                                                                                                                                                       High
                              For QIS4 purposes, participants are requested to classify items according to whether                   most of the bonds in the markets is linked to the Required Solvency Margin, which could be
                              conversion or write down is a contractual provision.                                                   compared to the MCR under the future Solvency II regime.
                              For each ancillary own fund item, participants are also requested to provide information on
                              the valuation basis. If an item is not valued at nominal value, y You are requested to explain
  V        D          3                                                                                                              Starting point for Solvency II is that all assets are valued at market value, not at nominal value.     Medium
                              why valuation is not at nominal value and provide a description of the valuation basis used
                              and the valuation assumptions made.
                              In order to facilitate completion of the spreadsheets, some examples are written below. These
                              examples are given in a purely indicative way as each item included in own funds must be
                                                                                                                            Makes clear that it is for the insurer to use their own judgement to determine how to classify
  V        E          1       assessed on its own merits based on the characteristics for classification. Insurers should                                                                                                                    Medium
                                                                                                                            own fund items, referring to the defined characteristics of the different tiers of capital
                              apply their own judgement to allocate own fund items according to the characteristics for
                              classification of capital items set out below (TS.V.E.2 to TS.V.E.6)
                              (…) · A net surplus on a insurer's (...) A net deficit on such a scheme is not included in own
  V        E          2                                                                                                              · If the obligation to meet the deficit ranks below policyholders it should be excluded.                 High
                              funds if the claims of participants to the scheme are (...)
                              (…) · A net surplus on an insurer‟s scheme for employee benefits, such as post-retirement               · It extends the interpretation given for the net deficit of a employee benefits scheme to other
  V        E          2       benefits, (...) . This rationale also applies to other subordinated liabilities whose creditors        subordinated liabilities such as the ones included in Article 286(1)(b) of the FD proposal. Low           Low
                              claims are subordinated to policyholders‟ interests.                                                   priority because section TS.V.E. is only dedicated to examples.
5/1/2010                                                                                                                                                                           6:58 PM                                                               WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                      Explanation / Rationale
         Sub-     Paragraph                                            Drafting suggestion                                                                                                                                                    priority
 area                                                                                                                                                                          for changes
        section   reference
                                                                                                                                      It is essential that issue date is used in connection with step up features as otherwise it will
                                  (...) · Non-cumulative fixed-term preference shares with a legal maturity duration of at least
                                                                                                                                      greatly affect the viability of hybrid capital instruments.
                                  10 years from the reporting date. (...)
                                                                                                                                      Please refer to CEA marketability paper in Annex.
                                  · Other hybrid capital instruments which fulfil the criterion of loss-absorbency in going
                                                                                                                                      The legal maturity of a hybrid is more relevant than the current effective duration in assessing
                                  concern with a legal maturity duration of at least 10 years from the reporting date. Any
  V        E           2                                                                                                              the protection afforded by a hybrid to policyholders. This is because the option to redeem is at       Very High
                                  interest step-ups must not apply before 10 years from the issue date reporting date and must
                                                                                                                                      company's discretion and subject to supervisor approval. In the adverse circumstances being
                                  not exceed the maximum of 100 basis points or 50% of the initial credit spread.
                                                                                                                                      considered the effective duration would be very much longer than the current effective duration
                                  · Subordinated liabilities which fulfil the criterion of loss-absorbency in going concern with a
                                                                                                                                      because under such circumstances the debt would not be redeemed.
                                  legal maturity duration of at least 10 years from the reporting date.
                                                                                                                                      Linked to comment on TS.V.E.3, TS.V.E.4, TS.V.I.8, TS.V.I.9, TS.V.I.10, TS.V.I.11.
                                  (...) · Subordinated l Liabilities subordinated to policyholders‟ interests which fulfil the
                                                                                                                                      To clarify the subordinated liabilities which should be considered in the determination of own
  V        E           2          criterion of loss-absorbency in going concern with a legal maturity duration of at least 10                                                                                                                 Medium
                                                                                                                                      funds.
                                  years from the reporting date.
                                  • Where statutory or contractual equalisation mechanisms are in place, the effects of which
                                  are not recognised in the calculation of technical provisions or capital requirement, the
  V        E           2                                                                                                        The full loss absorbancy should be taken into account.                                                          Low
                                  amount which can be distributed in the case of a stress is expected to materialise within one
                                  year is included in the excess of assets over liabilities.

                                                                                                                                      Linked to comment on TS.V.E.2, TS.V.E.4, TS.V.I.8, TS.V.I.9, TS.V.I.10, TS.V.I.11 ///
                                  (…) · Cumulative fixed-term preference shares with a legal maturity duration of at least 5          Please refer to CEA marketability paper in Annex.
                                  years from the reporting date.                                                                      It is essential that issue date is used in connection with step up features as otherwise it will
                                  · Other hybrid capital instruments with a legal maturity duration of at least 5 years from the      greatly affect the viability of hybrid capital instruments.    ///    The legal maturity of a hybrid
                                  reporting date. Any interest step-ups must not apply before 5 years from the issue reporting        is more relevant than the current effective duration in assessing the protection afforded by a
  V        E           3                                                                                                                                                                                                                     Very High
                                  date and must not exceed the maximum of100 50 basis points or 50% of the initial credit             hybrid to policyholders. This is because the option to redeem is at company's discretion and
                                  spread.                                                                                             subject to supervisor approval. In the adverse circumstances being considered the effective
                                  · Subordinated liabilities with a legal maturity duration of at least 5 years form the reporting    duration would be very much longer than the current effective duration because under such
                                  date.                                                                                               circumstances the debt would not be redeemed.            ///     Also it makes no sense to have
                                                                                                                                      more severe restrictions on step ups for tier 2 than tier 1 !!

                                                                                                                                      Linked to comment on TS.V.E.2, TS.V.E.3, TS.V.I.8, TS.V.I.9, TS.V.I.10, TS.V.I.11
                                  Basic own funds, tier 3                                                                             Please refer to CEA marketability paper in Annex.
                                  · Cumulative fixed-term preference shares with a legal maturity duration of less than 5 years       It is essential that issue date is used in connection with step up features as otherwise it will
                                  from the reporting date.                                                                            greatly affect the viability of hybrid capital instruments.
  V        E           4          · Other hybrid capital instruments with a legal maturity duration of less than 5 years from the     The legal maturity of a hybrid is more relevant than the current effective duration in assessing         High
                                  reporting date.                                                                                     the protection afforded by a hybrid to policyholders. This is because the option to redeem is at
                                  · Subordinated liabilities with a legal maturity duration of less than 5 years from the reporting   company's discretion and subject to supervisor approval. In the adverse circumstances being
                                  date.                                                                                               considered the effective duration would be very much longer than the current effective duration
                                                                                                                                      because under such circumstances the debt would not be redeemed.

                                  (...) As a consequence, only part of unbudgeted supplementary member calls can be classified
                                  in Tier 2 ancillary own funds, being calls, the recoverability of which is considered certain. For
                                                                                                                                     There's no rationale behind the number of 40 %. We think if such calls are regarded as certain
                                  QIS4, 40 % of the callable amount can be classified in Tier 2 ancillary own funds, and the rest
  V        E           5                                                                                                             they should qualify for Tier 2. In general, we think that splitting capital instruments needs to be      Medium
                                  in Tier 3 ancillary own funds. If relevant past experience shows that 95 % of a call are paid in
                                                                                                                                     well founded.
                                  normally, the split is 95 % to 5 % for Tier 2 respectively Tier 3.
                                  (...)

                                  For the reporting of intangible assets, participants are invited to refer to the technical
                                  specification on the valuation of assets and liabilities other than technical provisions.
                                  Intangible assets (including goodwill) should be valued at nil on an economic basis for
                                                                                                                                      We believe that the economic value of all assets must be included. Given that all risks are
                                  solvency purpose avoiding any double counting (e.g. in respect of future profits expected on
                                                                                                                                      explicitly allowed for when determining capital amounts there would be an element of double
                                  existing business). For information purposes, intangible assets should be reported, using
                                                                                                                                      counting if certain assets were excluded. We recommend that for the purposes of QIS4 exercise
                                  IFRS, grouped in four categories: 1) Goodwill on acquisition of participants 2) goodwill on
  V        F           1                                                                                                              the economic value of intangible assets is taken into account and companies are asked to                 High
                                  acquisition of business 3) brand names          4) other intangible assets (please specify their
                                                                                                                                      separately identify, quantify and describe the valuation process of any intangible assets so that
                                  nature)     /// We can take into account all kinds of elements registered or not in the balance
                                                                                                                                      the potential scale of the economic value associated with these assets can be assessed.
                                  sheet that contribute in a direct manner to increase or decrease the expected cash-flows (in-
                                                                                                                                      Linked to comment on TS.III.A & TS.VI.D.1
                                  flows and out-flows) i.e. Intangible assets such as formation investment, costs of research
                                  and development, concessions, patents, licenses, others operating activities in pension fund
                                  management etc...

                                                                                                                                      In line with the previous CEA's position on available capital expressed on the "CEA Working
                                  On the "Key Features" column of the table:                                                          Paper on the Total Balance Sheet Approach", and since "the solvency system aims at the
                                  (1) The total amount of the item must be subordinated to the interests of policyholders and         protection of policyholders and beneficiaries" , our preliminary thoughts on this matter lead us to
  V        I           8                                                                                                                                                                                                                       High
                                  all other senior creditors creditors who, in a winding up situation, rank equal or above            the conclusion that the subordinated liabilities mentioned in Article 86º of the FD are those
                                  policyholders.                                           (...)                                      liabilities that are subordinated to policyholders' interests.
                                                                                                                                      Linked to comment on TS.V.I.9, TS.V.I.11

                                                                                                                                      · Linked to comment on TS.V.E.2, TS.V.E.3, TS.V.I.4, TS.V.I.9, TS.V.I.10, TS.V.I.11
                                  On the "Key Features" column of the table:
                                                                                                                                      Please refer to CEA marketability paper in Annex.
                                  (...) (3) the item: must be undated or of sufficient legal maturity duration in relation to the
                                                                                                                                      It is essential that issue date is used in connection with step up features as otherwise it will
                                  insurance obligations it covers (i.e. must have a legal maturity duration of at least 10 years
                                                                                                                                      greatly affect the viability of hybrid capital instruments.
                                  from reporting date); and (...)
  V        I           8                                                                                                              The legal maturity of a hybrid is more relevant than the current effective duration in assessing         High
                                  (4) the item must be · free from any requirements to redeem the item; · free from any
                                                                                                                                      the protection afforded by a hybrid to policyholders. This is because the option to redeem is at
                                  incentives to redeem (i.e. step-ups must not apply before 10 years from issue reporting date
                                                                                                                                      company's discretion and subject to supervisor approval. In the adverse circumstances being
                                  and must not exceed a prescribed level (the maximum of 100 bsp or 50% of initial credit
                                                                                                                                      considered the effective duration would be very much longer than the current effective duration
                                  spread)
                                                                                                                                      because under such circumstances the debt would not be redeemed.

                                  (5) at a pre-determined trigger point based on the firm‟s MCR, any coupons must be: able to         · As market standard, the deferred interests should be paid with the proceeds of sales of stocks
                                  be cancelled; or able to be deferred for an indefinite term, where coupons are non cash             or other junior or pari passu securities and not only with stocks underwritten by bond investors.
                                  cumulative and can only be settled in stock or new Issuer securities ranking junior to or pari      Most of the bond investors indeed can not invest in equity and therefore this prevent many fixed
  V        I      8 (continued)   passu with the issued Hybrid and having features at least similar to the Hybrid. Please note,       income investors from participating in the market of hybrid or reduce their appetite for this kind
                                  that this is a principle not a rule. Consequently existing instruments may be eligible if the       of instruments.                                                                   · On the other
                                  participant is able to justify this on basis of the economic character of the instrument.           hand, a pre-determined trigger point based on the firm's MCR cannot contractually be realised as
                                  (...)                                                                                               long as the MCR is not defined. Especially instruments already given will not include the
                                                                                                                                      possibility to be adjusted.
5/1/2010                                                                                                                                                                        6:58 PM                                                             WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                   Explanation / Rationale
         Sub-     Paragraph                                        Drafting suggestion                                                                                                                                                   priority
 area                                                                                                                                                                       for changes
        section   reference
                              On the "Items" column of the table:
                              The excess of assets over liabilities:                                                               Called up common equity is tier 1 capital ex article 87 in connection with article 90 and should
  V        I          8                                                                                                                                                                                                                  Medium
                              · paid up and called up common equity (common share capital, initial fund) with redemption           be listed as such to avoid unnecessary obscurities.
                              subject to prior supervisory approval, (…)
                                                                                                                                   Linked to comment on TS.V.I.8, TS.V.I.11
                              On the "Key Features" column of the table:                                                           In line with the previous CEA's position on available capital expressed on the "CEA Working
                              (1) The total amount of the item must be subordinated to the interests of policyholders and          Paper on the Total Balance Sheet Approach", and since "the solvency system aims at the
  V        I          9                                                                                                                                                                                                                   High
                              all other senior creditors creditors who, in a winding up situation, rank equal or above             protection of policyholders and beneficiaries" , our preliminary thoughts on this matter lead us to
                              policyholders.                                           (...)                                       the conclusion that the subordinated liabilities mentioned in Article 86º of the FD are those
                                                                                                                                   liabilities that are subordinated to policyholders' interests.

                                                                                                                                   Linked to comment on TS.V.E.2, TS.V.E.3, TS.V.I.4, TS.V.I.8, TS.V.I.10, TS.V.I.11.
                              On the "Key Features" column of the table:
                                                                                                                                   Please refer to CEA marketability paper in Annex.
                              (...) (3) the item: · must be of sufficient legal maturity duration in relation to the insurance
                                                                                                                                   It is essential that issue date is used in connection with step up features as otherwise it will
                              obligations it covers (i.e. must have a legal maturity duration of at least 5 years from
                                                                                                                                   greatly affect the viability of hybrid capital instruments.
                              reporting date); and (...)
                                                                                                                                   The legal maturity of a hybrid is more relevant than the current effective duration in assessing
  V        I          9       (4) the item must be · free from any requirements to redeem the item; · free from any                                                                                                                       High
                                                                                                                                   the protection afforded by a hybrid to policyholders. This is because the option to redeem is at
                              incentives to redeem (i.e. step-ups must not apply before 5 years from issue reporting date
                                                                                                                                   company's discretion and subject to supervisor approval. In the adverse circumstances being
                              and must not exceed a prescribed level (the maximum of 100 bsp or 50% of initial credit
                                                                                                                                   considered the effective duration would be very much longer than the current effective duration
                              spread) (...)
                                                                                                                                   because under such circumstances the debt would not be redeemed.
                                                                                                                                   Also it makes no sense to have more severe restrictions on step ups for tier 2 than tier 1 !!

                                                                                                                                   Linked to comment on TS.V.E.2, TS.V.E.3, TS.V.I.4, TS.V.I.8, TS.V.I.10, TS.V.I.11
                              On the "Items" column of the table:                                                                  Please refer to CEA marketability paper in Annex.
                              · Hybrid capital instruments with a legal maturity duration of at least 5 years from reporting       It is essential that issue date is used in connection with step up features as otherwise it will
                              date: e.g. · cumulative preference shares, · others (to be specified by participants) provided       greatly affect the viability of hybrid capital instruments.
  V        I          9       they posses the key features in the preceding column.                                                The legal maturity of a hybrid is more relevant than the current effective duration in assessing       High
                              · Subordinated liabilities with a legal maturity duration of at least 5 years from reporting date,   the protection afforded by a hybrid to policyholders. This is because the option to redeem is at
                              e.g. · fixed term subordinated liabilities, · others (to be specified by participants) provided      company's discretion and subject to supervisor approval. In the adverse circumstances being
                              they posses the key features in the preceding column.                                                considered the effective duration would be very much longer than the current effective duration
                                                                                                                                   because under such circumstances the debt would not be redeemed.
                              On the "Key Features" column of the table:                                                           Linked to comment on TS.V.E.2, TS.V.E.3, TS.V.I.4, TS.V.I.8, TS.V.I.9, TS.V.I.11
                              (...) (3) the item: · must be undated or of sufficient legal maturity duration in relation to the    Please refer to CEA marketability paper in Annex.
                              insurance obligations it covers (i.e. must have a legal maturity duration of at least 10 years       It is essential that issue date is used in connection with step up features as otherwise it will
                              from reporting date); and (...)                                                                      greatly affect the viability of hybrid capital instruments.
  V        I         10       (4) the item must be · free from any requirements to redeem the item; · free from any                The legal maturity of a hybrid is more relevant than the current effective duration in assessing       High
                              incentives to redeem (i.e. step-ups must not apply before 10 years from issue reporting date         the protection afforded by a hybrid to policyholders. This is because the option to redeem is at
                              and must not exceed a prescribed level (the maximum of 100 bsp or 50% of initial credit              company's discretion and subject to supervisor approval. In the adverse circumstances being
                              spread)                                                                                              considered the effective duration would be very much longer than the current effective duration
                              (...)                                                                                                because under such circumstances the debt would not be redeemed.

                                                                                                                                   Linked to comment on TS.V.I.8, TS.V.I.11
                              On the "Key Features" column of the table:
                                                                                                                                   In line with the previous CEA's position on available capital expressed on the "CEA Working
                              (1) The total amount of the item must be subordinated to the interests of policyholders and
                                                                                                                                   Paper on the Total Balance Sheet Approach", and since "the solvency system aims at the
  V        I         11       all other senior creditors creditors who, in a winding up situation, rank equal or above                                                                                                                    High
                                                                                                                                   protection of policyholders and beneficiaries" , our preliminary thoughts on this matter lead us to
                              policyholders.
                                                                                                                                   the conclusion that the subordinated liabilities mentioned in Article 86º of the FD are those
                              (...)
                                                                                                                                   liabilities that are subordinated to policyholders' interests.

                                                                                                                              Linked to comment on TS.V.E.2, TS.V.E.3, TS.V.I.4, TS.V.I.8, TS.V.I.9, TS.V.I.10
                                                                                                                              Please refer to CEA marketability paper in Annex.
                              On the "Items" column of the table:                                                             It is essential that issue date is used in connection with step up features as otherwise it will
                              · Hybrid capital instruments with a legal maturity duration of less than 5 years from reporting greatly affect the viability of hybrid capital instruments.
  V        I         11       date: e.g. · cumulative preference shares, · others (to be specified by participants) .         The legal maturity of a hybrid is more relevant than the current effective duration in assessing            High
                              · Subordinated liabilities with a legal maturity duration of less than 5 years from reporting   the protection afforded by a hybrid to policyholders. This is because the option to redeem is at
                              date, e.g. · fixed term subordinated liabilities, · others (to be specified by participants).   company's discretion and subject to supervisor approval. In the adverse circumstances being
                                                                                                                              considered the effective duration would be very much longer than the current effective duration
                                                                                                                              because under such circumstances the debt would not be redeemed.

                              The principle of substance over form should be followed considered in determining how risks
                              are to be treated. For instance, where claims are payable in the form of an annuity (for             It is very impractical and difficult to understand results when for example risks associated with
                              example in motor insurance), agreed claims should normally be part of SCRlife determined             non-life products (e.g. Bodily injury claims arising from the Motor Third Part Liability portfolio)
                              with actuarial techniques which are commonly used for life insurance products (e.g. use of           are reported under the module of life risk. Companies would regard the risk of increased claims
  VI       A          3                                                                                                                                                                                                                   High
                              mortality or disability tables). The results should for practicality reasons be disclosed under      as part of non-life risk rather than life risk, even though technically "life" methods are used to
                              the non-life risk module. life technical unless If the impact of the associated risk on the risk     evaluate these risks. We agree that "life" techniques MAY be more appropriate to evaluate the
                              capital charges for the individual risk modules can be expected to be negligible, the traditional    risk, but this should be a decision left to the company.
                              non-life techniques may be used.

                                                                                                                               (linked to II.E.1 and XII.A.2.)                                    We do not understand the
                                                                                                                               reclassification of "accident" and "workers compensation" to section "health" in calculation of
                              The analysis of non-life underwriting risk will require a segmentation of the participant‟s non- the SCR. This approach is inconsistent to the calculation of the non-life CAT-module. Here
                              life insurance business into individual lines of business (LoBs). This follows the segmentation "accident" and "workers compensation" are included in the CAT calculations. Moreover,
                              specified for the valuation of non-life technical provisions, as laid out in paras. TS.II.E.1 to "accident" and "workers compensation" are included in the MCR-formula (TS.XV.C.4.) , which
  VI       B          1                                                                                                                                                                                                                   High
                              TS.II.E.8, except that the first three lines of business are for SCR calculation purposes        implies that the SCR and MCR for non-life are not comparable. This will also lead to further
                              classified in the specific health underwriting risk module, together with German and Austrian practical and presentational difficulties. For example, typical non-life insurers with "accident"
                              long-term health that is on a similar technical basis to that of life assurance.                 products will need to carry out calculations with the "health" module. /// Furthermore, these
                                                                                                                               products are not pursued on a similar technical basis to that of life insurance and should
                                                                                                                               therefore not fall within the "health" module, in accordance to the Directive Article 104,4.
5/1/2010                                                                                                                                                                         6:58 PM                                                               WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                    Explanation / Rationale
         Sub-     Paragraph                                        Drafting suggestion                                                                                                                                                     priority
 area                                                                                                                                                                        for changes
        section   reference
                              VI.C.1: In QIS3, participants were invited to supply, as additional information, an overall
                              SCR estimate where the assets to be taken into consideration were limited to those required
                                                                                                                                    We believe that while stressing all assets should represent the default method, companies
                              to back the total of the technical provisions and the SCR. This means that no capital charge
                                                                                                                                    should be given the possibility not to stress free asstes. Given that certain related other issues
  VI       C         1, 2     would be applied in respect of free assets in excess of the SCR. /// VI.C. 2: This testing                                                                                                                     High
                                                                                                                                    remain unresolved the CEA believes that this additional information should be collected as it be
                              proposal is not in line with the Framework Directive Proposal, which is based on a total
                                                                                                                                    useful in the ultimate resolution of these issues.
                              balance sheet approach. Therefore, QIS4 no longer includes this testing proposal. The same
                              approach is maintained in QIS 4.

                                                                                                                                    Linked to comment on TS.III.A & TS.V.F.1
                                                                                                                                    We believe that the economic value of all assets must be included. Given that all risks are
                              For the calculation of the SCR, when participants are requested to input the value of assets,
                                                                                                                                    explicitly allowed for when determining capital amounts there would be an element of double
                              in accordance to the specifications on the valuation of assets and liabilities other than
  VI       D          1                                                                                                             counting if certain assets were excluded. We recommend that for the purposes of QIS4 exercise            High
                              technical provisions, intangible assets (including goodwill) are to be valued at nil on an
                                                                                                                                    the economic value of intangible assets is taken into account and companies are asked to
                              economic basis.
                                                                                                                                    separately identify, quantify and describe the valuation process of any intangible assets so that
                                                                                                                                    the potential scale of the economic value associated with these assets can be assessed.
                              In cases where the mother owns more than 20% of another undertaking part of the same
                              group, for which the "Solvency II" Framework Directive Proposal is applicable (called "the
                              subsidiary"):    - The calculation of the SCR of the mother shall be carried out using a "look-
                              through" approach, on a consolidated basis including the subsidiaries. - If the undertaking
                              is not able to calculate the SCR by consolidating the participation, then it will apply a
                              deduction- aggregation method.

                                                                                                                                    There is no real benefit in having a complex look through approx for participations at the solo
                               For the purposes of calculating solo SCRs all participations (including intra-group) should be
                                                                                                                                    level. Doing so effectively treats the solo as a sub-group and Solvency II is seeking to avoid sub-
  VI       E          2       treated in the same way as other equity holders, i.e. treated as an asset, provided that the                                                                                                                   High
                                                                                                                                    group supervision. More complex approaches for participations are only appropriate at the group
                              participated undertaking is included in he group Solvency calculation of the group to which
                                                                                                                                    level. For further details, please refer to CEA response to QIS 4 CfA.
                              the participating undertaking belongs.

                              If this is not the case, the following specifcation applies: In cases where the participating
                              undertaking mother owns more than 20% of another undertaking part of the same group, for
                              which the "Solvency II" Framework Directive Proposal is applicable (called "the subsidiary"):
                              - The calculation of the SCR of the participating undertaking of the mother shall be carried out
                              using a "look-through" approach, on a consolidated basis including the participated
                              undertaking Article 103(7) of the Framework Directive Proposal, this option SCR by
                              In line with subsidiaries. - If the undertaking is not able to calculate the is intended to           The aim is to determine the 99.5th percentile VaR for underwriting risk, i.e. the change in the
                              allow the use of internal, insurer specific data within the design of the standard formula            technical provisions consistent with this (the assets will remain unchanged). For this purpose it
  VI       F          1       calculation of the underwriting risk capital charges.This option can be taken where there is          is not necessary to assume the distribution that CEIOPS has used to derive the 99.5th percentile         High
                              the same underlying distribution assumption of the data and the same statistical tests are            stresses for the standard approach. What is important is that the 99.5th percentile shocks that
                              applied. If another distribution was used or different statistical tests, then a partial internal     companies use is consistent with their experience.
                              model would be required.
                              Scope of application of undertaking-specific parameters:
                              Logically, it follows that this method can be used if data quality standards are set and              Link TS.VI.F.3          This needs to be aligned with Article 103(7) of the Directive, which also
                              respected, as well as an explicit standardized method of calculation (distribution assumption         allows this for life companies as well as non-life and health ones to "… within the design of the
                              and statistical tests). Given the current availability of explicit standardized methods, the use of   standard formula, replace a subset of its parameters by parameters specific to the undertaking
  VI       F          2       undertaking-specific parameters is limited in QIS3 to certain parameters of the non life and          concerned when calculating the life, non-life and special health underwriting modules". Also,          Medium
                              health underwriting modules.                                                                          what is important is that the 99.5th percentile shocks that companies use is consistent with their
                              The scope of the calculation of the undertaking-specific parameters extends to life, non-life         experience and not that it necessarily conforms with a standard distribution prescribed by
                              and health business subject to companies having sufficient data to make reasonable                    CEIOPS.
                              assumptions.

                              However, this does not preclude a more extensive application to other parameters, including
                              in the "life" module in the future. CEIOPS would welcome participants‟ comments on potential Need to understand what companies have done and why. Also, what is important is that the
  VI       F          3       alternative standardized methods and the way they could lead to alternative sets of          99.5th percentile shocks that companies use is consistent with their experience and not that it                   High
                              undertaking-specific parameters. Participants are requested to describe the approach used to necessarily conforms with a standard distribution prescribed by CEIOPS.
                              derive undertaking-specific parameters and any underlying assumptions.
  VI       F        4 to 7    DELETE                                                                                                No longer needed                                                                                         High

                              Simplified methods and statistical techniques may be used if the criteria outlined below are
                              satisfied. These criteria are required to be applied where they are expected to be met. For the The CEA supports the availability of simplified methods and testing them in QIS4. However, the
  VI       G          5       avoidance of doubt, it is not necessary to calculate the diversified SCR using the standard     CEA needs to see the results of QIS4 before commenting on specific simplifications and the                     High
                              approach in order to determine whether the absolute / relative criteria (to the overall SCR)    suitability of restricting their use via relative and/or absolute criteria.
                              are met - they are to be applied on a best efforts basis.

                              For with-profits business in life insurance … risk absorption of future profit sharing. This is
                              achieved by a three step "bottom up" approach as follows: one step approach whereby the               Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                              capital amount (e.g. nMktint) is calculated net of the effect of risk absorption from profit          approach was introduced in QIS3 in response to concerns over non linearity. However, it
  VI       H          1                                                                                                                                                                                                                    Very High
                              sharing business, i.e. there is no longer the need to calculate KC factors. Where companies           involves a significant calculation burden on companies and will not address any linearity
                              suspect that there may be significant non linear effects they are required to use the                 concerns as effectively as the alternative approach outlined in TS.VIII.C7.
                              alternative method described in TS.VIII.C7

                                                                                                                                    Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                    approach was introduced in QIS3 in response to concerns over non linearity. However, it
  VI       H        2 to 7    DELETE                                                                                                                                                                                                       Very High
                                                                                                                                    involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                    concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                    TS.III.A, TS.V.B.4 and TS.VIII.C5 are inconsistent and confusing. It is essential that the
                              Add guidance on:                                                                                      treatment of deferred tax is clarified. Deferred tax liabilities that are subordinated to
  VI       H          7       Adjustment for risk mitigating properties of non subordinated future taxes.                           policyholders should not be included in the liabilities. The risk absorbing features of deferred tax   Very High
                                                                                                                                    liabilities that are not subordinated should be fully recognised. /// For further details, please
                                                                                                                                    refer to CEA response to QIS 4 CfA.
5/1/2010                                                                                                                                                                      6:58 PM                                                                WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                 Explanation / Rationale
         Sub-     Paragraph                                        Drafting suggestion                                                                                                                                                   priority
 area                                                                                                                                                                     for changes
        section   reference
                                                                                                                                 This module is not in line with the draft directive (See articles 103.1 and 104.4. in the draft
                                                                                                                                 directive.) as products such as workers compensation ("WC") or accident, which are not pursued
                                                                                                                                 on a life basis.    /// In addition there are practical difficulties if SCR calculations for products
                                                                                                                                 such as for Motor TPL and WC, although having similar characteristics, need to be reported in
                                                                                                                                 different risk modules and partly in different ways. For example, according to our understanding,
                                                                                                                                 disability risk should be applied for WC annuities but not for Motor TPL annuities.
                              Apply the same classification to QIS3, which is in line with the framework directive. Hence        Further, in TS.XII.G.2., WC non-annuities should be split into "Stan-dard non-life type of
 XII                                                                                                                                                                                                                                       High
                              move the modules of "accident" and "workers compensation" to the non-life module.                  liabilities" and "Regular and recurrent benefits on a (generally) long-term basis" (long-term basis
                                                                                                                                 = until the death as said in the last sentence?). /// Already pointed out under QIS 3 we can
                                                                                                                                 see no reason to apply revi-sion risk for Motor TPL or WC, and now also disability risk for WC.
                                                                                                                                 For example for Motor TPL these risks are already accounted for under NLpr when the IBNR (i.e.
                                                                                                                                 the non-annuities) is stressed. /// Furthermore there are inconsistencies with the non-life CAT
                                                                                                                                 calculations and the MCR calculations ///
                                                                                                                                 Linked to comments on TS.VI.A.3 and TS.VI.B.1

                                                                                                                                 Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                 approach was introduced in QIS3 in response to concerns over non linearity. However, it
 VII       A          4       Delete references to KC                                                                                                                                                                                    Very High
                                                                                                                                 involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                 concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                 This is only be a possibility if management policies etc would be allowed to reduce certain risks.
 VII       A          4       Delete: the operational risk charge also addresses the risk of risk mitigation failure.            And if the operational risk charge were risk sensitive. It is not, this sentence should be left out.    Medium
                                                                                                                                 Indeed, in VII.B.6, processes and controls are not allowed for risk mitigation.
                                                                                                                                 In our view, most risk mitigation instruments are not recognized appropriately in QIS 4. The
                                                                                                                                 reasons for this originates from the variety and complexity of ways risk mitigation can and
                                                                                                                                 should be used to reduce an insurer‟s risk. This may never be appropriately reflected by any
                                                                                                                                 standard approach. An inappropriate recognition of risk mitigation, however, does not only lead
                                                                                                                                 to a SCR not reflecting the insurer‟s risk situation properly, it may also perversely discourage
                                                                                                                                 state of the art risk management practices. In those cases the use of partial internal models
                              In cases where a material share of the risk mitigation effect within one risk module or sub-       could be explicitly allowed to especially reflect any kind of risk mitigation. This underlines the
                              risk module is not appropriately captured by the standard approach, a partial internal model       need to reduce obstacles and to define clear principles for the use of an (partial) internal model
 VII       A          5                                                                                                                                                                                                                    High
                              should be used to calculate the respective capital requirement for the respective risk module      when risk mitigation is assessed under Solvency II.
                              or sub-risk.                                                                                       Some examples of insufficient recognition of risk mitigation are:
                                                                                                                                 a) Non-proportional non-life reinsurance increases instead of decreases the non-life premium
                                                                                                                                 risk as the volatility of the net loss ratios is increased when the cover has not been affected in
                                                                                                                                 the past.
                                                                                                                                 b) Risk mitigation may not be limited to QIS 4 segmentation.
                                                                                                                                 c) Risk mitigation usually affects the modelling itself: As risk mitigation can have a significant
                                                                                                                                 impact on an insurer‟s risk profile, assumptions made in QIS 4 like e.g. non-life premium and
                              The allowance for risk mitigating effects in the standard formula is restricted to instruments     reserve risk being log-normally distributed can become inappropriate.
                                                                                                                                 Link TS.II.D.44       Needs to be consistent with the recognition of risk mitigation tools. Where a
                              except where processes and controls that the company has in place to manage investment             firm has processes and practices to dynamically replicate options these should be recognised.
 VII       B          6       risk are part of a firm's integrated principles and practice processes and controls such as                                                                                                                Medium
                                                                                                                                 Examples include dynamic replication strategies to manage investment risk on variable annuity
                              dynamic hedging strategies, e.g. to dynamically replicate options as part of variable annuity      products and where companies are uses similar approaches to manage guarantee costs.
                              hedging strategies.
                              The sentence restricting the use of financial protection .. BBB should be removed.
                                                                                                                                 Financial protection should also be allowed for when granted by non-rated financial institutions.
                              As a general rule, when the insurer applies the standard
                              calculation for a certain risk module, only financial protection
                              provided by entities rated BBB or better will be considered in
                              the assessment of SCR. All financial protection provided by all entities should be considered in
 VII       F          2       the assessment of the SCR, provided a capital charge for their Counterparty Default Risk is                                                                                                                  High
                              taken into account in the relevant sub-risk module (Reference TS.X.). In the event of the
                              default, insolvency
                              or bankruptcy of the provider of the financial risk mitigation
                              instrument – or other credit event set out in the transaction
                              document – the financial risk mitigation instrument should be
                              capable of liquidation in a timely manner or retention.
                                                                                                                                 It should be rather obvious that the risk for premium insufficiency should depend on the
                                                                                                                                 relationship between premium income and expenses and losses. It may look like that there is an
                                                                                                                                 underlying assumption that the combined ratio for all lines of business on average equals 100
                                                                                                                                 percent so the only risk we have to consider is the 1 into 200 event for exceeding the average
                                                                                                                                 combined ratio (of 100 percent). The non-life insurance companies will on average have to make
 VIII      A          4       The SCR is determined as: SCR = BSCR + SCRop - expected profits/losses non-life business                                                                                                                     High
                                                                                                                                 a profit on the underwriting result. The fact that an insurance company on average (over time)
                                                                                                                                 will have a combined ratio below 100 (make a profit) is not taken into account when calculating
                                                                                                                                 the SCR-requirement for premium risk. In order to do that the level of the combined ratio have
                                                                                                                                 to taken into account and not just the variation around the combined ratio. One way to do this is
                                                                                                                                 to allow for future profit and losses in non-life insurance.

                                                                                                                                Link TS.VIII.B4 Operational risk is widely accepted as being largely uncorrelated with other risks.
                              The parameters and assumptions used for the calculation of the SCR are intended to reflect a
                                                                                                                                As it is not included within the correlation matrix approach (our preferred approach) its
                              VaR risk measure (calibrated to a confidence level of 99.5%) and a time horizon of one year.
 VIII      A          5                                                                                                         calibration should reflect this, i.e. there should be a lower, stand-alone capital charge. CEIOPS          High
                              The calibration of SCROP is lower than that used for QIS3 to implicitly allow for diversification
                                                                                                                                should disclose how the operational risk capital charge has been calibrated and implicitly allow
                              effects that are not captured in the correlation matrix aggregation approach.
                                                                                                                                for diversification effects by reducing the capital charge compared to QIS3
 VIII      B          2                                                                                                          Please provide more guidance on what is meant by "annual expense".                                        High
 VIII      B          4       Opnlul Oplnul = ...                                                                                Link TS.VIII.A5 - see above                                                                             Medium

                                                                                                                                 Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                 approach was introduced in QIS3 in response to concerns over non linearity. However, it
 VIII      C        2&4       Delete references to KC                                                                                                                                                                                    Very High
                                                                                                                                 involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                 concerns as effectively as the alternative approach outlined in TS.VIII.C7.

 VIII      C          4       Typo - "0,25" should be "0.25" in the entry for row 6 column 5                                     TYPO                                                                                                      Low
5/1/2010                                                                                                                                                                             6:58 PM                                                                WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                       Explanation / Rationale
         Sub-     Paragraph                                            Drafting suggestion                                                                                                                                                      priority
 area                                                                                                                                                                           for changes
        section   reference
                                                                                                                                       TS.III.A, TS.V.B.4 and TS.VIII.C5 are inconsistent and confusing. It is essential that the
                                  According to Art. 106 of the Framework Directive Proposal, the SCR should take into account
                                                                                                                                       treatment of deferred tax is clarified. Deferred tax liabilities that are subordinated to
                                  the loss absorbing capacity of deferred taxes for unexpected losses. Due to the variety of tax
 VIII      C           5                                                                                                               policyholders should not be included in the liabilities. The risk absorbing features of deferred tax Very High
                                  regimes across the Member States, participants are invited to comment on how this specific
                                                                                                                                       liabilities that are not subordinated should be fully recognised. /// For further details, please
                                  risk mitigation mechanism would apply in their Member State.
                                                                                                                                       refer to CEA response to QIS 4 CfA.

                                  The alternative method may be used by the participant provided it can demonstrate they can           The requirement to "demonstrate" could be interpreted as having to do both methods in order to
 VIII      C           7                                                                                                                                                                                                                        Medium
                                  justify that it is likely to provide a more accurate estimate of the ...                             provide this demonstration

                                  DELETE "Therefore, the capital charges need to be calculation either … the participant should
                                  still make the default calculation in this case and disclose the results)" and REPLACE with
                                  "The default SCR and KC calculations are therefore needed as inputs for the spreadsheet,
 VIII      C           7                                                                                                           This explanation is very confused and misleading and as a result unhelpful                                   Medium
                                  which will then provide a combined scenario (i.e. lower stresses, but for all risk factors) that
                                  can be used to derive the SCR capital amount in one go without needing to aggregate
                                  individual capital amounts using a correlation matrix approach.

                                  Where there is some doubt the participant should choose the method delivering the highest
 VIII      C           7          SCR. In case … justify its choice. Participants should use the alternative method where they         Current text is confusing.                                                                               Medium
                                  believe it will give more appropriate results and explain why they believe this.

                                                                                                                                       The input information required to calculate the market risk has been supplemented with the risk
                                                                                                                                       mitigating effect of future profit sharing for concentration risk (KCconc; see also IX.G.15 –
                                                                                                                                       IX.G.17). From our point of view this seems to be a reasonable measure, since it corresponds to
  IX       A           2          DELETE footnotes 23 and 25                                                                           the overall concept of the market risk module, where the different sub-risks are subject to their          Low
                                                                                                                                       respective risk mitigating effect of future profit sharing. However, footnotes no. 23 and 25
                                                                                                                                       (KCconc is defined to be zero) is contradictory to the description given in IX.G.17. This might be
                                                                                                                                       a QIS3-relict that should have been deleted.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       A        2, 3 & 5      Delete references to KC                                                                                                                                                                                       Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       B         3&8          Delete references to KC                                                                                                                                                                                       Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       B         6&7          DELETE                                                                                                                                                                                                        Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.
                                  In order to determine the interest rate scenario effect on the value of assets and liabilities
                                  other than technical provisions, a simplified calculation according to the duration approach
                                  may be made if the following conditions are met:a simplified calculation whereby changes in
                                  value are estimated as the yield change * the relevant modified duration seperately for assets
                                  and liabilities may be made if the following conditions are met
                                  a) The duration approach is proportionate to nature, scale and complexity of the risks
                                                                                                                                       It is essential that the change in value of the technical provisions is reflected. Also, the "duration
                                  supported by the insurance or reinsurance undertaking.
                                                                                                                                       approach" referred to needs to be defined.
  IX       B           9          b) The cash-flows of the item are not interest-rate sensitive, in particular the item has no                                                                                                                  Medium
                                                                                                                                       Please refer to CEA guidance of "Proxies for the interest rate risk sub module" paper
                                  embedded options.
                                                                                                                                       in Annex.
                                  c) The convexity of the cash-flows of the item does not lead to a material error under the
                                  duration approach
                                  The shocks are parallel yield stress, at all durations of:
                                  Downward shock: - 40%
                                  Upward shock: + 55 %


                                  Equity risk arises from the level or volatility of market prices for equities. Exposure to equity
                                                                                                                                       The origin of the equity risk does not include an exemption for policies where policyholders bear
  IX       C           1          risk refers to all assets and liabilities whose value is sensitive to changes in equity prices and                                                                                                            Medium
                                                                                                                                       investment risks (comparable to IX.B.1). This information needs to be added.
                                  which are not allocated to policies where policyholders bear the investment risk.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       C           8          Delete references to KC                                                                                                                                                                                       Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       C      18 to 20 incl   DELETE                                                                                                                                                                                                        Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                  For the determination of the capital charge for equity risk, the following indices are
                                  considered:

                                                                                                                                       Link TS.IX.C.13 The sole criteria for assuming a higher shock should be that the underlying
                                  No. Index
  IX       C           9                                                                                                               investment is inherently more volatility than global equities. Whether or not an asset is listed or        High
                                  1 Global
                                                                                                                                       not does not change its inherent volatility.
                                  2 Other
                                  Footnote 31 Comprising emerging markets, non-listed equities, private equity, hedge funds
                                  and other alternative investments
5/1/2010                                                                                                                                                                            6:58 PM                                                               WORKING DRAFT


          TS           TS
  TS                                                                                                                                                                       Explanation / Rationale
         Sub-      Paragraph                                           Drafting suggestion                                                                                                                                                    priority
 area                                                                                                                                                                           for changes
        section    reference
                                   For the determination of this capital charge, all equities and equity type exposures have to be     This paragraph has been supplemented with the exclusion of the capital charge for equity equal
                                   taken into account, including private equity as well as certain types of alternative investments,   to more than 20 % of an undertaking (case of a deduction-aggregation method; see VI.E.1 on
  IX       C            13         excluding equity owned in an undertaking part of the same group for which the "Solvency II"         page 116). Apart from the fact that the underlying threshold appears to be found on arbitrary            High
                                   Framework Directive Proposal is applicable, representing more than 20 % of the capital of this      grounds, it does not correspond to clear-cut economic experiences. On this account we suggest
                                   undertaking when using the deduction aggregation method.                                            to cancel the introduction of this kind of exemption with respect to the SCR-calculation.

                                                                                                                                       We note that the alternative investments included here may well have relatively low correlations
                                                                                                                                       with each other and conventional equities. The approach proposed does not recognise the
                                                                                                                                       diversification benefits potentially available on these assets. However, we also recognise that
  IX       C            14                                                                                                             this will only be an issue for relatively few of the companies using the standard approach. As           Low
                                                                                                                                       such we are not advocating any changes and instead recommend that flexibility is applied in
                                                                                                                                       Pillar II when assessing such companies, i.e. it is recognised that the standard approach is likely
                                                                                                                                       to be conservative in this regards.
                                   Additionally, the overall result of the calculation should also
                                   be determined under the condition that the participant is able to
                                   vary its assumptions on future bonus rates in response to the
  IX       C            19         shock being tested.                                                                              Copied from QIS 3, also there incorrect.                                                                    Low
                                   The risk mitigating effect KCeq of future profit sharing for
                                   interest rate equity risk is determined as the difference between these
                                   two calculations.
                                   Property risk arises from the level or volatility of market prices of property and which are not The origin of the property risk does not include an exemption for policies where policyholders
  IX       D            1                                                                                                                                                                                                                     Medium
                                   allocated to policies where policyholders bear the investment risk.                              bear investment risks (comparable to IX.B.1). This information needs to be added.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       D          3&8          Delete references to KC                                                                                                                                                                                    Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       D        6 to 8 incl    DELETE                                                                                                                                                                                                     Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       E      second 1 and 7   Delete references to KC. Also note that the numbering of the paragraphs is wrong                                                                                                                           Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       E            6          DELETE                                                                                                                                                                                                     Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                The capital charge is just the sum of a product calculated at the level of each exposure. Hence
                                                                                                                                the spread risk module assumes that the credit events are 100% correlated between all credit
                                   “Government bonds are exempted from an application of this module. The exemption relates
                                                                                                                                ratings. We note that this is inconsistent with the approach for concentration which is also built
                                   to borrowings by the national government, or guaranteed by the national government, of an
  IX       F            3                                                                                                       around credit events and assumes that they are uncorrelated (TS.IX.G.17). There is also no                    Medium
                                   OECD or EEA state, issued in the currency of the government. Assets invested associated with
                                                                                                                                account of the change in value in the liabilities - there may be cases where the value of the
                                   unit linked contracts should also be excluded.”
                                                                                                                                liabilities is also affected - like in the case of the equity stress. At the very least the stress
                                                                                                                                should be specified such that unit linked assets are excluded.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       F          6&7          Delete references to KC.                                                                                                                                                                                   Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                       Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                       approach was introduced in QIS3 in response to concerns over non linearity. However, it
  IX       F         10 to 12      DELETE                                                                                                                                                                                                     Very High
                                                                                                                                       involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                       concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                       Need a relatively pragmatic calculation for what in most cases is likely to be relatively small
                                                                                                                                       component of the SCR, e.g. a company could have numerous reinsurance arrangements and
                                   Gross SCR u/w = Aggregate SCR for underwriting risks calculated according to the standard
                                                                                                                                       doing lots of separate calculations adds very little extra accuracy but could significantly increase
  X        A            3          formula, but disregarding the risk mitigating effect of reinsurance contracts (or SPV) (and                                                                                                                  High
                                                                                                                                       the workload. There is no justification for excluding the effect of loss absorption from
                                   disregarding the loss absorbing capacity of future bonuses and deferred taxes)
                                                                                                                                       discretionary bonuses and deferred tax. Also, in most instances this is unlikely to have much
                                                                                                                                       effect as profit sharing business is seldom reassured.
                                   Suggested simplification for the calculation of LGD of a reinsurance contract:
                                   LGD= 50%*(1+6*sigma)*(BE_gross-BE_net).                                               Calculating the LGD for each reinsurer as defined may too burdensome ( SCRuw Gross and Net
  X        A            3          Assumptions: Premium and Reserve Risk is considered ; Diversification between premium must be measured). The materiality of the underlying risk may not justify such a complex                               High
                                   and reserve risk is not allowed.                                                      approach in all cases. The proposed simplified approach should be tested in QIS4.
                                   Rec (receivables) = BE_gross-BE_net;
                                   If the market is efficient then Rec=premium_ceded and premium_ceded are referred to
5/1/2010                                                                                                                                                                       6:58 PM                                                              WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                  Explanation / Rationale
         Sub-     Paragraph                                        Drafting suggestion                                                                                                                                                  priority
 area                                                                                                                                                                      for changes
        section   reference

                                                                                                                                   No loss should be assumed in respect of collateral already posted. A higher recovery rate is
                                                                                                                                   appropriate for financial derivatives because of the collaterisation arrangements specified in the
                                                                                                                                   credit support annex to ISDA agreements. This typically requires the difference between the
                                                                                                                                   market value and a collateral threshold to be very frequently posted as collateral to the
                                                                                                                                   company. The collateral threshold is linked to the rating of the company such that as the rating
  X        A          6       LGD = collateral + 75% * (Recoverables - collateral + market SCR gross - market SCR net).                                                                                                                   High
                                                                                                                                   of the counterparty declines (indicating greater default risk), the collateral threshold greatly
                                                                                                                                   declines, i.e. a much greater % of the market value is covered by the collateral. In adverse
                                                                                                                                   circumstances the company is therefore likely to have collateral that is very high proportion of
                                                                                                                                   the market value. This therefore provides the company with a high level of protection, which
                                                                                                                                   should be reflected in the assumed recovery rate. [to be completed]

                                                                                                                                   Need a relatively pragmatic calculation for what in most cases is likely to be relatively small
                              net SCR market = Aggregate SCR for market risks calculated according to the standard                 component of the SCR, e.g. a company could have numerous financial derivatives and doing lots
  X        A          6                                                                                                            of separate calculations adds very little extra accuracy but could significantly increase the          High
                              formula (disregarding the loss absorbing capacity of future bonuses and deferred taxes)
                                                                                                                                   workload. There is no justification for excluding the effect of loss absorption from discretionary
                                                                                                                                   bonuses and deferred tax.
                                                                                                                                   Need a relatively pragmatic calculation for what in most cases is likely to be relatively small
                              Gross SCR market = Aggregate SCR for market risks calculated according to the standard               component of the SCR, e.g. a company could have numerous financial derivatives and doing lots
  X        A          6       formula, but disregarding the risk mitigating effect of the financial derivatives (and               of separate calculations adds very little extra accuracy but could significantly increase the          High
                              disregarding the loss absorbing capacity of future bonuses and deferred taxes)                       workload. There is no justification for excluding the effect of loss absorption from discretionary
                                                                                                                                   bonuses and deferred tax.
                              Concerning the spread risk module the table should state: disallowance of mitigating effect of
  X        A          7                                                                                                                                                                                                                 Medium
                              the derivative in the adverse credit derivatives in the determination of the exposure.

                                                                                                                                   Confirmation required from CEIOPS that the factors do not double-count with the adjustment for
  X        A          9       A PD estimate is derived from external ratings according to the following table:                                                                                                                            High
                                                                                                                                   expected counterparty default risk in the best estimate of the reinsurance asset (TS.II.B.16).

                              In case of reinsurance ceded to a reinsurer (i) part of the same group (internal reinsurance)
                              that does not have a rating required for X.A.9, the probability of default of counterparty i is
                                                                                                                                 Where an intragroup cession is to a rated counterparty the rating of the counterparty should be
  X        A         19       replaced , for the share of the reinsurance that is retroceded outside the group to a                                                                                                                       High
                                                                                                                                 used.
                              counterparty k by the probability of default of counterparty k. (the probability of default of
                              counterparty i still being used for the share of the reinsurance kept in retention by reinsurer i)

                              For intragroup reinsurance which does not meet the requirements specified in the previous
                              paragraph, a regulatory rating may should be used to determine the probability of default of
  X        A         20       the intragroup counterparty. The probability of default depends on the solvency ratio (ratio of Typos                                                                                                       Low
                              own funds and SCR) according to the following table: ........ Counterparty solvency ratio >
                              50%         PDi 6.40% 6.04% ....
                              Based on the principle of substance over form, set out in paragraph TS.VI.A.3, agreed claims
                              arising from non-life business payable in the form of an annuity should normally be part of
  XI       A          3                                                                                                            Related to commentary on VI.A.3                                                                        High
                              SCRlife (subject to materiality considerations). In particular, the risk of revision is applicable
                              only to this type of annuities.
                                                                                                                                   Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                   approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       A       4, 5 & 7   Delete references to KC.                                                                                                                                                                                  Very High
                                                                                                                                   involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                   concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                              Correlation between mortality risk and longevity risk = 0 = should be negative. A certain            Empirical evidence shows a certain degree of negative correlation between Life mortality risk and
                              degree of negative correlation should be established between Life mortality risk and Life            Life longevity risk. We would expect that the correlation is negative. Both risks cannot occur at
  XI       A          6                                                                                                                                                                                                              Very High
                              longevity risk in the correlation matrix CorrLife. Our proposal is to establish a negative           the same time.
                              correlation between both risks of 0.25 (-0.25).
                              For those contracts that provide benefits both in case of death and survival there is no need
                              to unbundle them. one of the following two options should be chosen and applied consistently
                              to all contracts in the various lines of business concerned:
                              • Option 1: Contracts where the death and survival benefits are contingent on the life of the
                              same insured person(s), should not be unbundled. For these contracts the mortality scenario          Splitting contracts into "death" and "survival" components (Option 2) makes no sense - there is
                              should be applied fully allowing for the netting effect provided by the „natural‟ hedge between      only 1 life and so there can only be survival or death and not both! Contracts on different lives
  XI       B          3       the death benefits component and the survival benefits component (note that a floor of zero          are automatically unbundled and TS.XI.B.1 excludes any natural hedges, i.e. where an increase          High
                              applies at the level of contract if the net result of the scenario is favourable to the              in mortality rates may be favourable (e.g. annuity business) and so there is no need for
                              (re)insurer).                                                                                        unbundling in this instance.
                              • Option 2: All contracts are unbundled into 2 separate components: one contingent on the
                              death and other contingent on the survival of the insured person(s). Only the former
                              component is taken into account for the application of the mortality scenario.


  XI       B          4       Participants are asked to identify the option chosen and the underlying reasons.                     Companies will all opt for option 1 as it is the only one that makes sense.                            High

                                                                                                                                   Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                   approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       B          6       Delete references to KC.                                                                                                                                                                                  Very High
                                                                                                                                   involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                   concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                   Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                   approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       B       8 to 10    DELETE                                                                                                                                                                                                    Very High
                                                                                                                                   involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                   concerns as effectively as the alternative approach outlined in TS.VIII.C7.
5/1/2010                                                                                                                                                                             6:58 PM                                                                   WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                       Explanation / Rationale
         Sub-     Paragraph                                          Drafting suggestion                                                                                                                                                           priority
 area                                                                                                                                                                           for changes
        section   reference

                                "The longevity test applies the same stress to annuities and disabled life reserves. This
                                implies that there is no diversification between these two subsets. In many cases the age
                                groups will be different and the drivers of stress different. We suggested that at a minimum
  XI       C          2         QIS4 collects separate amounts for the 2 subsets so that potential diversification effects can        Suggestion to extend the longevity test                                                                      Medium
                                be assesed."

                                "In disability the test is the same and the results added for disability income and critical
                                illness. It is not clear that the same level of stress is appropriate and here too the correlations
                                between the two subsub risks will be less than 1."
                                                                                                                                      Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                      approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       C          5         Delete references to KC.                                                                                                                                                                                           Very High
                                                                                                                                      involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                      concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                      Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                      approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       C        7 to 9      DELETE                                                                                                                                                                                                             Very High
                                                                                                                                      involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                      concerns as effectively as the alternative approach outlined in TS.VIII.C7.


                                longevityshock = a (permanent) 25% decrease in mortality rates for each age For some           In some markets, empirical evidence shows that a longetivity shock of a 25% decrease in
  XI       C          6                                                                                                                                                                                                                           High
                                markets, when justified, different % decrease in mortality rates for different age cohorts may mortality rates for all ages is not realistic.
                                be applicable.
                                                                                                                                      Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                      approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       D          4         Delete references to KC.                                                                                                                                                                                           Very High
                                                                                                                                      involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                      concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                      Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                      approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       D      6 to 8 incl   DELETE
                                                                                                                                      involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                      concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                Lapse risk relates to the loss, or adverse change in the value of insurance liabilities, resulting
                                from changes in the level or volatility of the rates of policy lapses, terminations, changes to
                                paid-up status (cessation of premium payment) and surrenders. The standard formula allows
                                                                                                                                   Link TS.II.B.27 The SCR should also capture the risk that persistency rates in respect of future
                                for the risk of a permanent change of the rates as well as for the risk of a mass lapse event.
  XI       E          1                                                                                                            premiums are worse than expected with the expected level of future premiums being reflected in                    High
                                Companies should assess whether a 50% increase in changes in paid-up status is sufficient
                                                                                                                                   the technical provisions.
                                taking into account how policyholder behaviour might change in adverse circumstances and
                                whether ceasing premiums would result in a loss of guaranteed insurability. Where companies
                                believe that a stress greater than 50% should apply they should use this and explain why.

                                Capital charges are calculated on a policy-by-policy model point by model point comparison of
                                                                                                                                      Link TS.XI.E.2, 5, 6 and 7. The requirement to do the calculations on a policy by policy basis
                                surrender value and best estimate provision. The surrender strain on a policy is defined as the
                                                                                                                                      could be very burdensome and completely impractical for large firms where the calculations are
                                difference between the amount that would be currently payable on surrender and the best
  XI       E          4                                                                                                               likely to be done using representative model points rather than every policy. Also, where                      High
                                estimate provision held. The amount payable on surrender should be calculated net of any
                                                                                                                                      appropriate, companies should be allowed to reflect any management actions (e.g. changing /
                                amounts recoverable from policyholders or agents, e.g. net of the surrender charge that may
                                                                                                                                      introducing surrender penalties) that they would take.
                                be applied under the terms of the contract.
                                 The other terms represents..." Amend definition of lapseshock down as follows (new text
                                underlined) “Reduction of 50% in the assumed rates of lapsation in all future years for               Link TS.XI.E.2, 5, 6 and 7. Companies should apply separate up and and down lapse shocks
                                policies.                                                                                             dependning upon whether the surrender strain is negative or positive as it does not necessarily
                                lapseshock(down) = Reduction of 50% in the assumed rates of lapsation for policies where              follow that policyholders will act this rationally - they will not have this information available. It is
                                the surrender strain is negative If undertakings believe that lapse experience for different          also very burdensome and difficult for companies to do this, i.e. doing the calculations for each
  XI       E          5                                                                                                                                                                                                                              High
                                products could be materially different in adverse circumstances, e.g. lapses reduce on policies       model point with it being possible that the policies having both positive and negative surrender
                                with valuable guarantees but increase on policies with no guarantees and no surrender                 strains at different terms. However, we accept that there may be circumstances where such an
                                penalties then the lapse up and down shocks should be applied separately, i.e. assuming a             approach is needed as the effect is material, but this should not be the default. Supervisors can
                                lapse increase where the surrender strain is positive and a lapse decrease where it is                ensure the correct treatment as part of Pillar II.
                                negative.
                                                                                                                                      Link TS.XI.E.2, 5, 6 and 7. Companies should apply separate up and and down lapse shocks
                                lapseshock(up) = Increase 50% in the assumed rates of lapsation for policies where the
                                                                                                                                      dependning upon whether the surrender strain is negative or positive as it does not necessarily
                                surrender value is positive. If undertakings believe that lapse experience for different
                                                                                                                                      follow that policyholders will act this rationally - they will not have this information available. It is
                                products could be materially different in adverse circumstances, e.g. lapses reduce on policies
                                                                                                                                      also very burdensome and difficult for companies to do this, i.e. doing the calculations for each
  XI       E          6         with valuable guarantees but increase on policies with no guarantees and no surrender                                                                                                                              Medium
                                                                                                                                      model point with it being possible that the policies having both positive and negative surrender
                                penalties then the lapse up and down shocks should be applied separately, i.e. assuming a
                                                                                                                                      strains at different terms. However, we accept that there may be circumstances where such an
                                lapse increase where the surrender strain is positive and a lapse decrease where it is
                                                                                                                                      approach is needed as the effect is material, but this should not be the default. Supervisors can
                                negative.
                                                                                                                                      ensure the correct treatment as part of Pillar II.

                                                                                                                                      See comments for TS.XI.E.5 & 6. The rationale for a such an extreme rate of lapses is
                                                                                                                                      presumably a mass loss of policyholder faith in the company. Under such circusmtances it does
                                Lapse (mass) is defined as 30% of the sum of surrender strains over the policies where a
  XI       E          7                                                                                                               not follw that policyholders with a policy that has a positive surrender strain will not lapse.                High
                                (positive) surrender strain ...
                                                                                                                                      CEIOPS should disclose how it has calibrated the 30% shock. The CEA is unaware of any historic
                                                                                                                                      analysis that would support such a high mass surrender assumption.

                                                                                                                                      Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                      approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       F          2         Delete references to KC.                                                                                                                                                                                           Very High
                                                                                                                                      involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                      concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                      Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                      approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       F      4 to 6 incl   DELETE                                                                                                                                                                                                             Very High
                                                                                                                                      involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                      concerns as effectively as the alternative approach outlined in TS.VIII.C7.
5/1/2010                                                                                                                                                                         6:58 PM                                                                 WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                    Explanation / Rationale
         Sub-     Paragraph                                          Drafting suggestion                                                                                                                                                     priority
 area                                                                                                                                                                        for changes
        section   reference
                                Simplification: Expense risk capital requirement = (Renewal expenses in the 12 months prior
                                valuation date) * n(exp) *(0.1 + 0.005*n(exp)) *0.1 *annuity_certain(n(exp))
                                Where (n(exp)) = average period over which risk runs off, weighted by renewal expenses and
  XI       F          7         annuity_certain(n(exp)) is an annuity certain factor for term n(exp) reflecting the frequency of The formula is overly simplistic in not taking into account the time value of money.                        Medium
                                the expenses and using a discount rate equal to the risk free rate for term n(exp) less
                                assumed inflation rate less 1%


                                                                                                                                   We believe that it would be appropriate to test a scenario based approach, which would then
  IX       F                                                                                                                                                                                                                                 Medium
                                                                                                                                   align the methodology with that used for the rest of market risk
                                ADD :
                                Credit derivatives should be included in the calculations.
  IX       F          3                                                                                                            More guidance                                                                                             Medium
                                The risk mitigating effects are to be included for the notional amount.
                                Naturally the Counterparty Default Risk are to be included in the other risk modules.

                                                                                                                                   Not fully reflecting the ranking used by rating agencies, e.g. treating A+, A and A- could cause
                                                                                                                                   distortions and lumpiness. For example, the capital requirements for an A+ bond is 4 times that
  IX       F          8                                                                                                                                                                                                                      Medium
                                                                                                                                   for an AA- bond when in practice the default expectations are nowhere near as different. We
                                                                                                                                   recommend that a more granular approach is adopted.

  IX       G          11        Footnote n° 43 should be extended to the Swedish market.                                           Footnote n° 43 should be extended to the Swedish market.

                                                                                                                                   Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                   approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       H          3         Delete references to KC. Also note that the numbering of the paragraphs is wrong                                                                                                                             Very High
                                                                                                                                   involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                   concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                              A scenario approach is more appropriate. Also, it should be recognised that a pandemic would
                                REPLACE text with "The capital charge for Life catastrophe risk is determined as follows:
                                                                                                                              affect all lives. The 1918 influenza pandemic on which this is based affected all lives and not just
                                LifeCAT = ΔNAV Ι Life CAT shock where ΔNAV = change in net value of assets minus liabilities
  XI       H          4                                                                                                       younger lives. It was very unusual in that young adults were affected as much as very young
                                and Life CAT shock = 1.5 per mille absolute increase in mortality and disability rates at all
                                                                                                                              and old people. However, it was not the case that the latter were not affected. It is completely
                                ages"
                                                                                                                              unrealistic to assume that there would not be greater deaths among annuitants.

                                                                                                                                   Linked to: TS.VI.H2 to 6, TS.VIII. sections C to F and TS.XI sections A to D, F and H. The KC
                                                                                                                                   approach was introduced in QIS3 in response to concerns over non linearity. However, it
  XI       H      5 to 7 incl   DELETE
                                                                                                                                   involves a significant calculation burden on companies and will not address any linearity
                                                                                                                                   concerns as effectively as the alternative approach outlined in TS.VIII.C7.

                                                                                                                                   The “QIS4 – Technical specifications” seem to acknowledge the long-term nature of Workers
                                                                                                                                   Compensation business, especially in the “life assistance” component. However, for the purposes
                                                                                                                                   of determining premium risk (which encompasses all risk components – standard nonlife,
 XII       G          15        nlob = 15                                                                                                                                                                                                    Medium
                                                                                                                                   annuities and life assistance) only a maximum number of 5 years is considered within the
                                                                                                                                   determination of the company-specific premium risk standard deviation (TS.XII.G.15) which
                                                                                                                                   seems to contradict the afore mentioned long-term nature.

                                Premiums and provisions have to be allocated between the following geographical areas:
                                                                                                                             A more granular approach would be reasonable. We would for example expect that a company
                                Each country of the EEA, Switzerland, The rest of Europe, Asia (excluding Japan and China),
                                                                                                                             with international business across the US/Canada would be better diversified for non-life risk
 XIII      B          8         Japan, China, Oceania (excluding Australia), Australia, North America ( excluding Canada and                                                                                                                 Medium
                                                                                                                             than a company writing business in Luxembourg/Belgium. This is not reflected in the current
                                US), Canada, US, South America, Central America, Africa.
                                                                                                                             suggested geographical areas.

                                                                                                                                   Country borders within the EEC were chosen as a classification into regions for geographical
                                                                                                                                   diversification. This disadvantages insurers operating in the larger countries, e.g. in Germany,
                                                                                                                                   compared with small ones e.g. in all Baltic states or the Benelux Countries.
 XIII      B        7 to 9                                                                                                         By the consideration of the geographic diversifications the calculation instructions change in              low
                                                                                                                                   TS.XIII.B.10, 18, 19, 28, 29, 30.
                                                                                                                                   We consider the use of company specific parameters as more appropriate in order to allow for
                                                                                                                                   geographical diversification.
                                The loss ratio for accident/underwriting/occurrence year y is defined as the ratio for of
                                estimated ultimate claims over earned premiums for a given LoB. The estimated ultimate
                                claims can be derived from the actuarial techniques which are used to derive the best-
                                                                                                                                   The current description is not clear (i.e. what if the definition of year y: is it calendar year y or
                                estimate of the technical provisions. The earned premiums is calculated as follows: earned
                                                                                                                                   accident year y) and seems not to incorporate the most-up-to date data/information. As the best
                                premium of calendar year y = premium reserves of calendar year y at the beginning of the
                                                                                                                                   estimate of the technical provisions is already determined with sophisticated actuarial methods,
 XIII      B          11        year + written premium during calendar year y - premium reserves at the end of calendar                                                                                                                        High
                                                                                                                                   by means of run-off triangles, whereby the ultimate claims by accident/underwriting/occurrence
                                year y. The loss ratio is defined as the ratio for year y of incurred claims in a given LoB over
                                                                                                                                   year is already determined, it seems most practical to use this to determine the loss-ratios. This
                                earned premiums, determined at the end of year y. The earned premiums should exclude
                                                                                                                                   is also in line with best-practice and is being applied by the industry.
                                prior year adjustments, and incurred claims should exclude the run-off result, that is they
                                should be the total for losses occurring in year y of the claims paid (including claims
                                expenses) during the year and the provisions established at the end of the year.
                                                                                                                                   There is now the possibility to incorporate geographical diversification into premium/reserve risk,
                                                                                                                                   but Credit/Suretyship is explicitly excluded.

                                                                                                                                   CEIOPS Consultation Paper No. 14 states, “Diversification is fundamental to risk management in
                                                                                                                                   the insurance industry.” This applies to credit insurance.

                                                                                                                                   Credit insurance/suretyship risks are typically diversified on a geographical basis (as well as on
 XIII      B          18        in Footnote #85 , remove the reference to Credit Insurance and Suretyship.                                                                                                                                     High
                                                                                                                                   other bases such as industry sector) and the effects should be objectively identified, measured
                                                                                                                                   and supervised.

                                                                                                                                   It is theoretically incorrect to ignore diversification effects. This would imply that credit insurance
                                                                                                                                   risks in different geographic areas are perfectly correlated. While credit insurance risk correlation
                                                                                                                                   may be higher than in some other lines of insurance business, correlation is below 1.0.
5/1/2010                                                                                                                                                                                         6:58 PM                                                                WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                                    Explanation / Rationale
         Sub-     Paragraph                                              Drafting suggestion                                                                                                                                                                 priority
 area                                                                                                                                                                                        for changes
        section   reference
                              s(res, lob) = sqrt [clob x s2(U, res, lob) + (1 – clob) x s2(M, res, lob)] Where clob = Credibility factor for LoB   The standard deviation for reserve risk for each individual line of business is provided. In B.34,
                              s(U, res, lob) = Undertaking-specific estimate of the standard deviation for reserving risk and s (M,                the non-life underwriting risk asks whether undertaking-specific information is able to be built
                                                                                                                                                   into the formula. No credibility is given to a company‟s own experience in B.23 (although we
 XIII      B         23       res, lob) = Market-wide estimate of the standard deviation for reserving risk. The market-wide                                                                                                                                  High
                                                                                                                                                   note that estimates of companies‟ own premium and reserve risk are requested in B.34). We
                              estimate of tThe standard deviation for...
                                                                                                                                                   would suggest that the same credibility factors should apply as for the premium risk.

                                                                                                                                                   No rationale has been provided for the market wide factors. The factors are very similar to QIS
 XIII      B         25       CALIBRATION: The market wide factors for reserve risk …… for premium risk ……                                         3, except for credit & surety where factors have increased. We would like to see justification for Very High
                                                                                                                                                   the proposed factors.
                                                                                                                                                   For lines 2, 4, 7, 8, 10 a lot of credibility seems to be given if only 3 or 4 years of data is
                                                                                                                                                   available. In addition there is no added credibility if more than 5 years of data is available. For
                                                                                                                                                   the purpose of measuring standard deviations, we would expect that more than 5 years of data
                              The credibility factor lob is defined in the following table: [ADJUST TABLE FOR THE LOBS
                                                                                                                                                   would always improve an estimate and this should therefore receive more credibility. We agree
                              WHERE N=5] AND ALSO MAKE A TABLE FOR RESERVE RISK, AS ACCORDING TO TS.VI.F
 XIII      B         26                                                                                                                            that some credibility is given for these lines, if less years are available, but it makes sense to     High
                              UNDERTAKINGS CAN USE PERSONALISED FACTORS FOR RESERVE RISK AND REPLACE THE
                                                                                                                                                   give more credibility to those estimates which are based on more than 5 years of available data.
                              MARKET WIDE FACTORS.
                                                                                                                                                   /// Furthermore a jump of the credibility factor from 0 to 0.64 when 1 additional year of data is
                                                                                                                                                   realised, is very steep. The jumps should be more gradual.         /// Table required for reserve risk
                                                                                                                                                   as well.
                                                                                                                                                   In TS.VI.F.5 it is stated that insurers are allowed to replace standard parameters with
                              It seems necessary to add a paragraph, after TS.XIII.B.27, in order to allow insurers to use
 XIII      B         27                                                                                                                            parameters specific to their business, mentioning the standard deviation for both premium risk
                              undertaking-specific estimates of the standard deviation for reserve risk.
                                                                                                                                                   and reserve risk.
                              Diversification is not allowed for the following LoB:                                                                There is now the possibility to incorporate geographical diversification into premium/reserve risk,
                              miscellaneous. ("Credit and suretyship insurance" should be removed).                                                but Credit/Suretyship is explicitly excluded.

                                                                                                                                                   CEIOPS Consultation Paper No. 14 states, “Diversification is fundamental to risk management in
                                                                                                                                                   the insurance industry.” This applies to credit insurance.

                                                                                                                                                   Credit insurance/suretyship risks are typically diversified on a geographical basis (as well as on
                                                                                                                                                   other bases such as industry sector) and the effects should be objectively identified, measured
 XIII      B         28                                                                                                                                                                                                                                       High
                                                                                                                                                   and supervised. The diversification of the risk is fully part of the risk management of credit
                                                                                                                                                   insurance and should be also recognised by the regulator.

                                                                                                                                                   It is theoretically incorrect to ignore diversification effects. This would imply that credit insurance
                                                                                                                                                   risks in different geographic areas are perfectly correlated. While credit insurance risk correlation
                                                                                                                                                   may be higher than in some other lines of insurance business, correlation is below 1.0.
                                                                                                                                                   Companies such as KMV produce correlation models that would support this.


                              For the purposes of QIS4 companies are asked to use a The Herfindahl index approach to                               The Herfindahl index approach is a crude, although easy way of allowing for geographic risk. For
                              allow for geographic diversification for premiums and reserves risk for each line of business                        example, it assumes the same diversification effect between Belgium and Luxembourg as that
 XIII      B         29       (LoB) is calculated as follows: ….. Is the index for the geographical areas. Companies are                           between the UK and Japan. Also, it would not allow for any diversification effects within a very           High
                              asked to comment on the appropriateness of this approach and whether there are alternative                           large country such as the US where the diversification effects between different states could as
                              approaches they think are more appropriate.                                                                          significant as that between different European countries.

                                                                                                                                                   No justification has been provided for the approach to capture geographical diversification using
                                                                                                                                                   the Herfindahl index. In addition, the diversification benefits are capped. In practice, the
 XIII      B         30       The forumula provided should be reconsidered.                                                                        diversification benefits are maximum 15% to 20%, whilst for some products one would expect                Medium
                                                                                                                                                   more geographical diversification if spread across several geographies. The CEA and the CRO
                                                                                                                                                   Forum would like to help CEIOPS to assess a more correct value.

                              CEIOPS plans to further develop the non-life underwriting risk module after QIS4, addressing
                                                                                                                                                   It should be made more clear within the non-life risk module, that the replacement of market
                              the degree to which undertaking-specific information could be built into the formula, and
                                                                                                                                                   wide factors by personalised factors is allowed. The message is now confusing, as participants
                              analysing the appropriateness of the calibration. Therefore, participants are invited to supply
                                                                                                                                                   are being asked to supply "additional information" rather than potentially "replace" market wide
                              the following additional information, to the extent this is available: the participant's own
 XIII      B         34                                                                                                                            factors. We agree that for practicality reasons that approval is automatically granted for QIS 4,          High
                              estimate of the standard deviation for premium risk; and the participant's own estimate of the
                                                                                                                                                   but that, when Solvency II is in place, approval needs to be given by the supervisor, in order to
                              standard deviation for reserve risk, for each of the LoBs considered in the formula. As
                                                                                                                                                   avoid cherry-picking. /// Some guidance could be provided (e.g. reference to documents) on
                              indicated in TS.VI.F.5, companies may replace the market wide factors by personalised
                                                                                                                                                   how the reserve volatility over a 1-year time horizon can be calculated/assessed.
                              factors, if the conditions described in paragraph TS.VI.F.5 are met.
 XIII      B         32       A should be alpha or vice versa                                                                                                                                                                                                  Low

                                                                                                                                                   Justification should be provided for the correlation matrix provided. It is not clear why the
                                                                                                                                                   correlation matrix for premium and reserve risk is the same. One would expect that there would
 XIII      B         33       The correlation matrix for premium and reserve risk should be reconsidered.                                                                                                                                                    Medium
                                                                                                                                                   be differences. For example: a high correlation between Motor TPL and General Liability for
                                                                                                                                                   reserve risk but a low correlation between Motor TPL and General Liability for premium risk.
                              CAT risks stem from extreme or irregular events that are not sufficiently captured by the
                              charges for premium and reserve risk. In order to avoid double counting, the calibration of
 XIII      C          1                                                                                                                            see annex
                              the scenarios and market losses should allow for the parts of catastrophe risks which are
                              covered by premium and reserve risk.
                                                                                                                                                   It is confusing to call different options, methods or approaches "layers", as layer is typically a
                                                                                                                                                   term widely used in reinsurance. Reinsurance is strongly linked with catastrophe risk and
 XIII      C          2       The sub-module is designed in two layers methods:                                                                    therefore we could end up with discussions whereby "layers of layers" would be used. To avoid             medium
                                                                                                                                                   confusion, it is recommended to use a different terminology and replace the name "layer"
                                                                                                                                                   throughout the text into "method" or "option".
                                                                                                                        It is confusing that the 3 health classes within Non-Life risk have been moved to the Health
                              The capital charge for the non-life CAT risk is determined as follows: …[MOVE THE CLASSES module for premium risk and catastrophe risk. We would expect that these classes would be
 XIII      C          6                                                                                                 moved from the catastrophe risk sub-module within non-life risk, for consistency reasons. This  medium
                              RELATED TO HEALTH BUSINESS TO THE HEALTH MODULE]
                                                                                                                        would, however, imply that within the Health module, there would need to be a catastrophe risk
                                                                                                                        sub-module.
                                                                                                                        If no scenarios for the second option are provided, companies will need to choose between
                              The regional scenarios can be outlined as follows:…… [SCENARIOS NEED TO BE PROVIDED option 1, which is a very simple factor based approach, or option 3, which is the use of own
 XIII      C          9                                                                                                                                                                                                Very High
                              BY SUPERVISORS. ONLY SOME GERMAN SCENARIOS HAVE BEEN PROVIDED]                            scenarios. We agree that option 2 will accommodate those companies who cannot calculate their
                                                                                                                        own scenarios (option 3). It is therefore CRUCIAL that these scenarios are provided asap.
5/1/2010                                                                                                                                                                       6:58 PM                                                              WORKING DRAFT


          TS          TS
  TS                                                                                                                                                                  Explanation / Rationale
         Sub-     Paragraph                                        Drafting suggestion                                                                                                                                                  priority
 area                                                                                                                                                                      for changes
        section   reference
                              Non-proportional non-life reinsurance business and non-life insurance and reinsurance
                              business that is located outside of the European Economic Area shall not be allowed for in the
                              approach described above. Instead, to the extent to which the business may give rise to            This requirement is not in line with the proportionality principle and will put significant
                              catastrophe risk, participants shall quantify the risk by means of a partial internal model. The   additional burden to those companies writing business outside the EEA. We would at least,
 XIII      C         17                                                                                                                                                                                                                      High
                              partial internal model shall comply with the requirements specified in Article 100 of the          recommend some proportionality criteria (TS.VI.G) whereby the first option should be possible to
                              Framework Directive Proposal. The capital charge for this risk shall be added to the capital       use if these proportionality criteria are met.
                              charge derived under the approach described above. If the criteria is section TS.VI.G are met,
                              then option 1 can be used to derive the requirements for catastrophe risk.
                                                                                                                                 1) For Credit Insurance, a catastrophe scenario based on a problem with a single policy is
                                                                                                                                 irrelevant. If a policyholder defaults, no claims will be paid, ie. It is not a catastrophe for the
                                                                                                                                 insurer. It is more appropriate to base a scenario on insolvency of a large buyer (i.e. buyer of
                                                                                                                                 goods/services from a policyholder). This would result in multiple claims from policyholders.

                                                                                                                                 2) The credit insurance industry believes that its ability to dynamically manage its exposures will
                                                                                                                                 help significantly in dampening the impact of large movements in world-wide insolvency rates on
                                                                                                                                 its underwriting result. It is not unreasonable, however, to ask for a recession scenario to be
                                                                                                                                 analyzed.
                              Credit:                                                                                            We do not believe, however, that a 1930‟s scenario is a reasonable scenario to base such an
                              • Total impact of a default of a single large exposure (a credit insurance buyer and/or surety     analysis on. In the 1930‟s, the US economy contracted 10-15%, however the global economy
 XIII      C         34                                                                                                                                                                                                                      High
                              customer).                                                                                         has changed significantly. It should be noted that credit insurance companies operating during
                              • The impact of a deeper than normal, global, economic recession.                                  this period were able to manage their exposure effectively.

                                                                                                                                 Experts currently believe that even a minor contraction of the US economy would be considered
                                                                                                                                 an extreme event Asking our line of business to analyze a 1930‟s scenario would be like asking
                                                                                                                                 the life insurance line of business to analyze the impact of a World War II scenario.

                                                                                                                                 We acknowledge that both the original draft scenario and our suggested replacement are vague.
                                                                                                                                 We appreciate that it is difficult to arrive at a more refined wording at this stage. Should the
                                                                                                                                 submissions to QIS4 lead to the conclusion that this scenario should indeed be treated as a CAT
                                                                                                                                 scenario then we advise to also use the inputs you receive to arrive at a more specific wording
  XV                          Disagree with the Linear Approach to the MCR                                                       For further details, please refer to CEA response to QIS 4 CfA.                                       Very High
                              Replace with "Calculations shall be carried out at the level of the ultimate EEA participating
 XVI       A         11                                                                                                          Clearer Guidance                                                                                      medium
                              undertaking i.e. the entity which issues consolidated accounts"
                              Replace with "Groups may take into account materiality in calculating the adjustment for intra-
                              group transactions, explaining what the level of materiality used was and the rationale behind
 XVI       A         14       it. Material intra-group transactions may include financial reinsurance arrangements, loans,    More guidance                                                                                            high
                              etc. Regular commercial transactions such as one entity purchasing from another group entity
                              fire damage cover for its buildings would not need to be eliminated."
 XVI       B          5       Replace with original B6                                                                           worldwide method should be default one                                                                high
                              Replace with "If the group is not able to include non-EEA entities as described under B5,
                              Groups are asked to calculate the default group SCR as the sum of the local requirements in
                              these non-EEA countries. That local requirement has to be the first intervention point of the
                              local supervisor (e.g. 200% of the USA RBC or Swiss Solvency Test for Switzerland). When
 XVI       B          6                                                                                                     Local non-EEA requirements optional                                                                        medium
                              (re)insurance entities in non-EEA countries form a subgroup for which a specific capital
                              requirement exists, this latter could be used, instead of the sum of the requirements of each
                              solo entity. This will constitute SCRnon-eea. This will be added to the EEA group SCR with no
                              recognition of diversification between EEA and non-EEA parts of the group."
 XVI       B          7       Delete                                                                                             worldwide method should be default one                                                                high
                              Replace with: "The contribution of participations held in other financial sectors to the capital
                              requirement of the group should be the other financial sector's requirements. When
                              participations in another financial sector form a group for which a specific capital requirement
 XVI       B          9       exists, this latter, (instead of the sum of the requirements of each solo entity) should be used. Extension to cross-sectoral diversification                                                            medium
                              This will form SCRofs. Groups that are able to quantify cross-sectoral group diversification
                              may allow for this rather than simply adding capital requirements to the insurance part and
                              are invited to comment on the approach and assumptions used"

                              Replace with: "Where a group's interest in an EEA (re)insurer is greater than 20% the look-
                              through approach should be applied (or deduction and aggregation if this is not possible). If
                              the solo SCR... movement in premiums. If the group's interest is lower than or equal to 20%
                                                                                                                               Clearer guidance
 XVI       B         11       then the SCR in respect of the participation should be calculated by applying equity risk to the                                                                                                         very high
                              market value of the participation. However, groups have the option (irrespective of the
                              ownership share) to chose the most appropriate of the two approaches depending on the
                              nature of the participation"

                                                                                                                                 Clarification needed. In order to properly comment the treatment of with profit business within a
 XVI       B         13       With-Profit business                                                                                                                                                                                 high
                                                                                                                                 group, it is necessary to know the contents of the Appendix mentioned in TS.XVI.B.18.

 XVI       B         15       Delete                                                                                             There should be allowance for diversification with respect to with profit business                    high
                              Replace with: "The charts below illustrate the structure of the default method and the
 XVI       B         20                                                                                                          worldwide method should be default one                                                                high
                              alternative one" show only d) and c)
                              Loss Given Default (LGD) should be calculated by summing of all the solo LGDs for a
                              particular counterparty with adjustments to eliminate intra-group transactions. These
                              combined LGD amounts and the methodology described in TS.X.A should be used to                     The notion of replacement cost is no longer used in the Solo specs and has been replaced by
 XVI       B         28                                                                                                                                                                                                                low
                              determine the group counterparty default risk capital amount. The LGD from each specific           "LGD" notion and the wording wasn't very clear on how to perform the calculation.
                              entity are summed because risk mitigants are generally relevant for each entity and are not
                              effective more widely.
 XVI       B         31       Replace with: "The method is same as at solo level"                                                Avoid confusion                                                                                       medium
 XVI       B         32       delete                                                                                             Additional guidance provided not necessary and rather confusing                                       medium
 XVI       B         33       delete                                                                                             Additional guidance provided not necessary and rather confusing                                       medium
5/1/2010                                                                                                                                                                  6:58 PM                                                              WORKING DRAFT


          TS          TS
  TS                                                                                                                                                             Explanation / Rationale
         Sub-     Paragraph                                       Drafting suggestion                                                                                                                                              priority
 area                                                                                                                                                                 for changes
        section   reference
 XVI       B          34      delete                                                                                          Additional guidance provided not necessary and rather confusing                                     medium
 XVI       B         35       delete                                                                                          Additional guidance provided not necessary and rather confusing                                     medium
                                                                                                                              Correlation matrix approach conceptually preferred but may turn out to be too complex for the
 XVI       B        25, 26    See cover note                                                                                                                                                                                      low
                                                                                                                              standard approach
 XVI       C          4       Provide more guidance                                                                           Provide more guidance                                                                               high
                                                                                                                              This makes no sense as assets are shown at market value and so by definition include
 XVI       D          4       delete                                                                                                                                                                                              medium
                                                                                                                              unrealised gains
 XVI       D          5       Replace with: "Participations"                                                                  Link to TS.V.G - need consistent terminology throughout the technical specification                 low

                              Replace with: "If the 'look-through' approach is applied the eligible own funds measured with
                              QIS 4 principles subject to TS.XVI.D.21 of the participation should contribute to the group
 XVI       D          6                                                                                                      Clearer guidance                                                                                     low
                              available capital. Under the alternative 'equity method' the market value or market-consistent
                              value of the participation should be taken into account"
                                                                                                                              A clarification on the treatment of Minority interests is required combined with a numerical
 XVI       D          7                                                                                                                                                                                                           High
                                                                                                                              example illustrating the implementation of the proposed formula.
                              These capital items (mainly non-cumulative preference shares and subordinated debt), cannot
                              in principle be considered as transferable if not issued or guaranteed by the ultimate parent of We would welcome a clarification that capital items issued by funding entities controlled by the
 XVI       D          9       the group (in essence, this depends on the rights of the subscribers on the revenues of these ultimate parent, whereby the ultimate parent usually guarantees the issuance of the capital basis           High
                              instruments). If non-transferable, they should be subject to the limitations as set out in para. on a subordinated basis, should be considered as fully transferable
                              TS.XVI.D.22 'non-transferable items' below.
                              Subordinated debt issued by group entities other than the ultimate parent are is normally only
                              available to support the business of the issuing entity because of its legal liability to the
 XVI       D         10                                                                                                      Improved clarity                                                                                      medium
                              subscribers to that debt. In principle, subordinated debt issued by undertakings other than
                              the ultimate parent ...
                              ..., they either should be deducted from the available capital of the group or the deduction   Undertakings should be able, if possible, to use the deduction and aggregation methd as well
 XVI       D         15                                                                                                                                                                                                                 High
                              and aggregation method should be applied.                                                      (based on the Solvency requirements referred to in XVI.B.9)
                                                                                                                              Under the Framework Directive group support is classified as “ancillary own funds” which implies
                              "Group support" would constitute an eligible element of capital (ancillary own funds) at the
                                                                                                                              that declarations of group support could be part of tier 2 or tier 3 at solo level. This could
 XVI       E          2       level of individual group undertakings and a binding commitment to support individual                                                                                                            low
                                                                                                                              potentially restrict the use of group support to cover the SCR, which is inappropriate given the
                              undertakings at the group level.
                                                                                                                              focus on group SCR rather that the Solo SCRand is something that we do not support.
                              Replace with: "… describe the potential legal and practical barriers to the transfer of assets …
                              between subsidiaries in different jurisdictions; provide details of any existing intra-group
 XVI       E          5       support arrangements including the circumstances under which they would apply and the            Useful extra information                                                                           low
                              ability of the supported entity to legally enforce it ... describe the type of instruments they
                              think they would use ..."

				
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