Question ID: 2402
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Solvency Capital Requirement (SCR)
Article: 83.1, 23, 142
Status: Final
Date of submission: 10 Mar 2022
Question
Questions regarding the use of future management actions during the mass lapse stress: a) Can the undertaking define future management action as lowering the level of expenses or increasing of the management fees in case of mass lapse event and activate them during the mass lapse scenario? b) Will the answer to the question a) be different if the lowering of expenses or increasing of the management fees happens not at the time point when the stress occurs but after that time point? c) The undertaking is defining future management actions as setting different levels of expenses or management fees, depending on the lapse level of the portfolio. The model can have several thresholds, depending on the lapse level. One of the thresholds can, for example, coincide with the lapse level from the mass lapse stress. Can such future management actions be present in the best estimate models and respectively in the solvency capital requirement calculation?
Background of the question
According to the article 83.1 (d) of Delegated regulation (EU) 2015/35 no management actions should be taken by the undertaking during the scenario. There are though several ways to go around this restriction such as 1) To model expense cash-flow or income cash-flow with several if/else-statements, when the level of expense or income depends on the lapse assumption in the model. This would leave the numerical set of FMA parameters constant, but still give rise to altered assumptions during the stress. Then the application of the article 83.1 (d) is not obvious. 2) To claim that the change in the assumptions (such as level of expense or level of income) happens after the stress and not during the scenario. Then the application of the article 83.1 (d) and recital (72) are not equally obvious.
EIOPA answer
a) No, the article 83.1 (d) of Delegated regulation (EU) 2015/35 does not allow management actions during scenarios in the sense that the shock may not be changed by these management actions. For the mass-lapse scenario this means that lapse level cannot be reduced by any management actions. Furthermore, the article 142 of Delegated regulation (EU) 2015/35 defines mass-lapse risk as the loss associated with an instantaneous lapse event, this instantaneous character leaves but little room for activating managements actions during the mass lapse scenario.
b) If a management action is triggered by the stress, the principle stays the same – it should not be activated during the scenario, according to the article 83.1 (d) of Delegated regulation (EU) 2015/35. That means that the instantaneous nature of the mass-lapse scenario implies management actions cannot start until after the mass-lapse occurs. In this specific case, management actions triggered by the mass-lapse event are allowed to be modelled as happening after the mass-lapse has occurred provided they comply with the Solvency II regulation, in particular with DA articles 23 and 83 of Delegated regulation (EU) 2015/35.
c) Yes if the models are realistic in accordance with the articles 23 and 83 of Delegated regulation (EU) 2015/35. The undertaking should have a management plan, which identifies concrete circumstances where FMAs would be triggered, including defined thresholds, and a description of the order in which management actions would be carried out. FMAs should not be triggered only in times of distress (only in a number of extreme scenarios), but the undertaking should give indications on the action plan even in “normal" and “adverse" scenarios. The undertaking should be able to show indications of the behaviour in accordance to the management action plan modelled in the best estimate. The models should be backtested in some way.