On 15 September (13.30 – 16.30), EIOPA is organising a virtual workshop on Prudent Harmonized Reduced Set of Scenarios in relation to its advice on Proportionality in pillar I.
In the workshop, EIOPA proposes to
- present the framework of Prudent Harmonized Reduced Set of Scenarios
- exchange with experts of the industry on their views on it
- gather views of the industry regarding the format of the scenarios to be published by EIOPA (risk factors to be included, market conventions, etc.)
- discuss the first impact assessment timeline
For more information and registration, please see here.
Background
In its advice on the 2020 Solvency II review provided to the European Commission, EIOPA proposes to permit a “prudent deterministic valuation” for contracts with options and guarantees if the four following conditions are satisfied:
i. The undertaking complies with all the low risk profile undertaking (LRU) criteria.
ii. The time value of options and guarantees (TVOG), measured based on the prudent harmonised reduced set of scenarios (PHRSS), of the contracts where the prudent deterministic valuation is applied is below 5% of the SCR.
iii. The undertaking adds to its Best Estimate a stochastic supplement equal to 5% of the SCR. An undertaking may calibrate an ad-hoc stochastic supplement using prudent harmonised reduced set of scenarios in case it accurately reflects its risk profile.
iv. The stochastic supplement is kept constant through the whole SCR calculation process. Therefore, the loss-absorbing capacity of technical provisions should never be affected by the stochastic supplement.
To facilitate the assessment of these criteria, EIOPA would publish a prudent harmonised reduced set of scenarios (PHRSS). The PHRSS would consist of approximately 10 economic scenarios prudently calibrated. Using these scenarios would avoid the need for undertakings to run thousands of cash flow projections to demonstrate that the TVOG are immaterial (according to condition ii above).
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