The CRO forum risk margin working group has prepared a paper, including a risk margin industry proposal for discussion.
In terms of next steps, the paper is work in progress and assuming support is gained for this proposal, it would become part of the “Industry Package”, which will be the basis for further lobbying in the context of the Solvency II 2020 review.
Risk Margin industry proposal
While the paper provides further theoretical background and technical justification, the risk margin proposal for discussion is the following:
- Allowing for a CoC rate of 3%
- Setting the lambda at 0.85
- Allowing for diversification at group level and across business lines
- And assuming EIOPA would want to set a prudent floor for the forward cost-of-capital rate of 1%
This combination would result in a reduction in the risk margin level of 58%-78% depending on product duration, with a corresponding reduction in volatility, and remains consistent with previous industry feedback to EIOPA.
| Table – Impact of proposal – CoC rate 3%, lambda 0.85 and 1% floor with diversification (15% estimate) One-year product | Medium-term product | Long-term product | |||
| Impact on level | -58% | -72% | -78% | ||
| Impact on interest rate sensitivity | -58% | -80% | -84% | ||
The secretariat of Insurance Europe highlights that the risk margin industry proposal put forward in the paper is consistent with the high-level Insurance Europe risk margin proposal reflected in the paper with “Insurance Europe views on EIOPA’s Holistic Impact Assessment”:
- Recalibrating the lambda parameter and its proposed floor to better reflect the impact of risk dependence over time.
- Allowing for diversification between life and non-life business within the same entity, or between different entities within a group.
- Lowering the Cost of Capital rate to 3%, in line with evidence provided by the industry.