Update of EIOPA guidance on contract limits and valuation of technical provisions

The 2020 review of Solvency 2 has identified a number of areas where divergences in supervisory practices are observed.
Some topics were covered in the review, but some were covered by Level 3 texts (EIOPA Guidelines).

EIOPA has therefore launched two consultations between July and November 2021 to update this guidance originally published in 2015 on :
• Valuation of technical provisions
• The contract boundary

After taking into account the various feedbacks to these consultations, EIOPA published the final version of the revisions on 21 April.
These new guidelines will apply from 1 January 2023.

In summary, the updated EIOPA guidelines will have a very limited impact on the French market.

During the consultation, the main point of attention concerned guideline 28a on the inclusion of investment-related costs in the calculation of the BE, which should be based on a base equal at least to the S2 technical provisions and the SCR. This point had raised many questions in particular on the economic sense (e.g. in case of negative S2 provisions) and on the operational complexity of the calculation (introduction of a circular reference in the calculation as the BE would depend on the SCR).
On this point EIOPA agreed to revise the wording, which is now much more in line with the calculations made on the French market.

Below we look in more detail at the main feedback received on these two consultations.

The main feedback received in the consultation concerned the following issues:

The date of application of these revisions
On this point EIOPA has not made any changes, the date of entry into force remains 1 January 2023. In some specific cases, if it is complicated to respect this date, EIOPA encourages companies to approach their supervisor to discuss a possible delay.

The application of the principle of proportionality
EIOPA confirms that the principle of proportionality applies to these guidelines and adds a guideline (#0) to clarify it.

The inclusion of investment-related costs in the calculation of the BE
The consultation introduced new guidance on the inclusion of investment-related costs in the calculation of BE:

Guideline 28a introduced by EIOPA in the July 2021 consultation:

Insurance and reinsurance undertakings should take into account
administrative and trading expenses related to and amount of investments
at least equal to Solvency II technical provisions plus the SCR

EIOPA partially agrees with these findings and proposes to review this orientation.

The new guidance states that :

• Insurance undertakings must identify the costs of the investments necessary for the application of the insurance contract.
• For products that require clear identification of the assets associated with the coverage of the reserves (such as unit-linked or ring-fenced funds) the investment charges should take into account all of these investments
• For other products, the company must determine these costs according to the characteristics of the products. In particular, the technical provisions under local standards can be used as drivers.

In this new version, therefore, there is no longer any mention of the inclusion of investment-related costs against the SCR or S2 technical provisions.

Taking into account the New Business in future management actions

The market points to potential inconsistencies in equity management should it be necessary to take into account new business not modelled in the projections used to calculate the EB.
EIOPA agrees that this guidance may be misinterpreted and clarifies that the guidance is intended to avoid modelled equity management being based solely on contract frontier cash flows and should reflect decision-making in a business continuity situation.
EIOPA has reformulated this guidance (#40b).

The role of the actuarial function in the validation of the EPIFP

Requests were received to clarify whether the actuarial function should validate the EPIFP calculation (not specified in Article 272 of the RD).
EIOPA recommends that the EPIFP should be validated by the actuarial function in the same way as the technical provisions.

The main feedback received on this consultation concerned the stripping of guarantees.

As a reminder, the consultation paper defines the situations where the guarantees of the same contract have to be dismembered, i.e. treated independently. The boundaries are then determined separately for each guarantee.

In the final opinion EIOPA clarifies some points:

• The assessment of contract boundaries does not require prior supervisory approval,
• In determining whether a guarantee is “noticeable” or not, the qualitative approach should be preferred and the quantitative approach should only be applied in situations where the qualitative approach does not allow for a satisfactory conclusion,
• There is no defined threshold for determining whether a guarantee is noticeable or not (the example given in the Consultation Paper is only an example and not a threshold),
• This assessment should be updated in case of extreme changes in the economic environment (i.e. contract boundaries may change).

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