GFSC Guidance Note on Solvency 2: Calculation of technical provisions

Version: 1.0 Publication Date: 17 March 2025

www.gfsc.gi GFSC Guidance Note Solvency 2: Calculation of technical provisions

Gibraltar Financial Services Commission Guidance Note - Solvency 2: Calculation of technical provisions 2 Contents

1. Introduction ......................................................................................................................................... 3
2. Best Estimate ....................................................................................................................................... 3 Simplified calculation of recoverables from reinsurance contracts and special purpose vehicles 3 Simplified calculation of the best estimate for insurance obligations with premium adjustment mechanism ...................................................................................................................................... 4 Simplified calculation of the calculation of the counterparty default adjustment ......................... 4
3. Risk Margin........................................................................................................................................... 5

Gibraltar Financial Services Commission Guidance Note - Solvency 2: Calculation of technical provisions 3

1. Introduction 1.1 This Guidance Note sets out the expectations of the Gibraltar Financial Services Commission (GFSC) in respect of how insurance undertakings1 and reinsurance undertakings2 should calculate their technical provisions. Insurance undertakings and reinsurance undertakings are collectively referred to as ‘insurers’ or ‘firms’ within this Guidance Note. 1.2 This Guidance Note is relevant to all insurers and should be read alongside the relevant provisions of the Financial Services (Insurance Companies) Regulations 2020 (the ‘Insurance Companies Regulations’) and the Financial Services (Solvency 2)(Technical Standards) Regulations 20253 (the ‘Solvency 2 Technical Standards’). 1.3 Section 2 of this Guidance Note is also relevant to third-country insurance undertakings that have a branch in Gibraltar (third-country branch undertakings). Such undertakings should read any reference to ‘technical provisions’ as ‘the provisions referred to in regulation 154 of the Insurance Companies Regulations’, and other references to provisions within the Insurance Companies Regulations and the Solvency 2 Technical Standards with the necessary modifications. 1.4 In line with Article 56 of the Solvency 2 Technical Standards, insurers are expected to ensure that the methods used to calculate technical provisions are proportionate to the nature, scale and complexity of the risks underlying their insurance and reinsurance obligations. 1.5 It is important that firms carefully consider whether the methods used in their technical provisions calculations comply with the requirements set out in the Insurance Companies Regulations and the Solvency 2 Technical Standards, including that they are in fact proportionate. 1.6 The following sections of this Guidance Note set out the GFSC’s expectations in respect of insurers applying simplifications to the best estimate and risk margin elements of the technical provisions.
2. Best Estimate Simplified calculation of recoverables from reinsurance contracts and special purpose vehicles 2.1. Where appropriate, firms may calculate the amounts recoverable from reinsurance contracts and special purpose vehicles before adjusting those amounts to take account of the expected loss due to default of the counterparty as the difference between the following estimates: (a) the best estimate calculated gross as referred to in regulation 67(2)(b)(iii) of the Insurance Companies Regulations; and (b) the best estimate, after taking into account the amounts recoverable from reinsurance contracts and special purpose vehicles and without an adjustment for the expected loss due to default of the counterparty (unadjusted net best estimate) calculated in accordance with paragraph 2.2. 1 Financial Services (Insurance Companies) RegulaƟons 2020, RegulaƟon 3 2 ibid. 3 Financial Services (Solvency 2) (Technical Standards) 2025

Gibraltar Financial Services Commission Guidance Note - Solvency 2: Calculation of technical provisions 4 2.2. Firms may use methods to derive the unadjusted net best estimate from the gross best estimate without an explicit projection of the cash flows underlying the amounts recoverable from reinsurance contracts and special purpose vehicles. Firms may calculate the unadjusted net best estimate based on homogeneous risk groups. Each of those homogeneous risk groups should cover not more than one reinsurance contract or special purpose vehicle unless those reinsurance contracts or special purpose vehicles provide a transfer of homogeneous risks. Simplified calculation of the best estimate for insurance obligations with premium adjustment mechanism 2.3. Where appropriate, firms may calculate the best estimate of long-term insurance business obligations with an arrangement by which the firm has the right or the obligation to adjust the future premiums of an insurance contract to reflect material changes in the expected level of claims and expenses (premium adjustment mechanism) using cash flow projections. These projections must assume that changes in the level of claims and expenses occur simultaneously with premium adjustments and result in a net cash flow that is equal to zero, provided that all of the following conditions are met: (a) the premium adjustment mechanism fully compensates the firm for any increase in the level of claims and expenses in a timely manner; (b) the calculation does not result in an underestimation of the best estimate; and (c) the calculation does not result in an underestimation of the risk inherent in those insurance obligations. Simplified calculation of the calculation of the counterparty default adjustment 2.4. Where appropriate, firms may calculate the adjustment for expected losses due to default of the counterparty, referred to in regulation 76 of the Insurance Companies Regulations for a specific counterparty and homogeneous risk group to be equal as follows: where: (a) 𝑃𝐷 denotes the probability of default of that counterparty during the following 12 months; (b) 𝐷𝑢𝑟𝑚𝑜𝑑 denotes the modified duration of the amounts recoverable from reinsurance contracts with that counterparty in relation to that homogeneous risk group; and (c) 𝐵𝐸𝑟𝑒𝑐 denotes the amounts recoverable from reinsurance contracts with that counterparty in relation to that homogeneous risk group.

Gibraltar Financial Services Commission Guidance Note - Solvency 2: Calculation of technical provisions 5 3. Risk Margin 3.1. Where appropriate, firms may use simplified methods when they calculate the risk margin, including one or more of the following: (a) methods which use approximations of the amounts denoted by the terms SCR(t) referred to in Article 37(1) of the Solvency 2 Technical Standards (Calculation of the risk margin); and (b) methods which approximate the discounted sum of the amounts denoted by the terms SCR(t) as referred to in Article 37(1) of the Solvency 2 Technical Standards (Calculation of the risk margin) without calculating each of those amounts separately. 3.2. Where appropriate, firms may derive the risk margin for calculations that need to be performed quarterly from the result of an earlier calculation of the risk margin without an explicit calculation of the formula referred to in the Solvency 2 Technical Standards.

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