Circular NBB_2016_17 / Circular on the application of the 'life underwriting risk' module in the calculation of the Solvency Capital Requirement under the standard formula

NBB_2016_17 – 25 April 2016 Circular – Page 1/3 14 Berlaimont Boulevard – BE-1000 Brussels tel. +32 2 221 38 12 – fax +32 2 221 31 04 company number: 0203.201.340 Brussels RPM www.bnb.be

Circular
Brussels, 25 April 2016
Reference: NBB_2016_17
Your contact:
Kajal Vandenput tel. +32 2 221 51 77 – fax +32 2 221 31 04 Kajal.vandenput@nbb.be

Circular on the orientations regarding the application of the 'life underwriting risk' module in the calculation of the solvency capital requirement under the standard formula

Scope
Belgian insurance or reinsurance undertakings; Insurance or reinsurance undertakings that are part of a Belgian group within the meaning of Article 339, 2° of the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings; Belgian undertakings that are part of a Belgian financial conglomerate within the meaning of Article 340, 1° of the aforementioned Law of 13 March 2016; Branches of third-country undertakings carrying on insurance [or reinsurance] activities in Belgium.

This circular applies to mutual insurance companies defined in Article 15, 79° of the aforementioned Law of 13 March 2016. For these undertakings, 'the Bank' should be replaced by 'the Office for the Supervision of Mutualities and National Unions of Mutualities' as defined in Article 15, 84° of the same Law.

This circular does not apply to insurance undertakings referred to in Articles 275, 276 or 294 of the aforementioned Law of 13 March 2016.

Subject
This circular aims to explain the Bank's orientations regarding the application of the 'life underwriting risk' module in the calculation of the solvency capital requirement under the standard formula.

Legal References
The Law: The Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings.
Regulation 2015/35: Delegated Regulation (EU) 2015/35 of the Commission of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).

Circular – Page 2/3 NBB_2016_17 – 25 April 2016

Structure
I. Objectives
II. Definitions
III. Additional Information
IV. Entry into Force
V. Orientations on the Application of the 'Life Underwriting Risk' Module

Madam,
Sir,

I. Objectives
This circular relates to Article 157 of the Law, as well as Articles 136 and 139 of Regulation 2015/35.
It aims to provide additional specifications on the rates that should be subjected to shocks to calculate the required capital at the level of the 'life underwriting risk' module referred to in Article 154 of the Law. It focuses on:
a) the 'mortality risk' sub-module, referred to in Article 157 of the Law and Article 137 of Regulation 2015/35; b) the 'longevity risk' sub-module, referred to in Article 157 of the Law and Article 138 of Regulation 2015/35; c) the 'disability-morbidity risk' sub-module, referred to in Article 157 of the Law and Article 139 of Regulation 2015/35.

Furthermore, these orientations provide additional specifications concerning the calculation of the required capital for 'disability-morbidity risk' in the case of contracts providing for multiple disability states. They aim to help undertakings appropriately define the transition rates that must be subjected to shocks when calculating technical provisions under crisis scenarios.

II. Definitions
In the absence of a definition in this circular, terms have the meaning defined in the legislative and regulatory acts referenced therein.

III. Additional Information
This circular is part of the harmonized implementation of the principles of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), as this implementation has been determined by the guidelines of the European Insurance and Occupational Pensions Authority. Undertakings may consult these guidelines for information purposes at the following address: https://eiopa.europa.eu/publications/eiopa-guidelines.

IV. Entry into Force
This circular applies from 23 March 2016.

NBB_2016_17 – 25 April 2016 Circular – Page 3/3

V. Orientations on the Application of the 'Life Underwriting Risk' Module

Orientation 1 – Increase in mortality rates
Undertakings should apply the increase in mortality rates referred to in Article 137 of Regulation 2015/35 regardless of the time unit of the rates (annual, monthly, etc.) and when the increase in mortality rates leads to an increase in technical provisions without the risk margin. After the increase, the value of the rates must not exceed 1.

Orientation 2 – Decrease in mortality rates
Undertakings should apply the decrease in mortality rates referred to in Article 138 of Regulation 2015/35 regardless of the time unit of the rates (annual, monthly, etc.) and when the decrease in mortality rates leads to an increase in technical provisions without the risk margin.

Orientation 3 – Increase in disability-morbidity incidence rates Undertakings should apply the increase in disability and morbidity rates referred to in Article 139, points a) and b), of Regulation 2015/35 regardless of the time unit of the rates (annual, monthly, etc.). After the increase, the value of the disability and morbidity rates should not exceed 1.

Orientation 4 – Decrease in recovery rates for disability-morbidity Undertakings should apply the decrease in the recovery rate for disability and morbidity referred to in Article 139, point c), of Regulation 2015/35 regardless of the time unit of the rates (annual, monthly, etc.).

Notwithstanding the preceding paragraph, undertakings should not apply the decrease to recovery rates whose value is 1, which merely reflects the fact that benefit payments cease at the end of the period provided for in the contract.

Orientation 5 – Multiple health state guarantees If transition rates between multiple health states are taken into account in the calculation of technical provisions, undertakings should consider all transition rates from a given health state to a more severe health state as disability and morbidity rates, and all transition rates from a given health state to a less severe health state (including the 'healthy' state) as recovery rates for disability and morbidity for the purpose of calculating the required capital for 'disability-morbidity risk' referred to in Article 139 of Regulation 2015/35, regardless of the current health state of the policyholder for whom a technical provision is calculated.

Only persistence rates should be adjusted to ensure that the value of the sum of transition rates from one health state to others, after being subjected to the shock, is always 1.

A copy of this circular is sent to the commissioner(s), approved auditor(s) of your undertaking.

We ask you to accept, Madam, Sir, the expression of our distinguished sentiments.

Jan Smets
Governor