Regulatory Alerts2016-04-25 | NBB_2016_17Added · Updated
Circular NBB_2016_17 on the application of the 'life underwriting risk' module in the Solvency Capital Requirement calculation under the standard formula
This circular specifies the shock rates for the life underwriting risk module (mortality, longevity, and disability/morbidity) that Belgian insurance and reinsurance companies must apply when calculating the Solvency Capital Requirement using the standard formula. It mandates that companies apply upward shocks to mortality and disability/morbidity incidence rates, and downward shocks to disability/morbidity recovery rates, ensuring that post-shock rate values do not exceed 1. Additionally, it clarifies that transition rates between multiple health states must be treated as disability/morbidity rates for capital calculation purposes, with only persistence rates adjusted to maintain a sum of 1. These requirements apply to Belgian insurance entities, including mutual insurance companies, effective from March 23, 2016.
NBB_2016_17 – 25 April 2016 Circular – Page 1/3 14 Boulevard de Berlaimont – BE-1000 Brussels Tel. +32 2 221 38 12 – Fax +32 2 221 31 04 Company number: 0203.201.340 RPM Brussels 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 regarding the guidelines on 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 forming 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 forming part of a Belgian financial conglomerate within the meaning of Article 340, 1° of the aforementioned Law of 13 March 2016; Branches of undertakings from third countries carrying on insurance [or reinsurance] activity in Belgium.
This circular applies to mutual insurance companies as 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 guidelines regarding the application of the 'life underwriting risk' module in the calculation of the solvency capital 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. Guidelines 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 sub-module 'mortality risk', referred to in Article 157 of the Law and Article 137 of Regulation 2015/35; b) the sub-module 'longevity risk', referred to in Article 157 of the Law and Article 138 of Regulation 2015/35; c) the sub-module 'disability-morbidity risk', referred to in Article 157 of the Law and Article 139 of Regulation 2015/35.
Furthermore, these guidelines provide additional specifications concerning the calculation of the required capital for 'disability-morbidity risk' in the case of contracts providing for multiple states of disability. 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, the terms have the meaning defined in the legislative and regulatory acts referred to 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 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. Guidelines on the application of the 'life underwriting risk' module
Guideline 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.
Guideline 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.
Guideline 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.
Guideline 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.
Guideline 5 – Guarantees of several health states If transition rates between several 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 serious health state as disability and morbidity rates, and all transition rates from a given health state to a less serious 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