Circular NBB_2016_18 / Circular on guidelines for the 'health catastrophe risk' sub-module in the Solvency Capital Requirement calculation under the standard formula

NBB_2016_18 – 25 April 2016 Circular – Page 1/5 14 Berlaimont Boulevard – 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_18 your contact:
Kajal Vandenput tel. +32 2 221 51 77 – fax +32 2 221 31 04 Kajal.vandenput@nbb.be

Circular on guidelines for the 'health catastrophe risk' sub-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 entities 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] activity 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 guidelines regarding the 'health catastrophe risk' sub-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 2/5 NBB_2016_18 – 25 April 2016

Structure
I. Objectives
II. Definitions
III. Additional Information
IV. Entry into Force
V. Guidelines on the 'health catastrophe risk' sub-module

Madam, Sir,

I. Objectives
This circular relates to Article 158 of the Law and Articles 160 to 163 of Regulation 2015/35. It aims to help undertakings define and calculate appropriately the quantities involved in the calculation of the capital required for health catastrophe risk in various cases and possible situations.

II. Definitions
For the purposes of these guidelines, the following definition has been developed:
"Single Claim": a claim resulting from a specific event occurring to a single identified insured person.
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 determined by the guidelines of the European Insurance and Occupational Pensions Authority (EIOPA). 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_18 – 25 April 2016 Circular – Page 3/5

V. Guidelines on the 'health catastrophe risk' sub-module

Guideline 1 – General provisions concerning the calculation of the capital requirement for health catastrophe risk If it is necessary to determine the cause of a catastrophe scenario in the calculations of the Solvency Capital Requirement for the 'health catastrophe risk' sub-module and if the effects described in the scenarios can have different causes, undertakings should use in the calculation the cause generating the highest loss in basic own funds. Undertakings should not, in particular, exclude the scenario according to which certain possible causes of the catastrophe scenario are excluded under the policy terms and conditions (e.g., terrorism).

Guideline 2 – Calculation of the insured sum for death benefits caused by an accident If an insurance contract provides for benefits in case of death, regardless of the cause, and additional benefits in case of death caused by an accident, undertakings should only take into account the additional benefits when calculating the value of the benefits referred to in Article 161, paragraph 3, point b), and Article 162, paragraph 4, point c), of Regulation 2015/35, provided that the following conditions are met:
a) the benefits have been split; b) the risks related to the benefits in case of death, regardless of the cause, are duly taken into account in the 'life underwriting risk' module.
If additional payments of recurring benefits are provided in case of death caused by an accident, undertakings should base their calculation of the value of benefits to be paid on best estimate parameters (mortality table and discount rate curve) taking into account relevant demographic characteristics. Undertakings should also take into account in the calculation the contractual duration of the recurring benefit payments. In the absence of demographic data or in the absence of sufficient demographic data, undertakings should use in the calculation of the value of benefits realistic assumptions regarding demographic parameters based on public or internal statistics. Undertakings should be able to justify these assumptions satisfactorily to the Bank. In the calculation of the value of benefits, undertakings should take into account expected increases in the amount of recurring benefit payments and claims management expenses.

Guideline 3 – Calculation of the insured sum for permanent disability benefits If disability benefits can be paid either as a lump sum or as recurring payments, undertakings should adopt a three-step approach to determine the value of the benefits referred to in Article 161, paragraph 3, point b), and Article 162, paragraph 4, point c), of Regulation 2015/35:
a) Step 1: determine the planned proportion of benefit payments as a lump sum. b) Step 2: determine, for each insured person, the benefits in case of lump sum payment and the best estimate of recurring benefits. c) Step 3: calculate the average of the two values determined in Step 2 weighted by the proportion calculated in Step 1. Notwithstanding the first paragraph of this guideline, when the choice between lump sum and recurring payments lies with the beneficiary, the undertaking should use the maximum of the two values instead of the weighted average. Undertakings should justify the assumptions underlying the calculation of the proportions referred to in the first paragraph. If undertakings are unable to justify the calculation of the proportions satisfactorily to the Bank, they should calculate the value of the benefits as the maximum between the lump sum and the best estimate of recurring benefits.

Circular – Page 4/5 NBB_2016_18 – 25 April 2016 If the amount of disability benefit payments depends on the percentage of disability of the victims, undertakings should calculate the value of the benefits for all victims as follows:
a) establish a distribution of disability percentages among victims; b) calculate the claim costs associated with each disability percentage; c) apply the distribution of percentages to the associated claim costs accordingly.
Undertakings should justify the assumptions underlying the calculation of the distribution of percentages referred to in the fourth paragraph. If undertakings are unable to justify the calculation of the proportions satisfactorily to the Bank, they should use for all victims the maximum claim cost of all disability percentages. In the calculation of the best estimate of recurring benefit payments for an event of the type 'permanent disability caused by an accident', undertakings should assume that payments are made for the entire indemnification period specified in the policy terms and conditions, but that exits due to mortality may occur. For the purpose of the calculation, undertakings should establish realistic assumptions on the mortality rates of persons with permanent disability based on public or internal statistics. Undertakings should be able to justify these assumptions. In the calculation of the value of benefits, undertakings should take into account expected increases in the amount of recurring benefit payments and claims management expenses.

Guideline 4 – Calculation of the insured sum for ten-year or twelve-month disability benefits If the beneficiary can receive either a lump sum or recurring benefit payments in the case of events of the type 'ten-year disability caused by an accident' or 'twelve-month disability caused by an accident', undertakings should adopt the same approach as described in Guideline 3. If the amount of disability benefit payments depends on the percentage of disability of the victims, undertakings should adopt the same approach as described in Guideline 3, paragraphs 4 and 5. When calculating the best estimate of recurring benefit payments for the event type 'ten-year disability caused by an accident' or 'twelve-month disability caused by an accident', undertakings should exclude any cause of exit and take into account all future payments between:
a) the end of any deferral period; b) the end of the ten-year or twelve-month period or, if earlier, the end of the coverage period.
In the calculation, undertakings should take into account expected increases in the amount of recurring benefit payments and claims management expenses.

Guideline 5 – Calculation of the insured sum for medical treatment caused by an accident Undertakings should calculate average amounts in the case of events of the type 'medical treatment caused by an accident' by dividing the benefits for medical treatment generated by an accident observed in previous years, including related expenses, by the number of 'single claims' corresponding to these benefits. Undertakings should ensure that the observation period is sufficiently long to minimize statistical errors. To calculate average amounts, undertakings should adapt previous data to take into account the inflation rate of medical expenses.

NBB_2016_18 – 25 April 2016 Circular – Page 5/5 If it is expected that a medical treatment will last more than one year, undertakings should take into account the expected inflation rate of medical expenses.
Undertakings should appropriately distinguish between benefits paid for medical treatment caused by an accident and other benefits based on previous observations.
If necessary, undertakings should complement this analysis with expert judgment. Undertakings should base all their estimates on public or internal statistics. Undertakings should be able to justify these assumptions satisfactorily to the Bank.

Guideline 6 – Calculation of the insured sum in the 'accident concentration risk' sub-module To calculate the value of the benefits referred to in Article 162, paragraph 4, point c), of Regulation 2015/35, undertakings should apply the same principles as those described in Guidelines 2 to 4. If an insured person is covered by two or more contracts with benefit payments in case of event type e and which are not mutually exclusive, undertakings should add the benefit payments for the different contracts to determine the value SI(e,i) referred to in Article 162, paragraph 4, point c), of Regulation 2015/35.

Guideline 7 – Calculation of exposure to income protection risk in case of a pandemic If the contract provides for recurring benefit payments, undertakings should calculate the best estimate of benefit payments in case of permanent incapacity caused by an infectious disease, referred to in Article 163, paragraph 2, point b), of the implementing measures, as provided for in Guideline 3 for the best estimate of benefit payments in case of event type 'permanent disability caused by an accident'.

Guideline 8 – Calculation of the best estimate of medical expense amounts Undertakings should calculate the best estimate of amounts to be paid for recourse to medical treatments of type h, referred to in Article 163 of Regulation 2015/35, as the product:
a) of the expected number of recourse to medical treatments of type h for an insured person; b) of the expected average claim cost for a single recourse to medical treatments of type h where the value of the expected number of recourse to medical treatments is at least 1. Undertakings should make a precise estimate, based on their own experience:
a) of the expected number of recourse to each medical treatment of type h; b) of the average claim cost for a single recourse to each medical treatment of type h.
When an undertaking can justify that past experience does not allow for a precise estimate, it must use the value 1 as the expected number of recourse to medical treatments of type 'hospitalization' and 'no formal medical care requested' and the value 2 for recourse to medical treatments of type 'doctor consultation'. Undertakings should adapt the estimate of the average claim cost to take into account the inflation rate of medical expenses and complement it, if necessary, with expert judgment. The observation period must be sufficiently long to avoid statistical errors.

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