Circular on Guidelines on Undertaking-Specific Parameters

NBB_2020_040 – 22 December 2020 Circular – P. 1/7 14 Boulevard de Berlaimont – BE-1000 Brussels tel. +32 2 221 33 93 – fax +32 2 221 31 36 company number: 0203.201.340 RPM Brussels www.bnb.be

Circular
Brussels, 22 December 2020
Reference: NBB_2020_040 your contact:
Jérôme Bourtembourg tel. +32 2 221 33 93 – fax +32 2 221 31 36 Jerome.bourtembourg@nbb.be

Circular on Guidelines on Undertaking-Specific Parameters

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 undertakings from third countries 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 guidelines on the data quality criteria to be taken into account in the process of calculating undertaking-specific parameters and group-specific parameters.

This circular replaces Circular 2016_19 on the same subject. The third paragraph of Guideline 6 has been amended and Annexes 1 to 4 have been added.

Legal References

• The Law: the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings

Circular – P. 2/7 NBB_2020_040 – 22 December 2020

• 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).
• Regulation 2015/498: Implementing Regulation (EU) 2015/498 of the Commission of 24 March 2015 laying down implementing technical standards with regard to the procedure for the approval by supervisory authorities of the use of undertaking-specific parameters under Directive 2009/138/EC of the European Parliament and of the Council

Structure
I. Objectives
II. Definitions
III. Additional Information
IV. Entry into Force
V. Guidelines on Undertaking-Specific Parameters
VI. Annex 1 - QUANT Template - USP - Historical SCR Ratios
VII. Annex 2 - QUANT Template - USP Premium Risk
VIII. Annex 3 - QUANT Template - USP Reserve Risk - Method 1
IX. Annex 4 - QUANT Template - USP Reserve Risk - Method 2

Madam,
Sir,

I. Objectives
This circular relates to Articles 151 and 166 of the Law, as well as Articles 218, 219, 220, 335 and 338 of Regulation 2015/35 and Articles 1 to 7 of Regulation 2015/498.

When calculating the Solvency Capital Requirement, undertakings may replace, in the standard formula, a subset of parameters (standard parameters) with parameters specific to them, if the standard formula does not provide an appropriate representation of the underlying risks. This should help promote good risk management in insurance and reinsurance undertakings.

These guidelines provide additional specifications on the data quality criteria to be taken into account in the process of calculating undertaking-specific parameters and group-specific parameters.

Undertakings may only replace a subset of standard parameters in the "underwriting risk" modules with specific parameters. This means that certain input data used to calculate these parameters will be similar to (and may in some cases represent the same information as) the input data used to calculate technical provisions. The actuarial function must contribute to the assessment of these input data within the risk management system. The Law describes the role of the actuarial function and its contribution to the effective implementation of the risk management system, and in particular to the modelling of the risks underlying the capital requirement calculation. The role of the actuarial function in assessing the quality of the data used to calculate undertaking-specific parameters is therefore very important.

For information, Article 1 of Regulation 2015/498 specifies the content of the approval application that an insurance or reinsurance undertaking must submit to the Bank in order to use undertaking-specific parameters to replace a subset of parameters of the standard formula. The application must in particular contain the following elements:

NBB_2020_040 – 22 December 2020 Circular – P. 3/7 a) documents attesting to the internal decision-making process of the insurance or reinsurance undertaking that led to the application; b) a start date, from which the use of undertaking-specific parameters is requested; c) the subset of standard parameters for which replacement by undertaking-specific parameters is requested; d) for each segment, the standardized method used and the undertaking-specific parameter value obtained by this method; e) the calculation underlying the undertaking-specific parameters that the insurance or reinsurance undertaking requests to use, and information showing that this calculation is appropriate; f) elements proving that the data used for the calculation of undertaking-specific parameters are comprehensive, accurate and appropriate and meet the data quality criteria defined in Article 219 of Delegated Regulation (EU) 2015/35; g) justifications showing why each standardized method of calculating the undertaking-specific parameter for a segment gives the most accurate result for the purposes of complying with the requirements set out in Article 151 of the Law. That is to say, in particular, that the Solvency Capital Requirement corresponds to the Value-at-Risk of the basic own funds of the insurance or reinsurance undertaking, with a confidence level of 99.5% over a one-year horizon.

Only the approval process for undertaking-specific parameters at the individual level is harmonized by applying technical standards. In order to improve the consistency of the use of group-specific parameters in Member States, these guidelines aim to harmonize the Bank's approval process for group-specific parameters.

Guidelines 1 to 9 apply to both individual undertakings and the calculation of the group Solvency Capital Requirement according to the consolidation method or according to a combination of methods on consolidated data calculated in accordance with Article 335, paragraph 1, points a), b) and c), of Regulation 2015/35.

To calculate undertaking-specific parameters, undertakings may select a method from the standardized methods listed in Annex XVII of Regulation 2015/35. Any modification of the standardized methods for undertaking-specific parameters means that the approval referred to in Article 166 of the Law is no longer possible. However, the modified method could be qualified as a partial internal model subject to the approval of the Bank, as provided for in Articles 167, 168 and 174 to 188 of the Law.

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.

Circular – P. 4/7 NBB_2020_040 – 22 December 2020

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, for information, consult these guidelines at the following address: https://eiopa.europa.eu.

IV. Entry into Force
This circular applies from 31 December 2020.

V. Guidelines on Undertaking-Specific Parameters

Guideline 1 – Role of Expert Judgment
For the purpose of determining undertaking-specific parameters, undertakings should only be authorized to use assumptions based on expert judgment to adjust existing data and not to replace missing data.

Undertakings should only use assumptions based on expert judgment if the resulting adjusted data meet the criteria set out in Article 219 of Regulation 2015/35 at a higher level and should demonstrate this compliance upon request by supervisory authorities.

Guideline 2 – Materiality
Undertakings should ensure that the data quality criteria set out in Article 219 of Regulation 2015/35 are met regardless of the materiality of the segment for which undertaking-specific parameters are used.

Guideline 3 – Adjustments to Increase the Level of Data Adequacy Subject to Guideline 1, when determining undertaking-specific parameters, undertakings should adjust historical data as necessary to eliminate the effects of irrelevant risks, at least for the next twelve months.

Guideline 4 – Adjustments of Historical Data to Eliminate the Effects of Catastrophic Events and to Take into Account Existing Reinsurance Contracts Undertakings should, where appropriate, put in place internal policies and procedures aimed at a) detecting losses due to catastrophic events; b) adjusting data in accordance with Annex XVII, point B., paragraph 2, point e), of Regulation 2015/35; c) adjusting data in accordance with Annex XVII, point B., paragraph 2, point d), point C., paragraph 2, point c), and point D., paragraph 2, point f), of Regulation 2015/35.

Undertakings should ensure that changes in non-proportional reinsurance priorities are duly taken into account if they have an impact on the volatility of reserve risk.

NBB_2020_040 – 22 December 2020 Circular – P. 5/7

Guideline 5 – Calculation of the Non-Proportional Reinsurance Adjustment in the Scope of Premium Risk When undertakings determine the adjustment factor for the effect of non-proportional reinsurance as provided for in Article 218, paragraph 1, point a), iii) and point c) iii), of Regulation 2015/35, they should ensure that both the gross data and the net non-proportional reinsurance data for the next twelve months comply with Guidelines 1 to 4.

Guideline 6 – Continuous Compliance
Undertakings should monitor compliance with the requirements regarding the use of undertaking-specific parameters within the framework of the internal assessment of risk and solvency (ORSA).

In the framework of the report to the supervisor on the assessment of risk and solvency (ORSA report), undertakings should inform the Bank of any significant changes to the information contained in the approval application and provide relevant details of these significant changes.

Undertakings must provide the Bank annually, and no later than at the end of the deadline for submitting Solvency II quantitative reporting, details concerning the calculation of undertaking-specific parameters performed using the new set of data and the information necessary to demonstrate that the calculation is adequate; at minimum the USP calculation file, the file listing the tests implemented to demonstrate compliance with the requirements concerning the use of USPs, as well as the updated directory of assumptions. Undertakings are required to provide annually, with these updates, the tables included in the annex to this circular, completed. These tables must also be completed and submitted to the Bank with the approval application for the use of undertaking-specific parameters.

If undertakings realize that another standardized method provides a more accurate result for the purposes of complying with the calibration requirements referred to in Article 151, paragraph 3 of the Law, they should submit a new file for the use of this other standardized method.

The Bank expects that approved auditors pay particular attention to the review of USP parameters during their review of Solvency II reporting.

Guideline 7 – Remedy for Non-Compliance
In the event of non-compliance with the requirements regarding the use of undertaking-specific parameters, the Bank decides whether the undertaking can remedy the non-compliance within a period of three months.

When adopting its decision, the Bank will take into account the degree and scope of the non-compliance as well as the time required to remedy it and the actions the undertaking intends to take to comply with the requirements concerning the use of undertaking-specific parameters.

When it is impossible to remedy the non-compliance within a period of three months, the Bank withdraws the approval regarding the use of undertaking-specific parameters in accordance with Article 8 of Regulation 2015/498.

When the approval is withdrawn, undertakings should calculate the Solvency Capital Requirement using standard parameters and submit a new application if they intend to request the use of undertaking-specific parameters again.

Circular – P. 6/7 NBB_2020_040 – 22 December 2020

Guideline 8 – Request by the Bank to Use Undertaking-Specific Parameters If the Bank requests the undertaking to use undertaking-specific parameters in accordance with Article 166 of the Law, it should indicate to the undertaking the parameters referred to in Article 218 of Regulation 2015/35 that must be replaced. After establishing contact with the undertaking, the Bank sets a reasonable schedule for the submission of the application.

Upon receipt of the Bank's request, the undertaking should analyze the available standardized methods.

Guideline 9 – Significant Deviation
When examining the existence of a significant deviation, within the meaning of Article 166 of the Law, the Bank will take into account the following relevant factors:
a) the conclusions of the supervisory review process; b) the nature, type and significance of the deviation; c) the possibility and severity of any negative impact on policyholders and beneficiaries; d) the level of sensitivity of the assumptions to which the deviation relates; e) the expected duration and volatility of the deviation during the duration of the deviation.

The Bank performs this analysis at the level of each segment for which undertaking-specific parameters can be used.

Guideline 10 – Application for Approval of the Use of Group-Specific Parameters The application for approval of the use of group-specific parameters should include, at least, the information provided for in paragraphs 2, 4 and 5 of Article 1 of Regulation 2015/498, where any reference to "undertaking-specific parameters" should be understood as a reference to "group-specific parameters".

At the motivated request of the group supervisor, the insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should provide additional information, if this is necessary to assess the approval application.

Guideline 11 – Scope of the Use of Group-Specific Parameters by the Group When the group Solvency Capital Requirement is calculated according to Method 1 or according to a combination of Method 1 and Method 2, the insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should only use group-specific parameters for consolidated data calculated in accordance with Article 335, paragraph 1, points a), b) and c), of Regulation 2015/35.

When the group Solvency Capital Requirement is calculated according to Method 2, the insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should not use group-specific parameters.

If an undertaking uses undertaking-specific parameters to calculate group solvency according to Method 2, undertaking-specific parameters should only be included in the calculation of the group Solvency Capital Requirement for undertakings that have obtained approval from supervisory authorities.

Guideline 12 – Data Quality Requirements at Group Level The insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should be able to demonstrate to the group supervisor that the nature of the group's activities and its risk profile are sufficiently similar to those of the individual undertakings providing the data to ensure consistency between the statistical assumptions underlying the data used at the individual entity level and at the group level.

NBB_2020_040 – 22 December 2020 Circular – P. 7/7

Guideline 13 – Consultation with the College of Supervisors Within the framework of the consultation referred to in Article 356, paragraph 3, of Regulation 2015/35, the group supervisor and the other supervisory authorities within the college of supervisors should, among other things, analyze and discuss the representativeness of data at group level and the relevance of the standardized method used.

Guideline 14 – Information to be Provided to the College of Supervisors In the event of an application for approval of the use of undertaking-specific parameters by an individual undertaking included in the scope of the group solvency calculation, the supervisory authority receiving the application should inform the college of supervisors of the receipt of the application and its decision. If the application is rejected, it should inform the college of supervisors of the main reasons for its decision.

Before adopting its final decision on the application to use group-specific parameters, the group supervisor should take into account the decisions of supervisory authorities on applications from individual undertakings included in the scope of the group solvency calculation to use undertaking-specific parameters.

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

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

Pierre WUNSCH
Governor