FIT members noted that a wide margin of discretion is needed to determine whether the content of the Directive reflects several contracts with individual certificate holders or a single contract with an association or bank. It may be more evident when regulatory or legal requirements limit an insurer`s practical ability to re-evaluate its contracts than market and other restrictions. The European Insurance and Occupational Pensions Authority (EIOPA) provides advice on revisions to the Solvency II guidelines on contract limits and the assessment of technical provisions; the guidelines have been in force since the implementation of Solvency II in 2016. As part of the 2020 Solvency II review, EIOPA has identified several different practices in the implementation and monitoring of the calculation of technical provisions. EIOPA therefore proposes amendments to ensure a convergent application of Solvency II and its Delegated Regulation in this area. The comment period on this consultation will end on 12 November 2021, after EIOPA has published a final report on the consultation and submitted the guidelines for adoption by its Board of Supervisors. The first was the subject of the types of contracts discussed above and would therefore lead to a contract limit that would exclude planned future contract extensions. Point (c) shall be considered applicable where an insurance or reinsurance undertaking has the unilateral right to subsequently modify the premiums or benefits of a portfolio of insurance or reinsurance obligations so that the premiums in the portfolio fully reflect the risks covered by the portfolio. In the case of life assurance obligations where an individual risk assessment of the obligations to the insured person in the contract is carried out at the beginning of the contract and that assessment cannot be repeated before the changes in premiums or benefits, insurance and reinsurance undertakings shall assess, at contract level, whether the premiums fully reflect the risk referred to in point (c). Insurance and reinsurance undertakings shall not take into account limitations on the unilateral law referred to in points (a), (b) and (c) of this paragraph and limitations on the extent to which premiums or benefits may be modified which have no discernible effect on the economic viability of the contract. In determining whether it is a single contract or multiple contracts, FIT members also noted that some cash flows may be outside the limits of the contract when initially recognized, as restrictions limiting an insurer`s ability to revalue the contract have no commercial substance.
As circumstances change and these restrictions become more commercially important, these cash flows that were once outside the limits of the contract may fall within the limit. If the contract limits are reassessed in this way, the CSM of the existing group of contracts must be adapted. FIT members noted that in this particular case, the contract limit is 90 days, as the insurer`s physical obligation to provide services under a contract ends when it can terminate the contract. In addition, it was found that the insurer`s intention to reassess the risk or to carry out the reassessment is not relevant to the assessment of the contract limits – i.e. the contract limits end when the insurer has the practical opportunity to re-evaluate the entire contract, even if it is unlikely that it will actually exercise its right of revaluation. Currently, when evaluating insurance contracts that give policyholders the option to add insurance coverage at a later date, it is common to look at the premium for each component (i.e., the basic contract and the option) separately. Under IFRS 17, contract limits are set for the entire contract if the rights and obligations associated with the option are substantial and the contract is not divided into several components. Insurers may need to develop new estimates for a portion of cash flows in order to value these contracts in accordance with IFRS 17. Under IFRS 17, the limits of these contracts may be limited to the year for which the premiums were collected. 2.
All obligations relating to the contract, including obligations relating to the unilateral rights of the insurance or reinsurance undertaking to extend or extend the scope of the contract and obligations relating to premiums paid, shall be covered by the contract, unless otherwise provided for in paragraphs 3 to 6. An insurer may enter into a group contract under which it provides insurance coverage to members of an association or to customers of a bank, the so-called certificate holders. Comments made during this and previous discussions on treaty limits underscore the need to fully understand the substantive rights and obligations of insurance contracts in the application of contract limit requirements. Cash flows that fall outside the limits of the contract when initially recognised The proposed guidelines for the assessment of technical provisions aim to improve the consistency and convergence of business practices for all types and sizes of companies in the EU Member States and to help companies calculate their solvency II technical provisions. The proposed guidelines introduce new guidelines and amend existing guidelines on issues related to best-estimate assessment, including the application of future management measures and expert judgement; expenditure modelling and assessment of options and guarantees using economic scenario generators; and modelling the behaviour of policyholders. EIOPA also noted the need for clarification in the calculation of expected profits for future premiums. In the new and amended Guidelines, EIOPA wishes to clarify that where contracts with essential options and guarantees exist, undertakings are expected to use a valuation methodology that takes into account the fair value of those contracts. The guidelines for expertise, a key element in the calculation of technical provisions, are proposed on the basis of existing guidelines for the use of internal models that already applied to the valuation of technical provisions.
These guidelines are addressed to the competent national authorities in the context of Solvency II and are ultimately applied by actuaries and other professionals who may be entrusted with the exercise of actuarial functions. Contractual limits for contracts with the ability to add coverage This means that cash flows related to the same legal contract could potentially fall into more than one group of insurance contracts if they were accounted for in accordance with IFRS 17. Annual renewable term (TRT) contracts with staggered ratings and unit-linked contracts with additional insurance benefits contain several features that could have an impact on IFRS 17 accounting. Contracts such as these include some or all of the following. One question that arises is what limits can limit an insurer`s practical ability to re-evaluate a contract. Management must consider all conditions when assessing contract limits under IFRS 17, including risks that are reassessed and reassessed at what level. IFRS 17 may require an insurer to divide what is currently considered a contract into several shorter.B-term contracts, for example if there is a unilateral revaluation option against future coverage periods. Insurers can issue contracts that give policyholders the option to add insurance coverage at a later date. If a policyholder makes use of this option, the insurer is required to provide additional coverage.
A significant obligation to provide services ends when, in practice, the insurer is able to reassess the risks of the respective policyholder (or portfolio of insurance contracts) and, therefore, can set a price or level of performance that fully reflects the reassessed risks. The proposed Treaty Limits Guidelines are intended to promote the uniform application of the limits of an insurance or reinsurance contract. A contract limit determines whether the additional coverage resulting from policyholders` options is considered an existing or future business. The proposed guidelines provide additional guidance on existing requirements. The focus is on unbundling an insurance and reinsurance contract and assessing the discernible impact of a financial guarantee or cover on the economic viability of the contract. In particular, the new guidelines emphasise the objective of unbundling, ensuring that a contract is treated equally, whether it is sold as a single contract or as two independent contracts, where both are equivalent in terms of risk. The Guidelines help to determine which insurance or reinsurance obligations arise from future contract-related premiums in accordance with Articles 17 and 18 of Commission Delegated Regulation 2015/35; they are addressed to the supervisory authorities in the context of Solvency II. .
. .