Fixed indexed annuities with Market Risk Benefits
This paper focuses on the cash flow modeling aspects of Market Risk Benefits on fixed indexed annuities contracts, especially the methodology for projecting indexed account growth.
With Solvency II now implemented, a significantly increasing number of insurers have already disclosed their opening Solvency II coverage ratios. However, the next challenge, in the short term, is the public disclosure of more detailed solvency and financial condition information, which is required by Solvency II.
In June 2015, the European Insurance and Occupational Pensions Authority (EIOPA) expressed its opinion that external audit of such information can be a “powerful tool” in ensuring high-quality public disclosures under Solvency II. In July 2015, EIOPA indicated that it would take further regulatory action in case the quality and comparability of the public disclosures were found to be insufficient. EIOPA is of the view that in order to make best use of external audit in the context of the Solvency and Financial Condition Report (SFCR), at individual and group level, the main elements of the SFCR (balance sheet, own funds and capital requirements) of all insurance and reinsurance undertakings could fall within the scope of an external audit. Hence the scope has been defined in this way by some local supervisors.
In this article we explore the extent to which different countries have adopted or promoted practices or requirements for external audit or certification of the Solvency II results. Some examples will be provided of countries where these requirements are already well defined and confirmed (for example, Portugal) or are in consultation at present (for example, Ireland and the UK).
As mentioned, there are some member states that have already confirmed they will require external audit or have confirmed their intention to make external audit an official requirement. In Figure 1, these countries are shown either with the agreed scope or the proposed scope of the external audit to be performed and, in some cases, who should be responsible for performing this external audit.
Figure 1: Countries Confirming the Need for External Certification/Audit
|Country||Confirmed via||Scope of the external audit|
|Austria||Communication by regulator||
|Belgium||Communication by regulator||
|Germany||Communication by regulator||
|Ireland||Currently under public consultation||
|The Netherlands||Communication by regulator||
|Poland||Communication by regulator||
|Portugal||Included in regulation||
|Slovenia||Communication by regulator||
|Spain||Communication by regulator||
|United Kingdom||Public consultation finalised but final requirements have not been published yet||
The supervisors of Estonia, Finland, Greece, Lithuania, and Latvia have indicated that they are not going to make external audit an official requirement. They have not given any signs either that it might be required in the near future.
The supervisors in France and Sweden do not currently have the mandate by law to enforce external audit as an official requirement but are working on this matter and might require an external audit in the near future. In France, the body that can enforce this requirement is the Treasury. The French insurance supervisor (APCR) supports an external audit of at least some parts of the SFCR, such as the balance sheet, eligible own funds and capital requirements.
Croatia, Czech Republic, Denmark, and Slovakia have confirmed limited external audit requirements but might require external audit of a broader scope in the near future. The supervisor in Croatia will require an audit firm to assess the adequacy and completeness of the SFCR. Czech Republic has stated that in the case of deficiencies in insurance and reinsurance activities an external audit of the system of governance and of the information in the SFCR is required. The kinds of deficiencies that are considered here have yet to be defined. As for Denmark, an external audit will be required only for the data in the Solvency II reporting that also appears in the financial statements. In Slovakia, the supervisor has communicated that audited data is to be welcomed and that the issue will be discussed further during the review process.
There are differences in the scope required, or proposed, by each local supervisor but what most supervisors agree on is that the main elements of the SFCR should be audited.
In Ireland, Portugal, and the UK, the external audit requirements have been well defined for some time (see sidebar).
External certification has several obvious advantages:
Most importantly, under Solvency II insurers are disclosing more about their capital requirements, risk profiles, and economic values than ever before (especially for insurers that are not already publishing economic values such as Embedded Value). This means that not only do insurers need to be able to assert the credibility of the results, they must also be sure that they are going to be able to explain them and link them to their other communications to the market.
Under Solvency II insurers are disclosing more about their capital requirements, risk profiles, and economic values than ever before.
In addition, the calculations underlying the Solvency II results are complex and based on actuarial, financial, and risk modelling. In order to ensure the correct application and consistency of these calculations to the Solvency II technical requirements, these calculations would need to be reviewed or audited by appropriately qualified professionals, such as actuaries and risk professionals, with experience in economic valuation and economic capital for insurers and reinsurers. In the case of Portugal, this is reflected in the regulations, with a clearly defined division of responsibilities between the auditor of accounts and a responsible actuary. In Ireland, a reviewing actuary should be assigned that needs to review the work of the Head of Actuarial Function´s work related to technical provisions. This is not included as part of the external audit guidelines but is included separately in the guidelines describing the role of the Head of Actuarial Function.
At Milliman, we have vast experience in the implementation of the quantitative and qualitative aspects of Solvency II across Europe and in all three pillars. Our proven experience in the practical implementation of the complex calculations required to meet the Solvency II technical requirements, as well as having already carried out a number of internal and non-public certifications of Solvency II results, means that we can add value to your external certification process.
The authors would like to thank Eamonn Phelan and Michael Culligan for their contributions to this article.
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Germany, Austria, Switzerland, Nordics
Italy, Central and Eastern Europe