Monday October 29, 2012 - Top 10 Risk Compliance News Events

7/30/2019 Monday October 29, 2012 - Top 10 Risk Compliance News Events

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)

www.risk-compliance-association.com

International Association of Risk and ComplianceProfessionals (IARCP)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the

week's agenda, and what is next

Dear Member,

This week I will start from a really

interesting approach to risk management: There are essential parts of the valuation framework still under political discussions

What? Politicians in actuarial roles? Who said that?

The European Insurance and Occupational Pensions Authority (EIOPA) that was established in consequence of the reforms to the structure of supervision of the financial sector in the European Union.

This phrase is at the top of the "I wish I had the guts to say it" list for asupervisor. Congratulations EIOPA.

Read more at Number 4 below.

Welcome to the Top 10 list.
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Chairman Ben S. Bernanke

U.S. Monetary Policy and InternationalImplications

At the "Challenges of the Global Financial System:Risks and Governance under Evolving Globalization,"

A High-Level Seminar sponsored by Bank of Japan-InternationalMonetary Fund, Tokyo, Japan

The new UK Regulator: The Financial Conduct Authority

The Financial Conduct Authority (FCA) will be the new regulator whose vision it is tomake markets work well soconsumers get a fair deal.

It will be responsible forrequiring firms to put the

well-being of their customers atthe heart of how they run theirbusiness, promoting effectivecompetition and ensuring thatmarkets operate with integrity.

The FCA will start work in 2013, when it will receive new powersfrom the Financial Services Bill that is currently going through

parliament.


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Cyber Experts Engage on DARPAs Plan X

Proposers Day dialogue cements program approach

When the team behind DARPA s Plan X mapped out where it wanted togo with research in the development of cyber capabilities and platforms , itknew the DARPA approach to problem solving included soliciting inputfrom the leading experts in the field.

Technical Specifications for theSolvency II valuation and SolvencyCapital Requirements calculations(Part I)

This technical specification is a working document proposed by EIOPA to be used by insurance and reinsurance undertakings participating inany quantitative assessment to be undertaken until new update isavailable.

International Association of Insurance Supervisors IAIS Releases Proposed Policy Measures forGlobal Systemically Important InsurersPublic consultation to continue through 16 December 2012

Basel The International Association of Insurance Supervisors (IAIS)

today released its proposed policy measures for global systemicallyimportant insurers, or G-SIIs .


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President's Summary of

Outcomes from the Expertsmeeting on Corruption

The Financial Action Task Force (FATF) convened, in collaboration withthe G20 Anti-Corruption Working Group, an Experts Meeting onCorruption.

Lim Hng Kiang: Whats next for hedgefunds?

Keynote address by Mr Lim Hng Kiang,Minister for Trade and Industry and DeputyChairman of the Monetary Authority of Singapore, at the SkyBridge Alternative (SALT)Conference, Marina Bay Sands

Gill Marcus: Why education is important tothe South African ReserveBank

Address by Ms Gill Marcus, Governor of theSouth African Reserve Bank, at the Partners inPerformance 2012 Celebration Lunch at theMaths Centre, Braamfontein


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Andrew G Haldane: The Bank and thebanksSpeech by Mr Andrew G Haldane, ExecutiveDirector, Financial Stability, Bank of England, at Queens Unive rsity, Belfast

Proposal for a Directive of theEuropean Parliament and of theCouncil on criminal sanctions forinsider dealing and marketmanipulation (MAD)State of play and orientation debate


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Chairman Ben S. Bernanke At the "Challenges of the Global Financial System:Risks and Governance under Evolving Globalization,"

A High-Level Seminar sponsored by Bank of Japan-International Monetary Fund, Tokyo, Japan

U.S. Monetary Policy and InternationalImplications

Thank you. It is a pleasure to be here. This morning I will first brieflyreview the U.S. and global economic outlook.

I will then discuss the basic rationale underlying the Federal Reserve'srecent policy decisions and place these actions in an internationalcontext.

U.S. and Global Outlook

The U.S. economy has faced significant headwinds , and, although theeconomy has been expanding since mid-2009, the pace of our recoveryhas been frustratingly slow.

The headwinds include the effects of deleveraging by households, thestill-weak U.S. housing market, tight credit conditions in some sectors,spillovers from the situation in Europe , fiscal contraction at all levels of government, and concerns about the medium-term U.S. fiscal outlook.

In this environment, households and businesses have been quite cautious in increasing spending.

Accordingly, the pace of economic growth has been insufficient to

support significant improvement in the job market; indeed, theunemployment rate, at 7.8 percent, is well above what we judge to be itslong-run normal level.


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With large and persistent margins of resource slack, U.S. inflation hasgenerally been subdued despite periodic fluctuations in commodity

prices.

Consumer price inflation is running somewhat below the FederalReserve's 2 percent longer-run objective, and survey- and market-basedmeasures of longer-term inflation expectations have remained wellanchored.

The global economic outlook also presents many challenges, as youknow.

Fiscal and financial strains have pushed Europe back into recession.

Japan's economy is recovering from last year's tragic earthquake andtsunami, and it continues to struggle with deflation and persistent weak demand.

And in the emerging market economies, the rapid snap-back from theglobal financial crisis has given way to slower growth in the face of weak export demand from the advanced economies.

The soft tone of global activity is yet another headwind for the U.S.economy.

Looking ahead, economic projections of Federal Open MarketCommittee (FOMC) participants prepared for the Committee'sSeptember meeting called for the economic recovery to proceed at amoderate pace in coming quarters, with the unemployment rate decliningonly gradually.

FOMC participants generally expected that inflation was likely to run ator below the Committee's inflation goal of 2 percent over the next few

years.

The Committee also judged that there were significant downside risks tothis outlook, importantly including the potential for an intensification of strains in Europe and an associated slowing in global growth.


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Federal Reserve's Recent Policy Actions

All of the Federal Reserve's monetary policy decisions are guided by ourdual mandate to promote maximum employment and stable prices.

With the disappointing progress in job markets and with inflation pressures remaining subdued, the FOMC has taken several importantsteps this year to provide additional policy accommodation.

In January, the Committee noted that it anticipated that economicconditions were likely to warrant exceptionally low levels of the federalfunds rate at least through late 2014--a year and a half later than in

previous statements.

In June, policymakers decided to continue through year-end the maturityextension program (MEP), under which the Federal Reserve purchaseslong-term Treasury securities and sells short-term ones to help depresslong-term yields.

At its September meeting, with the data continuing to signal weak labormarkets and no signs of significant inflation pressures, the FOMCdecided to take several additional steps to provide policyaccommodation.

It extended the period over which it expects to maintain exceptionally low levels of the federal funds rate from late 2014 to mid-2015.

Moreover, the Committee clarified that it expects to maintain a highlyaccommodative stance of monetary policy for a considerable period afterthe economic recovery strengthens.

The FOMC coupled these changes in forward guidance with additionalasset purchases, announcing that it will purchase agency

mortgage-backed securities (MBS) at a pace of $40 billion per month, ontop of the $45 billion in monthly purchases of long-term Treasurysecurities planned for the remainder of this year under the MEP.


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The FOMC also indicated that it would continue to purchase agencyMBS, undertake additional asset purchases, and employ other tools asappropriate until the outlook for the labor market improves substantiallyin a context of price stability.

The open-ended nature of these new asset purchases, together with theirexplicit conditioning on improvements in labor market conditions, will

provide the Committee with flexibility in responding to economicdevelopments and instill greater public confidence that the FederalReserve will take the actions necessary to foster a stronger economicrecovery in a context of price stability.

An easing in financial conditions and greater public confidence shouldhelp promote more rapid economic growth and faster job gains over

coming quarters. As I have said many times, however, monetary policy is not a panacea.

Although we expect our policies to provide meaningful help to theeconomy, the most effective approach would combine a range of economic policies and tackle longer-term fiscal and structural issues as

well as the near-term shortfall in aggregate demand.

Moreover, we recognize that unconventional monetary policies come

with possible risks and costs; accordingly, the Federal Reserve hasgenerally employed a high hurdle for using these tools and carefully

weighs the costs and benefits of any proposed policy action.

International Aspects of Federal Reserve Asset Purchases

Although the monetary accommodation we are providing is playing acritical role in supporting the U.S. economy , concerns have been raisedabout the spillover effects of our policies on our trading partners.

In particular, some critics have argued that the Fed's asset purchases, andaccommodative monetary policy more generally, encourage capital flowsto emerging market economies.


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These capital flows are said to cause undesirable currency appreciation,too much liquidity leading to asset bubbles or inflation, or economicdisruptions as capital inflows quickly give way to outflows.

I am sympathetic to the challenges faced by many economies in a worldof volatile international capital flows.

And, to be sure, highly accommodative monetary policies in the UnitedStates, as well as in other advanced economies, shift interest ratedifferentials in favor of emerging markets and thus probably contribute to

private capital flows to these markets.

I would argue, though, that it is not at all clear that accommodative policies in advanced economies impose net costs on emerging market

economies, for several reasons.First, the linkage between advanced-economy monetary policies and

international capital flows is looser than is sometimes asserted.

Even in normal times, differences in growth prospects amongcountries--and the resulting differences in expected returns--are the mostimportant determinant of capital flows.

The rebound in emerging market economies from the global financial

crisis, even as the advanced economies remained weak, provided stillgreater encouragement to these flows.

Another important determinant of capital flows is the appetite for risk byglobal investors.

Over the past few years, swings in investor sentiment between "risk-on"and "risk-off," often in response to developments in Europe, have led tocorresponding swings in capital flows.

All told, recent research, including studies by the International MonetaryFund, does not support the view that advanced-economy monetary

policies are the dominant factor behind emerging market capital flows.


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Consistent with such findings, these flows have diminished in the pastcouple of years or so, even as monetary policies in advanced economieshave continued to ease and longer-term interest rates in those economieshave continued to decline.

Second, the effects of capital inflows, whatever their cause, on emergingmarket economies are not predetermined, but instead depend greatly onthe choices made by policymakers in those economies.

In some emerging markets, policymakers have chosen to systematicallyresist currency appreciation as a means of promoting exports anddomestic growth.

However, the perceived benefits of currency management inevitably

come with costs, including reduced monetary independence and theconsequent susceptibility to imported inflation.

In other words, the perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package--you can't have one without the other.

Of course, an alternative strategy--one consistent with classical principles of international adjustment--is to refrain from intervening inforeign exchange markets, thereby allowing the currency to rise and

helping insulate the financial system from external pressures.

Under a flexible exchange-rate regime, a fully independent monetary policy, together with fiscal policy as needed, would be available to helpcounteract any adverse effects of currency appreciation on growth.

The resultant rebalancing from external to domestic demand would notonly preserve near-term growth in the emerging market economies whilesupporting recovery in the advanced economies, it would redound toeveryone's benefit in the long run by putting the global economy on amore stable and sustainable path.


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Finally, any costs for emerging market economies of monetary easing inadvanced economies should be set against the very real benefits of those

policies.

The slowing of growth in the emerging market economies this year inlarge part reflects their decelerating exports to the United States, Europe,and other advanced economies.

Therefore, monetary easing that supports the recovery in the advancedeconomies should stimulate trade and boost growth in emerging marketeconomies as well.

In principle, depreciation of the dollar and other advanced-economycurrencies could reduce (although not eliminate) the positive effect on

trade and growth in emerging markets.However, since mid-2008, in fact, before the intensification of thefinancial crisis triggered wide swings in the dollar, the real multilateral

value of the dollar has changed little, and it has fallen just a bit against thecurrencies of the emerging market economies.

Conclusion

To conclude, the Federal Reserve is providing additional monetaryaccommodation to achieve its dual mandate of maximum employmentand price stability.

This policy not only helps strengthen the U.S. economic recovery, but byboosting U.S. spending and growth, it has the effect of helping supportthe global economy as well. Assessments of the international impact of U.S. monetary policies should give appropriate weight to their beneficialeffects on global growth and stability.


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The new UK Regulator: The Financial Conduct

Authority

The Financial Conduct Authority (FCA) will be the new regulator whose vision it is to make markets work well so consumers get a fair deal.

It will be responsible forrequiring firms to put the

well-being of their customers atthe heart of how they run theirbusiness, promoting effectivecompetition and ensuring thatmarkets operate with integrity.

The FCA will start work in 2013, when it will receive new powersfrom the Financial Services Billthat is currently going through

parliament.

The Journey to the FCA sets outhow we will approach ourregulatory objectives, how weintend to achieve a fair deal infinancial services for consumersand where we are on thisjourney.

Changes to authorisations

The UK regulatory structure will be changing in 2013, when the FSA willsplit into two regulatory bodies the Financial Conduct Authority (FCA)and the Prudential Regulation Authority (PRA) .
http://content.yudu.com/A1z7zd/journey-to-the-fca/http://content.yudu.com/A1z7zd/journey-to-the-fca/


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In April 2012, Supervision adopted the internal-twin peaks structure , andnow Authorisations are implementing a similar structure, withassessments carried out by both the Prudential Business Unit (PBU) andthe Conduct Business Unit (CBU).

This change will only affect firms that will be dual regulated in future.

The application submission process will not change and we will continueto seek to meet our statutory deadlines.

What will change is how the application is processed internally.

There will be a CBU case officer and a PBU supervisor responsible foreach application and they will coordinate to minimise duplication or theimpact on applicant firms and individuals.

The final decision will need to be agreed by both the PBU and the CBU toensure a single FSA decision during transition to the new regulatorystructure.

These changes will allow us to start to deliver, as far as possible, a modelthat will mirror the future authorisation procedures in the PRA and theFCA.

What is happening to the FSA Handbook? At legal cutover, the FSA Handbook will be split between the FCA andthe PRA to form two new Handbooks, one for the PRA and one for theFCA .

Most provisions in the FSA Handbook will be incorporated into thePRAs Handbook, the FCAs Handbook, or both, in line with each new regulators set of r esponsibilities and objectives.

Users of the Handbook will be able to access the following online:

1. The PRA Handbook , displaying provisions which apply toPRA-regulated firms


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2. The FCA Handbook , displaying all provisions which apply toFCA-regulated firms; and

3. To support the transition, a central version which will show the provisions of both Handbooks, with clear labels indicating which

regulator applies a provision to firms . The new Handbooks will reflect the new regulatory regime (for example,references to the FSA will be replaced with the appropriate regulator), andin some areas more substantive changes will be made to reflect theexistence of the two regulators, their roles and powers .

(This is likely to include such aspects as the future processes for permissions, passporting, controlled functions, threshold conditions andenforcement powers.)

The more substantive changes will be consulted on before the PRA andthe FCA acquire their legal powers.

Changes to the FSA Handbook as a result of EU legislation and FSA policy initiatives will continue throughout this work.

After acquiring their powers, the FCA and the PRA will amend their ownsuites of policy material as independent bodies in accordance with the

processes laid down in the Financial Services Bill, including cooperation

between them and external consultation.

What does this mean for firms?

This approach to the Handbooks for the FCA and the PRA has been planned to ensure a safe transition for firms and the new regulators as thenew regime is introduced.

Firms will have a new regulator or regulators, and will consequently needto assess how the new Handbooks of these bodies will apply to them.

Dual regulated firms will need to look to both the PRA and the FCA Handbooks, and FCA regulated firms to the FCA Handbook.


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When will the changes be in the Handbook?

We expect to publish the new Handbooks before legal cutover.

This will allow firms and others time to adjust to the application of the

new Handbooks before the FCA and the PRA are fully operational. The new Handbooks will not be available in detail before this.

Alongside the publication, we will publish material on how to interpretthe application of the Handbooks, where this is not dealt with in theHandbooks themselves.

The FSA will continue to make changes to its Handbook in accordance with the normal procedure, until the new bodies acquire their legal

powers. The FSA Handbook will remain in force until the FCA and PRA acquiretheir legal powers.


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Launch of the Journey to the FCA Speech by Martin Wheatley - Managing Director,FSA, and CEO Designate, FCA at the Launch of the Journey to the FCA event

Good morning. I would like to thank the MinisterGreg Clark for joining us today, for his supportive

words and for demonstrating the Governmentscommitment to working alongside us to deliver better conduct regulation.I would also like to thank Thomson-Reuters for hosting this morning.

Today is a big step forward on the road to becoming the new regulator,and I am glad that you are all here to join us as we launch the Journey tothe FCA .

The FCA offers a huge opportunity for the regulator and firms to startafresh, and work in partnership to reset how we deal with conduct infinancial services.

We see it as the role of the regulator to not only make the relevant markets work well but also to help firms get back to putting their customers at theheart of how they do business.

Regulation has a huge impact on the people and businesses that rely onfinancial services, and we should never forget this.

We have approached the creation of the FCA in a thoughtful andconsidered way, as the document we are sharing with you today shows.

We will regulate one of our most successful industries, central to thehealth of our economy and a provider of two million UK jobs.

This makes our job an important one, and it will mean that we carry outour work in a way that is as open and accountable as possible.

We spent the summer engaging with consumer organisations, and 500

firms from all areas of financial services, as we developed our thinking onthe FCA.

This allowed us to gather useful feedback and we will continue this open working in the FCA.
http://www.fsa.gov.uk/about/what/reg_reform/fcahttp://www.fsa.gov.uk/about/what/reg_reform/fcahttp://www.fsa.gov.uk/about/what/reg_reform/fcahttp://www.fsa.gov.uk/about/what/reg_reform/fcahttp://www.fsa.gov.uk/about/what/reg_reform/fca


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We aim in the Journey to the FCA to demonstrate what our new organisation will mean for the firms we regulate and the consumers weare here to help protect.

I encourage you all to read it, and to give us your views.

We are clear about the type of regulator we want to become, and we wantto work with all of our stakeholders to get there and deliver regulation that

works better.

You have not yet had a chance to read the document, so let me explain abit more about what the FCA is going to be about.

The FCA has been set up to work with firms to ensure they put consumersat the heart of their business.

Underlining this are three outcomes:1. Consumers get financial services and products that meet their needsfrom firms they can trust.

2. Firms compete effectively with the interests of their customers and theintegrity of the market at the heart of how they run their business.

3. Markets and financial systems are sound, stable and resilient withtransparent pricing information.

Reforming regulation is not just good for consumers, it will also be goodfor firms. The industrys standing has suffered as the mis -selling scandalsand other problems have taken their toll.

This has damaged the reputation of firms across the industry, whetherdirectly involved or not. We need to work with you to put that right.

While much of what we will do is new, we will also build on what has worked well under the FSA.

We will keep up our policy of credible deterrence, pursuing enforcement

cases to punish wrongdoing. And our markets regulation will continue to promote integrity and carryon the FSAs fight against insider dealing, which has secured 20 criminalconvictions since 2009.


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We will continue to keep unauthorised firms from trying to takeadvantage of consumers.

We will set high expectations for those firms that want to enter financialservices, while still allowing innovation and good ideas to flourish.

And we will take forward a strong interest in the fair treatment of customers an agenda that has been around for many years, but is stillkey to the FCA.

There will, however, be important changes, and our approach will bemore forward-looking, better informed, and we will have a greaterappetite to get things done.

A new department will act as the radar of our new organisation combining better research into what is happening in the market, andanalysis of the risks to our objectives.

This will then feed into our policymaking and our supervision of firms. We want to really understand what is happening to your customers, thedeal they are getting and the issues they face.

This will include getting a better understanding of why consumers act inthe way they do, so we can adapt our regulation to their commonbehavioural traits.

Fewer firms will have regular direct contact with supervisors, as we shiftresources to allow us to deal more quickly and effectively with emergingissues, and run more cross-industry projects to get to the root cause of

problems.

We will have new partners to work with and our relationship with the new Prudential Regulation Authority will be crucial, and driven by a culture of cooperation.

We will aim to bring our expertise to international debates, so that EUand international policymaking works for UK consumers and firms.

All of this will be delivered by a new culture in the FCA. We willencourage our staff to be more confident in making bold, firm and

predictable decisions.


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To help us do our job, the Government intends to give the FCA new toolsto ensure that consumers get products that meet their needs.

This builds on one of the key lessons from past problems, which is thatregulation is often more effective if it steps in early to pre-empt and

prevent widespread harm.

We will reflect this in our supervision work when we look at how firmsdesign and sell their products.

But a key new power will mean that we can step in and ban the sale of products that pose unacceptable risks to consumers for up to 12 months, without consulting first.

We will also be able to ban misleading advertising.

We will use these new tools in a measured way and while we will actsooner, and more decisively, our approach will be based on a properunderstanding of the issues and a full consideration of the potentialsolutions.

So whilst there may be times when we have to act rapidly, this is notsomething that firms should be afraid of.

Firms selling the right products, in the right way, to the right consumershave little to fear.

Our new approach will mean that we will take competition into account inall our work.

We will weigh up the impact on competition of new measures we propose.

We will also consider whether competition could lead to better resultsthan other action we could take.

In our work here, and in other areas, I am very conscious that we have to work with firms.

Making regulation work better for us is also about allowing firms room totry new ideas and develop their business.

Promoting competition will play an important part in this.


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We are not here to stand in the way of progress that will be of benefit toconsumers.

Our goals as the FCA are clear: we will work for an industry that is betterat serving the needs of its customers.

I see this as an opportunity not just for us but for the industry.

We can do our job better if we work with you, and I am pleased that somany of the chief executives that I speak to are talking the same languageand have committed to rebuilding confidence and trust, and reconnecting

with their customers.

It is great hearing about these good intentions, but the difficult bit for usall is to make sure this change actually happens.

There are challenges and opportunities for both us the regulator, and youthe industry.

It is a journey we have to walk together, as we put consumers back at theheart of what we do.


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Cyber Experts Engage on DARPAs Plan X

Proposers Day dialogue cements program approach When the team behind DARPA s Plan X mapped out where it wanted togo with research in the development of cyber capabilities and platforms , itknew the DARPA approach to problem solving included soliciting inputfrom the leading experts in the field.

On October 15 and 16, DARPA outlined its plans for Plan X to a packedhouse of potential developers and performers and solicited theirfeedback.

More than 350 software engineers, cyber researchers and human-machineinterface experts attended the event.

DARPA officials presented the goals of Plan X in preparation for releaseof the programs Broad Agency Announcement (BAA) anticipated

within the next month.

Plan X, announced in May 2012, is the first DARPA program of its kind.

It will attempt to create revolutionary technologies for understanding, planning and managing DoD cyber missions in real-time, large-scale anddynamic network environments.

Plan X will conduct novel research on the cyber domain.

The Plan X program is explicitly not funding research and developmentefforts in vulnerability analysis or generation of cyberweapons.

Insights obtained from discussions with government partners and potential performers during the Proposers Day workshop will help usfinalize our approach to the Plan X program, said Dan Roelker, DARPA

program manager.


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The program covers largely unchartered territory as we attempt toformalize cyber mission command and control for the DoD.

It is anticipated that the BAA for this effort will be posted to www.fbo.gov within the next month.


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Technical Specifications for theSolvency II valuation and Solvency

Capital Requirements calculations(Part I)

Note This technical specification is a working document proposed by EIOPA to be used by insurance and reinsurance undertakings participating inany quantitative assessment to be undertaken until new update isavailable.

As there are essential parts of the valuation framework still under politicaldiscussions , i.e. the discount rates for the technical provisionscalculations, this document is not intended to be a complete set of technical specifications for the Solvency 2 balance sheet valuation nor forthe Solvency Capital Requirements calculations.

Howsoever these essential parts are not included at this stage but willfollow in due course.

Not even when the specification of discount rates for TP calculations are

finally added, the resulting technical specifications should be seen as acomplete implementation of the Solvency II framework , since for the purpose of feasibility of testing exercises, shortcuts and ad hocsimplifications have been included.

In particular, relevant parts of the SCR calculation such as internalmodels section, undertaking specific parameters section and within thegroup section: the combination method, the treatment of Participations,Ring Fenced funds and internal model for group calculation have beendeliberately not included in the current technical specifications, as these

were not considered by EIOPA as providing key information for the purposes of the quantitative tests that may be launched in the comingmonths.


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However, this should not be interpreted as an EIOPA speculation on itsinclusion in the final Solvency II framework.

This technical specification is inspired by the knowledge that EIOPA hason the current status of the negotiations on Omnibus 2 Directive, the

working documents on implementing measures and its own work in thedevelopment of Technical Standards and Guidelines.

EIOPA plans to incorporate the relevant elements of the technical provisions valuation, once the outcome of the OMDII negotiations isstabilised.

Important parts

IAS 39 Financial Instruments: Recognition and MeasurementIAS 39 establishes principles for recognising and measuring financialassets, financial liabilities and some contracts to buy or sell non-financialitems.

For the purpose of measuring a financial asset after initial recognition,this Standard classifies financial assets into the following four categories defined in paragraph 9:

(a) Financial assets at fair value through profit or loss;

(b) Held-to-maturity investments;

(c) Loans and receivables; and

(d) Available-for-sale financial assets.

These categories apply to measurement and profit or loss recognitionunder this Standard.

The entity may use other descriptors for these categories or othercategorisations when presenting information in the financial statements.


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After initial recognition, an entity shall measure financial assets,including derivatives that are assets, at their fair values, without anydeduction for transaction costs it may incur on sale or other disposal,except for the following financial assets:

(a) Loans and receivables , which shall be measured at amortised costusing the effective interest method

(b) Held-to-maturity investments, which shall be measured at amortisedcost using the effective interest method

(c) Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliablymeasured and derivatives that are linked to and must be settled by

delivery of such unquoted equity instruments, which shall be measured atcost.

Solvency II framework: Fair value measurement principles are consideredto be consistent with article 75 of Directive 2009/138/EC , except forsubsequent adjustments to take account of the change in own creditstanding of the insurance or reinsurance undertaking after initialrecognition in the measurement of financial liabilities.

Technical ProvisionsIntroduction

TP.1.1. The reporting date to be used by all participants should be 30 June.

TP.1.2. Solvency II requires undertakings to set up technical provisions which correspond to the current amount undertakings would have to payif they were to transfer their (re)insurance obligations immediately toanother undertaking.

The value of technical provisions should be equal to the sum of a bestestimate and a risk margin .


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However, under certain conditions that relate to the replicability of thecash flows underlying the (re)insurance obligations, best estimate andrisk margin should not be valued separately but technical provisionsshould be calculated as a whole.

TP.1.3. Undertakings should segment their (re)insurance obligations intohomogeneous risk groups , and as a minimum by line of business, whencalculating technical provisions

TP.1.4. The best estimate should be calculated gross, without deductionof the amounts recoverable from reinsurance contracts and SPVs. Thoseamounts should be calculated separately.

TP.1.5. The calculation of the technical provisions should take account of

the time value of money by using the relevant risk-free interest rate termstructure.

TP.1.6. The actuarial and statistical methods to calculate technical provisions should be proportionate to the nature, scale and complexity of the risks supported by the undertaking.

V.2.1. SegmentationGeneral principles

TP.1.7. Insurance and reinsurance obligations should be segmented as aminimum by line of business (LoB) in order to calculate technical

provisions.

TP.1.8. The purpose of segmentation of (re)insurance obligations is toachieve an accurate valuation of technical provisions.

For example, in order to ensure that appropriate assumptions are used, itis important that the assumptions are based on homogenous data to avoidintroducing distortions which might arise from combining dissimilarbusiness.


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Therefore, business is usually managed in more granular homogeneousrisk groups than the proposed minimum segmentation by lines of business where it allows for a more accurate valuation of technical

provisions.

TP.1.9. Undertakings in different Member States and even undertakingsin the same Member State offer insurance products covering different setsof risks.

Therefore it is appropriate for each undertaking to define thehomogenous risk group and the level of granularity most appropriate fortheir business and in the manner needed to derive appropriateassumptions for the calculation of the best estimate.

TP.1.10. (Re)insurance obligations should be allocated to the line of

business that best reflects the nature of the risks relating to the obligation.In particular, the principle of substance over form should be followed forthe allocation.

In other words, the segmentation should reflect the nature of the risksunderlying the contract (substance), rather than the legal form of thecontract (form).

TP.1.11. The segmentation into lines of business distinguishes betweenlife and non-life insurance obligations.

This distinction does not coincide with the legal distinction between lifeand non-life insurance activities or the legal distinction between life andnon-life insurance contracts.

Instead, the distinction between life and non-life insurance obligationsshould be based on the nature of the underlying risk:- Insurance obligations of business that is pursued on a similar

technical basis to that of life insurance should be considered as life insurance obligations, even if they are non-life insurance from a legal

perspective.

- Insurance obligations of business that is not pursued on a similartechnical basis to that of life insurance should be considered asnon-life insurance obligations, even if they are life insurance from alegal perspective.


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TP.1.12. In particular, annuities stemming from non-life insurancecontracts (for example for motor vehicle liability insurance) are lifeinsurance obligations.

TP.1.13. The segmentation should be applied to both components of the

technical provisions (best estimate and risk margin). It should also beapplied where technical provisions are calculated as a whole.

Segmentation of non-life insurance and reinsurance obligations

TP.1.14. Non-life insurance obligations should be segmented into thefollowing 12 lines of business:

Medical expenses insurance

This line of business includes obligations which cover the provision of preventive or curative medical treatment or care including medicaltreatment or care due to illness, accident, disability and infirmity, orfinancial compensation for such treatment or care, where the underlyingbusiness is not pursued on a similar technical basis to that of lifeinsurance, other than obligations considered as workers' compensationinsurance;

Income protection insurance

This line of business includes obligations which cover financialcompensation in consequence of illness, accident, disability or infirmity

where the underlying business is not pursued on a similar technical basisto that of life insurance, other than obligations considered as medicalexpenses or workers' compensation insurance;

Wo rkers compensation insurance

This line of business includes health insurance obligations which relate toaccidents at work, industrial injury and occupational diseases and wherethe underlying business is not pursued on a similar technical basis to thatof life insurance covering:


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- the provision of preventive or curative medical treatment or carerelating to accident at work, industrial injury or occupational diseases;or

- financial compensation for such treatment;- or financial compensation for accident at work, industrial injury or

occupational diseases;

Motor vehicle liability insurance

This line of business includes obligations which cover all liabilitiesarising out of the use of motor vehicles operating on land (includingcarriers liability);

Other motor insurance This line of business includes obligations which cover all damage to orloss of land vehicles, (including railway rolling stock);

Marine, aviation and transport insurance

This line of business includes obligations which cover all damage or lossto river, canal, lake and sea vessels, aircraft, and damage to or loss of goods in transit or baggage irrespective of the form of transport.

This line of business also includes all liabilities arising out of use of aircraft, ships, vessels or boats on the sea, lakes, rivers or canals(including carriers liability).

Fire and other damage to property insurance

This line of business includes obligations which cover all damage to orloss of property other than motor, marine aviation and transport due tofire, explosion, natural forces including storm, hail or frost, nuclearenergy, land subsidence and any event such as theft;


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General liability insurance

This line of business includes obligations which cover all liabilities otherthan those included in motor vehicle liability and marine, aviation andtransport;

Credit and suretyship insurance

This line of business includes obligations which cover insolvency, exportcredit, instalment credit, mortgages, agricultural credit and direct andindirect suretyship;

Legal expenses insurance

This line of business includes obligations which cover legal expenses andcost of litigation;

Assistance insurance

This line of business includes obligations which cover assistance for persons who get into difficulties while travelling, while away from homeor while away from their habitual residence;

Miscellaneous financial loss insurance This line of business includes obligations which cover employment risk,insufficiency of income, bad weather, loss of benefits, continuing generalexpenses, unforeseen trading expenses, loss of market value, loss of rentor revenue, indirect trading losses other than those mentioned before,other financial loss (not-trading) as well as any other risk of non-lifeinsurance business not covered by the lines of business alreadymentioned.

TP.1.15. Obligations relating to accepted proportional reinsurance shouldbe segmented into 12 lines of business in the same way as non-lifeinsurance obligations are segmented.


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Index-linked and unit-linked insurance

Insurance obligations with index-linked and unit-linked benefits otherthan those included in the annuities stemming from non-life insurance.

Other life insurance

obligations other than obligations included in any of the other life lines of business.

Annuities stemming from non-life insurance contracts and relating tohealth insurance obligations (annuities stemming from non-life contractsand NSLT health insurance).

Annuities stemming from non-life insurance contracts and relating toinsurance obligations other than health insurance obligations

TP.1.18. Obligations relating to accepted reinsurance in life should besegmented into 4 lines of business as follows:

Health reinsurance

Reinsurance obligations which relate to the obligations included in linesof business health insurance and Annuities stemming from non -lifeinsurance contracts and relating to health insurance obligations.

Life reinsurance

Reinsurance obligations which relate to the obligations included in linesof business Life Insurance with profit participation, Index -linked andunit- linked insurance, Other life insurance and Annuities stemmingfrom non-life insurance contracts and relating to insurance obligationsother than health insurance obligations.

TP.1.19. There could be circumstances where, for a particular line of business in the segment "life insurance with profit participation"


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(participating business), the insurance liabilities can, from the outset, notbe calculated in isolation from those of the rest of the business.

For example, an undertaking may have management rules such thatbonus rates on one line of business can be reduced to recoup guaranteedcosts on another line of business and/or where bonus rates depend on theoverall solvency position of the undertaking.

However, even in this case undertakings should assign a technical provision to each line of business in a practicable manner.

Health insurance obligations

TP.1.20. Health insurance covers one or both of the following:

- The provision of preventive or curative medical treatment or careincluding medical treatment or care due to illness, accident, disabilityand infirmity, or financial compensation for such treatment or care;

- Financial compensation in consequence of illness, accident, disabilityor infirmity.

TP.1.21. In relation to their technical nature two types of health insurancecan be distinguished:

- Health insurance which is pursued on a similar technical basis to thatof life insurance (SLT Health)

- Health insurance which is not pursued on a similar technical basis tothat of life insurance (Non-SLT Health)

TP.1.22. Health insurance obligations pursued on a similar technicalbasis to that of life insurance (SLT Health) are the health insuranceobligations for which it is appropriate to use life insurance techniques forthe calculation of the best estimate.

Health insurance obligations should be assigned to life insurance lines of business where such obligations are exposed to biometrical risks (i.e.


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mortality, longevity or disability/morbidity) and where the commontechniques used to assess such obligations explicitly take intoconsideration the behaviour of the variables underlying these risks.

Where insurance or reinsurance health obligations are calculatedaccording to the conditions set out in Article 206 of Directive2009/138/EPC they should be assigned to SLT health insurance lines of business.

TP.1.23. SLT health insurance obligations should be allocated to one of the four following lines of business for life insurance obligations definedin subsection V .2.1:

- Insurance contracts with profit participation where the main risk

driver is disability/morbidity risk - Index-linked and unit-linked life insurance contracts where the main

risk driver is disability/morbidity risk

- Other insurance contracts where the main risk driver isdisability/morbidity risk

- Annuities stemming from non-life contracts.

TP.1.24. With regard to the line of business for annuities stemming fromnon-life contracts or health insurance includes only annuities stemmingfrom Non-SLT health contracts (for example workers' compensation andincome protection insurance).

Insurance or reinsurance obligations that, although stemming fromNon-Life or NSLT health insurance, and originally segmented intoNon-Life or NSLT health lines of business, as a result of the trigger of anevent are pursued on a similar technical basis to that of life insurance,should be assigned to the relevant life lines of business as soon as there issufficient information to assess those obligations using life techniques.

TP.1.25. Non-SLT health obligations should be allocated to one of thethree following lines of business for non-life insurance obligations:


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- Medical expense

- Income protection

- Workers' compensation

TP.1.26. The definition of health insurance applied in the Quantitative Assessment may not coincide with national definitions of healthinsurance used for authorisation or accounting purposes.

TP.1.27. The granularity of the segmentation of insurance or reinsuranceobligations should allow for an adequate reflection of the nature of therisks.

For the purpose of calculation of the technical provisions, thesegmentation should consider the policyholders right to profit participation, options and guarantees embedded in the contracts and therelevant risk drivers of the obligations.

Unbundling of insurance and reinsurance contracts

TP.1.28. Where a contract includes life and non-life (re)insuranceobligations, it should be unbundled into its life and non-life parts.

TP.1.29. Where a contract covers risks across the different lines of business for non-life (re)insurance obligations, these contracts should beunbundled into the appropriate lines of business.

TP.1.30. A contract covering life insurance risks should always beunbundled according to the following lines of business- SLT- Life insurance with profit participation- Index-linked and unit-linked life insurance

- Other life insurance


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TP.1.31. Where a contract gives rise to SLT health insurance obligations,it should be unbundled into a health part and a non-health part where it istechnically feasible and where both parts are material.

Notwithstanding the above, unbundling may not be required where onlyone of the risks covered by a contract is material.

In this case, the contract may be allocated according to the main risk.

Best estimate

V.2.2.1. Methodology for the calculation of the best estimate Appropriate methodologies for the calculation of the bestestimate

TP.2.1. The best estimate should correspond to the probability weightedaverage of future cash-flows taking account of the time value of money.

TP.2.2. Therefore, the best estimate calculation should allow for theuncertainty in the future cash-flows.

The calculation should consider the variability of the cash flows in orderto ensure that the best estimate represents the mean of the distribution of cash flow values .

Allowance for uncertainty does not suggest that additional marginsshould be included within the best estimate.

TP.2.3. The best estimate is the average of the outcomes of all possiblescenarios, weighted according to their respective probabilities .

Although, in principle, all possible scenarios should be considered , it maynot be necessary, or even possible, to explicitly incorporate all possiblescenarios in the valuation of the liability, nor to develop explicit

probability distributions in all cases, depending on the type of risksinvolved and the materiality of the expected financial effect of thescenarios under consideration.


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Moreover, it is sometimes possible to implicitly allow for all possiblescenarios, for example in closed form solutions in life insurance or thechain-ladder technique in non-life insurance.

TP.2.4. Cash-flow characteristics that should, in principle and where

relevant, be taken into consideration in the application of the valuationtechnique include the following:

a) Uncertainty in the timing, frequency and severity of claim events.

b) Uncertainty in claims amounts , including uncertainty in claimsinflation, and in the period needed to settle and pay claims.

c) Uncertainty in the amount of expenses .

d) Uncertainty in the expected future developments that will have amaterial impact on the cash in- and out-flows required to settle the

insurance and reinsurance obligations thereof (e.g. the value of anindex/market values used to determine claim amounts).

For this purpose future developments shall include demographic, legal,medical, technological, social, environmental and economicdevelopments including inflation.

e) Uncertainty in policyholder behaviour .

f) Path dependency , where the cash-flows depend not only oncircumstances such as economic conditions on the cash-flow date, butalso on those circumstances at previous dates.

A cash-flow having no path dependency can be valued by, for example,using an assumed value of the equity market at a future point in time.

However, a cash-flow with path-dependency would need additionalassumptions as to how the level of the equity market evolved (the equitymarket's path) over time in order to be valued.

g) Interdependency between two or more causes of uncertainty. Some risk-drivers may be heavily influenced by or even determined byseveral other risk-drivers (interdependence).


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For example, a fall in market values may influence the (re)insuranceundertakings exercise of discretion in future participation, which in turnaffects policyholder behaviour.

Another example would be a change in the legal environment or the onsetof a recession which could increase the frequency or severity of non-lifeclaims.

TP.2.5. Undertakings should use actuarial and statistical techniques forthe calculation of the best estimate which appropriately reflect the risksthat affect the cash-flows.

This may include simulation methods, deterministic techniques andanalytical techniques.

TP.2.6. For certain life insurance liabilities, in particular the futurediscretionary benefits relating to participating contracts or othercontracts with embedded options and guarantees, simulation may lead toa more appropriate and robust valuation of the best estimate liability.

TP.2.7. For the estimation of non-life best estimate liabilities as well aslife insurance liabilities that do not need simulation techniques,deterministic and analytical techniques can be more appropriate.

Cash-flow projections

TP.2.8. The best estimate should be calculated gross, without deductionof the amounts recoverable from reinsurance contracts and special

purpose vehicles.

Recoverables from reinsurance and Special Purpose Vehicles should becalculated separately.

In the case of co-insurance the cash-flows of each co-insurer should becalculated as their proportion of the expected cash-flows withoutdeduction of the amounts recoverable from reinsurance and special

purpose vehicles. TP.2.9. Cash-flow projections should reflect expected realistic futuredemographic, legal, medical, technological, social or economicdevelopments.


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TP.2.10. Appropriate assumptions for future inflation should be built intothe cash-flow projection.

Care should be taken to identify the type of inflation to which particularcash-flows are exposed (i.e. consumer price index, salary inflation).

TP.2.11. The cash-flow projections, in particular for health insurancebusiness, should take account of claims inflation and any premiumadjustment clauses.

It may be assumed that the effects of claims inflation and premiumadjustment clauses cancel each other out in the cash flow projection,

provided this approach undervalues neither the best estimate, nor the risk involved with the higher cash flows after claims inflation and premiumadjustment.

Recognition and derecognition of (re)insurance contracts forsolvency purposes

TP.2.12. The calculation of the best estimate should only include futurecash-flows associated with obligations within the boundary of thecontract.

TP.2.13. A reinsurance or insurance obligation should be initiallyrecognised by insurance or reinsurance undertakings at whichever is theearlier of the date the undertaking becomes a party to the contract that

gives rise to the obligation or the date the insurance or reinsurance coverbegins.

TP.2.14. A contract should be derecognised as an existing contract only when the obligation specified in the contract is extinguished, dischargedor cancelled or expires.

The boundary of an existing (re)insurance contract

TP.2.15. The definition of the contract boundary should be applied in particular to decide whether options to renew the contract, to extend theinsurance coverage to another person, to extend the insurance period, toincrease the insurance cover or to establish additional insurance covergives rise to a new contract or belongs to the existing contract.


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Where the option belongs to the existing contract the provisions for policyholder options should be taken into account.

TP.2.16. For the purpose of determining which insurance or reinsuranceobligations arise in relation to an insurance or reinsurance contract, the

boundaries of the contract shall be defined in the following manner: (a) Where the insurance or reinsurance undertaking has at a future date:

(i) A unilateral right to terminate the contract,

(ii) A unilateral right to reject premiums payable under the contract, or

(iii) A unilateral right to amend the premiums or the benefits payableunder the contract in such a way that the premiums fully reflect the risks,any obligations which relate to insurance or reinsurance cover whichmight be provided by the undertaking after that date do not belong to the

contract, unless the undertaking can compel the policy holder to pay the premium for those obligations;

(b) Where the insurance or reinsurance undertaking has a unilateral right as referred to in point (a) that relates only to a part of the contract, thesame principle as defined in point (a) shall be applied to this part;

(c) Notwithstanding points (a) and (b), where an insurance orreinsurance contract:

(i) Does not provide compensation for a specified uncertain event that

adversely affects the insured person,(ii) Does not include a financial guarantee of benefits, any obligationsthat do not relate to premiums which have already been paid do notbelong to the contract, unless the undertaking can compel the policyholder to pay the future premium;

(d) Notwithstanding points (a) and (b), where an insurance orreinsurance contract can be unbundled into two parts and where one of these parts meets the requirements set out in points (c)(i) and (ii), anyobligations that do not relate to the premiums of that part and which have

already been paid do not belong to the contract, unless the undertakingcan compel the policy holder to pay future premium of that part;

(e) All other obligations relating to the contract, including obligationsrelating to unilateral rights of the insurance or reinsurance undertaking to


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renew or extend the scope of the contract and obligations that relate to paid premiums, belong to the contract.

TP.2.17. Where an insurance or reinsurance undertaking has theunilateral right to amend the premiums or benefits of a portfolio of

insurance or reinsurance obligations in such a way that the premiums of the portfolio fully reflect the risks covered by the portfolio, theundertaking's unilateral right to amend the premiums or benefits of thoseobligations shall be regarded as complying with the condition set out in

paragraph TP.2.16(a).

TP.2.18. Premiums shall be regarded as fully reflecting the risks coveredby a portfolio of insurance or reinsurance obligations, only where there isno scenario under which the amount of the benefits and expenses payableunder the portfolio exceeds the amount of the premiums payable under

the portfolio; TP.2.19. Notwithstanding paragraph TP.2.17, in the case of life insuranceobligations where an individual risk assessment of the obligationsrelating to the insured person of the contract is carried out at theinception of the contract and that assessment cannot be repeated beforeamending the premiums or benefits, the assessment of whether the

premiums fully reflect the risk in accordance with the condition set out in paragraph 1(a) shall be made at the level of the contract.

TP.2.20. For the purpose of points (a) and (b) of paragraph TP.2.16,

restrictions of the unilateral right and limitations of the extent by which premiums and benefits can be amended that have no discernible effect onthe economics of the contract, shall be ignored.

TP.2.21. For the purpose of points (c) and (d) of paragraph TP.2.16,coverage of events and guarantees that have no discernible effect on theeconomics of the contract, shall be ignored.

TP.2.22. Annex D includes several examples that illustrate the applicationof the definition of the contract boundary.

Time horizon

TP.2.23. The projection horizon used in the calculation of best estimateshould cover the full lifetime of all the cash in- and out-flows required to


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settle the obligations related to existing insurance and reinsurancecontracts on the date of the valuation, unless an accurate valuation can beachieved otherwise.

TP.2.24. The determination of the lifetime of insurance and reinsurance

obligations should be based on up-to-date and credible information andrealistic assumptions about when the existing insurance and reinsuranceobligations will be discharged or cancelled or expired.

Gross cash in-flows

TP.2.25. To determine the best estimate the following non-exhaustive listof cash in-flows should be included:- Future premiums; and

- Receivables for salvage and subrogation.

TP.2.26. The cash in-flows should not take into account investmentreturns (i.e. interests earned, dividends).

Gross cash out-flows

TP.2.27. The cash out-flows could be divided between benefits to the policyholders or beneficiaries, expenses that will be incurred in servicinginsurance and reinsurance obligations, and other cash-flow items such astaxation payments which are charged to policyholders.

Benefits

TP.2.28. The benefit cash out-flows (non-exhaustive list) should include:

- Claims payments- Maturity benefits- Death benefits

-

Disability benefits- Surrender benefits- Annuity payments- Profit sharing bonuses


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Expenses

TP.2.29. In determining the best estimate, the undertaking should takeinto account all cash-flows arising from expenses that will be incurred in

servicing all recognised insurance and reinsurance obligations over thelifetime thereof. This should include (non-exhaustive list):

- Administrative expenses- Investment management expenses- Claims management expenses / handling expenses

TP.2.30. Expenses that are pertinent to the valuation of technical provisions would usually include both allocated and overhead expenses.

Allocated expenses are those expenses which could be directly assignableto the source of expense that will be incurred in servicing insurance andreinsurance obligations.

Overhead expenses comprise all other expenses which the undertakingincurs in servicing insurance and reinsurance obligations.

TP.2.31. Overhead expenses include, for example, expenses which arerelated to general management and service departments which are notdirectly involved in new business or policy maintenance activities and

which are insensitive to either the volume of new business or the level of in-force business.

The allocation of overhead expenses to homogeneous risk groups or the premium provisions and the provisions for claims outstanding shall bedone in a realistic and objective manner and on a consistent basis overtime.

The same requirements shall apply to the allocation of overhead expenses

to existing and future business. TP.2.32. Administrative expenses are expenses which are connected with policy administration including expenses in respect of reinsurancecontracts and special purpose vehicles.


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TP.2.35. Investment management expenses are considered as cashout-flow in the calculation of the best estimate since discounting is made

with a yield curve gross of investment expenses.

TP.2.36. Claims management expenses are expenses that will be incurredin proc essing and resolving claims, including legal and adjusters feesand internal costs of processing claims payments. Some of these expensescould be assignable to individual claim (e.g. legal and adjusters fees),others are a result of activities that cover more than one claim (e.g.salaries of staff of claims handling department).

TP.2.37. Acquisition expenses include expenses which can be identifiedat the level of individual insurance contract and have been incurredbecause the undertaking has issued that particular contract.

These are commission costs, costs of selling, underwriting and initiatingan insurance contract that has been issued.

TP.2.38. Overhead expenses include salaries to general managers,auditing costs and regular day-to-day costs i.e. electricity bill, rent foraccommodations, IT costs.

These overhead expenses also include expenses related to thedevelopment of new insurance and reinsurance business, advertising

insurance products, improvement of the internal processes such asinvestment in system required to support insurance and reinsurancebusiness (e.g. buying new IT system and developing new software).

TP.2.39. Expenses connected with activities which are not linked withservicing insurance and reinsurance obligations are not taken intoaccount when calculating technical provisions.

Such expenses could be for example company pension scheme deficits,holding companies operational expenses connected with expenseslinked to entities which are not insurance or reinsurance undertakings.


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For example, market information is not deemed to be sufficientlyrepresentative where the market information has material dispersion inrepresentativeness of the portfolios whose data have been used tocalculate such market information.

The assessment of credibility considers the volume of data underlying themarket information.

TP.2.44. Assumptions with respect to future expenses arising fromcommitments made on or prior to the date of valuation have to beappropriate and take into account the type of expenses involved.

Undertakings should ensure that expense assumptions allow for futurechanges in expenses and such an allowance for inflation is consistent with

the economic assumptions made.Future expense cash flows are usually assumed to vary with assumedrates of general level of expense inflation in a reasonable manner.

TP.2.45. Relevant market data needs to be used to determine expenseassumptions which include an allowance for future cost increase.

The correlation between inflation rates and interest rates are taken intoaccount.

An undertaking needs to ensure that the allowance for inflation isconsistent with the economic assumptions made, which could beachieved if the probabilities for each inflation scenario are consistent with

probabilities implied by market interest rates.

Furthermore, expense inflation must be consistent with the types of expenses being considered (e.g. different levels of inflation would beexpected regarding office space rents, salaries of different types of staff,IT systems, medical expenses, etc.).

TP.2.46. Any assumptions about the expected cost reduction should berealistic, objective and based on verifiable data and information.


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TP.2.47. For the assessment of the future expenses, undertakings shouldtake into account all the expenses that are directly related to the on-goingadministration of obligations related to existing insurance andreinsurance contracts, together with a share of the relevant overheadexpenses.

The share of overheads should be assessed on the basis that theundertaking continues to write further new business.

Overhead expenses have to be apportioned between existing and futurebusiness based on recent analyses of the operations of the business andthe identification of appropriate expense drivers and relevant expenseapportionment ratios.

Cash flow projections should include, as cash out-flows, the recurrentoverheads attributable to the existing business at the calculation date of the best estimate.

TP.2.48. In order to determine which expenses best reflect thecharacteristics of the underlying portfolio and to ensure that the technical

provisions are calculated in a prudent, reliable and objective manner,insurance and reinsurance undertakings should consider theappropriateness of both market consistent expenses and undertakingspecific expenses.

If sufficiently reliable, market consistent expenses are not available participants should use undertaking-specific information to determineexpenses that will be incurred in servicing insurance and reinsuranceobligations provided that the undertaking-specific information isassessed to be appropriate.

TP.2.49. Expenses, that are determined by contracts between theundertaking and third parties have to be taken into account based on theterms of the contract.

In particular, commissions arising from insurance contracts have to beconsidered based on the terms of the contracts between the undertakingsand the sales persons, and expenses in respect of reinsurance are taken


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into account based on the contracts between the undertaking and itsreinsurers.

Tax payments

TP.2.50. In determining the best estimate, undertakings should take intoaccount taxation payments which are charged to policyholders.

Only those taxation payments which are settled by the undertaking needto be taken into account.

A gross calculation of the amounts due to policyholders suffices where tax payments are settled by the policyholders;

TP.2.51. Different taxation regimes exist across Member States giving riseto a broad variety of tax rules in relation to insurance contracts.

The assessment of the expected cash-flows underlying the technical provisions should take into account any taxation payments which arecharged to policyholders, or which would be required to be made by theundertaking to settle the insurance obligations.

All other tax payments should be taken into account under other balancesheet items.

TP.2.52. The following tax payments should be included in the bestestimate: transaction-based taxes (such as premium taxes, value addedtaxes and goods and services taxes) and levies (such as fire service leviesand guarantee fund assessments) that arise directly from existinginsurance contracts, or that can be attributed to the contracts on areasonable and consistent basis.

Contributions which were already included in companies expenseassumptions (i.e. levies paid by insurance companies to industry

protection schemes) should not be included.

TP.2.53. The allowance for tax payments in the best estimate should beconsistent with the amount and timing of the taxable profits and lossesthat are expected to be incurred in the future.


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In cases where changes to taxation requirements are substantiallyenacted, the pending adjustments should be reflected.

TP.2.54. Homogeneous risk groups of life insurance obligations

The cash-flow projections used in the calculation of best estimates for lifeinsurance obligations shall be made separately for each policy.

Where the separate calculation for each policy would be an undue burdenon the insurance or reinsurance undertaking, it may carry out the

projection by grouping policies, provided that the grouping complies with the following requirements:

(1) There are no significant differences in the nature and complexity of the risks underlying the policies that belong to the same group;

(2) The grouping of policies does not misrepresent the risk underlying the policies and does not misstate their expenses;

(3) The grouping of policies is likely to give approximately the sameresults for the best estimate calculation as a calculation on a per policybasis, in particular in relation to financial guarantees and contractualoptions included in the policies.

TP.2.55. In certain specific circumstances, the best estimate element of technical provisions may be negative (e.g. for some individual contracts).

This is acceptable and undertakings should not set to zero the value of thebest estimate with respect to those individual contracts.

TP.2.56. No implicit or explicit surrender value floor should be assumedfor the amount of the market consistent value of liabilities for a contract.

This means that if the sum of a best estimate and a risk margin of acontract is lower than the surrender value of that contract there is no need

to increase the value of insurance liabilities to the surrender value of thecontract.


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The valuation should take account of the time value of money where risksin the remaining period would give rise to claims settlements into thefuture.

TP.2.60. Additionally, the valuation of premium provisions should takeaccount of future policyholder behaviour such as likelihood of policylapse during the remaining period.

TP.2.61. With respect to the best estimate for provisions for claimsoutstanding, the cash-flow projections relate to claim events havingoccurred before or at the valuation date whether the claims arising fromthese events have been reported or not (i.e. all incurred but not settledclaims).

The cash-flow projections should comprise all future claim payments as well as claims administration expenses arising from these events.

TP.2.62. Where non-life insurance policies give rise to the payment of annuities, the approach laid down in the following subsection onsubstance over form should be followed.

Consistent with this, for premium provisions, its assessment shouldinclude an appropriate calculation of annuity obligations if a materialamount of incurred claims is expected to give rise to the payment of

annuities.

Principle of substance over form

TP.2.63. When discussing valuation techniques for calculating technical provisions, it is commo

Monday October 29, 2012 - Top 10 Risk Compliance News Events

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