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The updated technical specifications, published last month by EIOPA, have been criticised by actuaries for not defining clearly how insurers should determine the relevant premium volume for calculating the cat risk SCR when using the so-called risk factor method.
Insurers are required to use an estimate of premiums earned for each contract that covers obligations affected by catastrophe events. Specific risk factors generated by EIOPA are then applied to determine the SCR.
Actuaries say the specifications do not make clear whether the premium volume equates to the full premium charged for each contract, or just that part of the premium is attributable to the specific risk factor. There are also concerns that some insurers may find dividing the premium charged by risk factor more difficult than others, due to lack of data, which would place them at a disadvantage to those that can.
The risk factor method is seen as especially problematic for insurers writing multiline business, or with exposures outside the European Economic Area (EEA), as is the case with the London market, because they are unable to use the alternative ‘standardised scenarios' method for calculating their catastrophe SCR.
EIOPA is planning to correct formating inaccuracies in the technical specifications before the launch of the long-term guarantees impact assessment, expected at the end of the month, according to a spokeswoman. But it is not clear if EIOPA will provide clarification of how the premium volume is calculated.
The technical specifications provide the calculations firms should use in future quantitative assessments for Solvency II. Although EIOPA stresses they are not to be considered as a complete implementation of the Solvency II framework, many say they are indicative of where the final rules will end up.
The specifications on calculating the non-life catastrophe risk capital requirements reaffirmed that some allowance for regional diversification would be admitted for non-European catastrophe risk. As Insurance Risk reported last month, this is a welcome concession by the authority following feedback from QIS 5.
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