Solvency II: Groupe Consultatif comments on QIS 5 specification

The Groupe Consultatif has submitted comments on the draft QIS 5 technical specification to the European Commission.

The paper identifies a number of high-level issues:

Proportionality and complexity
The Groupe Consultatif is concerned that the incremental development of the Solvency II framework has introduced a degree of complexity into the standard quantitative requirements that may discourage participation in quantitative impact studies and, indeed, may serve as a barrier to eventual implementation, especially for smaller undertakings.

The Groupe Consultatif has called on the Commission and CEIOPS to encourage the use of rational simplifications in QIS 5, in relation to technical provisions and the application of the standard formula SCR.

Future profits
The Groupe Consultatif supports the Commission's approach of not restricting the availability of excess assets as Tier 1 capital by reference to surrender values or other measures.  However, they are not entirely unsympathetic to the view that a lesson of the global financial crisis is to require undertakings to consider their exposure to extreme adverse policyholder behaviours.  They believe that the ORSA should naturally consider this issue and that, in certain circumstances, it would be open to the supervisor to either require a capital add-on or to insist on a (partial) internal model.

Discount rates 
The Groupe Consultatif has identified four areas relating to discount rates where they believe that more work must be done, either before or after QIS 5, and they outline their rationale in the paper.  The four areas are:
- Balance of reliance on swap rates and on rates derived by reference to government bond yields;
- The integration of rates derived from market data with extrapolated estimates;
- Extrapolation of liquidity differentials throughout the term structure;
- Classification of elements of liabilities for the purpose of application of liquidity differentials in varying degree.

Spread risk
The paper identifies the following concerns:
- It is not clear whether the 'liquidity premium (differential) offset' is being determined consistently with the 'shock' to asset spreads and prices; and
- It is at least possible that corporate bonds and other assets subject to spread risk are not being treated consistently.

Health insurance segmentation
The range of business falling within the health class is very heterogeneous.  The Groupe Consultatif comments in the paper that some changes in the standard capital formula seem necessary in order to assure a well-functioning health insurance market and that this would require some reconsideration of which catastrophe scenarios are most relevant to which types of product.

Participating business
Consistency of treatment of participating business across countries has been a problem in previous quantiative impact studies, and probably will be again in QIS 5.  The Groupe Consultatif would support the establishment of a task force, including CEIOPS and industry, to achieve clearer guidance on application of the QIS 5 specification in different national contexts.

Non-life calibration
The Groupe Consultatif makes proposals in the paper regarding the treatment of reinsurance and diversification.

The paper also comments on a number of practicability issues, inconsistencies, gaps and ambiguities.


 Read the paper here.