The Society has responded to the EIOPA (formerly CEIOPS) consultation paper CP83, “Draft Report on Variable Annuities”.
We welcomed the Draft Report and expressed support for a substantial majority of the recommendations made in it.
We agreed with many of the issues raised but pointed out that many apply equally to other types of business. We suggested, therefore, that it would be more appropriate to set out the issues in a report that covers a wider range of products rather than only Variable Annuities (VAs). Solvency II treats options and guarantees in the same way regardless of product type, and we suggested that the report should encourage convergence towards this. We argued that, while the specifics of VAs need to be recognised, no new regulatory framework should be established specifically for this product type. Noting that many facets of risk are interrelated, we advocated the use of some form of risk mapping or risk-universe determination but we proposed that it is for undertakings to establish the grouping or categorisation of these risks such that all risks are identified and measured once and once only.
We also expressed a view that the Report pays insufficient attention to unhedged or unmitigated risks. We agreed with the CEIOPS Task Force words of caution that insurers should not become complacent just because a hedging programme is in place and that insurers should be aware of the risks not covered by the programme and of when the programme could fail. However, we urged the Task Force to emphasise that the risks involved with hedging are usually smaller than those that would exist in the absence of any hedging programme. For example, while basis risk and volatility of volatility should be considered when a hedge is in place, these second-order risks are generally lower than the first-order fixed interest and equity risks associated with naked options and guarantees.