On 13 October, the London Market Student Group (LMSG) hosted Susan Dreksler, director at PWC, and the current chair of the Solvency II Technical Provision (TP) working party.
In her presentation: Being Meaningful, Diversity and Solvency II Technical Provisions, Dreksler described the state of the market in 2010 when she joined the TP working party:
"The industry was spending a lot of time and resources focusing on capital modelling, while arguably the biggest most uncertain number on an insurer's Solvency II balance sheet is most likely to be TPs," she explained.
In light of this, the TP working party was formed with the mandate to raise awareness and shift some of the industry's focus towards TPs, given they are "probably the most important part of the Solvency II calculation", according to a CEIOPS QIS5 presentation.
The working party's directive included devising pragmatic ways of implementing the various principles and rules that form the Solvency II directive for TPs.
Dreksler's talk focused on the challenges faced by the industry when calculating TPs. Up to 2014, EIOPA had not provided clear guidance on how to make allowances for future RI recoveries and future RI renewals on obligated business at the valuation date.
This was challenging for the Lloyd's market, and not allowing for future RI recoveries on existing and future RI policies would result in major strains on a syndicate's balance sheet.
She then explained how, in May 2014, EIOPA published updated guidance that requires insurers to take full credit for the cost of future RI renewals, but prohibits them from taking full credit for the inuring RI recoveries on all future business.
This new approach goes against the 'fair value' principle underpinning the Solvency II Directive as full recognition cannot be taken for future RI recoveries.
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