Guidance notes on application of the Technical Specifications to the specific features of life insurance and health insurance are a core focus of the explanatory texts. They are also relevant for accident insurance with guaranteed premium repayment.

Transitional rules for the valuation of provisions

Under Solvency II, insurers are required to value technical provisions in a market-consistent manner. Under the current supervisory system, these provisions are to be valued in accordance with the German Commercial Code (Handelgesetzbuch - HGB).

Particularly during the current low interest-rate phase, market-consistent valuation under Solvency II may mean that these technical provisions are higher under Solvency II than in case of valuation pursuant to the HGB. To enable insurance undertakings in such cases to gradually increase their technical provisions to the level required under the Solvency II regulations, the Solvency II Directive (as amended by the Omnibus II Directive) stipulates two transitional measures: a transitional arrangement regarding interest rates and a transitional arrangement on technical provisions. BaFin’s explanatory notes provide guidance on how these transitional rules are to be applied in the specific context of German insurance business.

Future surplus participation

Valuation of technical provisions under Solvency II requires consideration not only of contractually guaranteed payments to policyholders but also payments resulting from the expected future surplus participation. German regulations on surplus participation play a key role in this respect in regard to German life insurance and health insurance and also for accident insurance with guaranteed premium repayment.

The treatment of provision for bonuses and rebates (Rückstellung für Beitragsrückerstattung – RfB) is particularly significant here. Insofar as it does not relate to bonuses which have already been allocated to the insured, in life insurance the provision for bonuses represents own funds under the currently applicable regulatory provisions. Article 91 (2) of the Solvency II Directive includes stipulations regarding surplus funds which are mainly intended to ensure that non-earmarked provisions for bonuses continue to be eligible as own funds under Solvency II. In its explanatory notes on the Technical Specifications, BaFin describes how surplus funds are to be considered when calculating the technical provisions and available own funds for German life and health insurance business and for accident insurance with guaranteed premium repayment. As with the Technical Specifications, this definition of surplus funds only applies during the preparatory phase. It does not prejudice transposition of Article 91 (2) of the Solvency II Directive into German law.

The surplus participation system in German life and health insurance and in accident insurance with guaranteed premium repayment is characterised by collective mechanisms. This gives rise to interaction between existing portfolios and new business. The explanatory notes on the Technical Specifications indicate how this interaction should be considered when calculating the technical provisions under Solvency II.

Valuation of future surplus participation under Solvency II also requires insurers to project the future development of the reference interest rate of the Zinszusatzreserve (the additional provision to the premium reserve introduced in response to the lower interest rate environment) pursuant to section 5 (4) of the Regulation on the Principles Underlying the Calculation of the Premium Reserve (Deckungsrückstellungsverordnung - DeckRV). In its explanatory notes, BaFin provides guidance on how to derive this projection from the risk-free interest rate term structure.

Risk-free interest rate term structures of EIOPA

For calculation of their solvency margin under the Solvency II regulations as of the key date 31 December 2013, undertakings may use the risk-free interest rate term structures which EIOPA has published in the context of the related stress test.

EIOPA has also provided further technical information which is intended to assist insurers in applying the measures for long-term guarantees under Solvency II and for the calculation of the interest-rate risk submodule of the standard formula for determination of the Solvency Capital Requirement (SCR).

Questions regarding the Technical Specifications

Undertakings may send questions on the Technical Specifications of EIOPA and BaFin’s explanatory notes by email to Vorbereitungsphase@bafin.de, using a standardised form which is available on BaFin’s website. The subject line should contain the phrase “Technical Specifications” (or “Technische Spezifikationen”) and, in brackets, the number of the section to which the question refers. Questions may be asked in German or English.

As a rule, BaFin will answer these questions itself and will publish them, together with its response, in anonymised form on its website. If a question is relevant for Europe as a whole or if BaFin is unable to respond to it for another reason, BaFin will forward it to EIOPA. In this case, EIOPA will answer your question and publish its response (likewise in anonymous form) on its website.

At a glance: Technical Specifications

In late April the European Insurance and Occupational Pensions Authority (EIOPA) published Technical Specifications by way of preparation for Solvency II. These Technical Specifications reflect the current provisions regarding the quantitative requirements under Solvency II and are intended to ensure that undertakings uniformly apply these provisions during the preparatory phase. This includes valuation of assets and liabilities, including technical provisions, determination of own funds, calculation of the minimum capital requirement (MCR) and the solvency capital requirement (SCR) identified in line with the standard formula. The Technical Specifications also provide details on the application of these measures for insurance business with long-term guarantees. They cover both life- and non-life insurance and the calculation of the capital requirements for individual undertakings and insurance groups.

In particular, the Technical Specifications are intended to support the quantitative reporting and the assessment of continuous compliance with the statutory capital requirements in the context of the Forward Looking Assessment of Own Risk (FLAOR) and the Own Risk and Solvency Assessment (ORSA).

The Technical Specifications are only applicable during the preparatory phase. When Solvency II is launched at the start of 2016, they will be replaced with the final arrangements for the quantitative requirements under Solvency II in the Delegated Acts, the Technical Standards and the EIOPA Guidelines.