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Solvency II Own Risk and Solvency Assessment for Long Term Care Insurance

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Abstract

The purpose of this chapter is to develop a panorama of methods applicable in establishing an Own Risk and Solvency Assessment (ORSA) model for Long Term Care insurance products.

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Notes

  1. 1.

    For more details, the interested reader may refer to règlement délégué (ue) 2015/35.

  2. 2.

    Starting from the regulatory framework, the following definition can be established: whereas Pillar 1 calculates the 1 year probability of ruin on the basis of portfolio Run off (closed) and through a set of risks defined by the European Commission, the overall solvency requirement corresponds to the level of capital necessary to ensure multi-year solvency of the insurer on the basis of a vision including a strategic development plan, by retaining assumptions adapted to specific characteristics of the company and taking into account the Administrative, Management or Supervisory Body (AMSB) risk appetite. It differs from the Solvency Capital Requirement (SCR) by its calculation horizon (that of the strategic plan), the risks taken into account (completeness of the major risks without being limited to the framework of the standard formula) and the safety margin retained.

  3. 3.

    And analysis of continuous compliance.

  4. 4.

    Committee of Sponsoring Organizations of the Treadway Commission.

  5. 5.

    If the stress-testing approach seems simpler than the stochastic approach, it presents the risk of not testing the right scenarios.

  6. 6.

    A few in the case of a stress-testing approach, an infinity in the case of a stochastic approach.

  7. 7.

    Branches, subsidiaries, etc.

  8. 8.

    Which must be consistent with strategic development goals.

  9. 9.

    It is therefore a sensitivity testing approach.

  10. 10.

    The central scenario corresponds to the best estimate of the evolution of the economic environment. It also includes the set of all assumptions held in the context of the business plan.

  11. 11.

    Also to detect any unfavorable and unforeseen developments when calculating the overall solvency requirement (in order to trigger, if necessary, a “non-regular ORSA”).

  12. 12.

    The health status of beneficiaries classified in the same state of dependence is very heterogeneous. Cause of incidence, accident or illness, has a direct impact on life expectancy in dependence. The nature of the disease is also critical because if some evolutionary pathologies are rather slow-running; others, on the contrary, can evolve rapidly. In Total Dependence (see Chap. 3), there are, for example, beneficiaries suffering from Alzheimer’s whose life expectancy is much higher than beneficiaries with terminal cancer.

  13. 13.

    It is then necessary to turn to handwriting recognition algorithms in order to process this initial information.

  14. 14.

    The first Long Term Care insurance contracts were marketed in France in 1985. These were individual contracts with an annuity guarantee in case of Total Dependence. With an average issue age of 60 years, the maximum insured attained age is now just over 90 years.

  15. 15.

    In the middle of the 1990s.

  16. 16.

    For a 60-year-old the risk is not likely to materialize, if at all, before 15 or 20 years.

  17. 17.

    Total, partial or light.

  18. 18.

    Therefore, the likelihood of a person who will be 75 years old in 20 years is assumed to be equal to that of a person who is now 75 years old.

  19. 19.

    Through stress (Pillar 1 or Pillar 2) but also through conservative assumptions.

  20. 20.

    Within the limit of the stability fund ceiling, generally expressed as a percentage of active lives reserve and as a function of expected profitability of the product.

  21. 21.

    Even though the revalorization of Long Term Care contracts is not regulated in France, the general terms and conditions of contracts generally provide for the presence of an annual revalorization mechanism, contract benefits and open claim benefits. This revalorization is generally determined by reference to an annual index performance (of the type of an annual social security maximum benefit) and within the limit of the capabilities of the revalorization fund. Premiums are re-valued in the same proportions.

  22. 22.

    As the shift from one dependent state to another dependent state is difficult to quantify, its stress-based modeling will not be addressed in this chapter.

  23. 23.

    As an example, claimant lives are highly sensitive to medical advances for some pathologies such as Alzheimer’s, which may not be as true for active lives.

  24. 24.

    To avoid catastrophic changes to the model, deaths observed before and during the Second World War were not retained.

  25. 25.

    In order not to skew the study by including obsolete phenomena, the observation interval was limited to 1971–2013.

  26. 26.

    These constraints allow the interpretation of alpha coefficients.

  27. 27.

    Volatility around this shift can be inferred from the time series volatility.

  28. 28.

    For more details, the interested reader may refer to Bonnin et al. [4].

  29. 29.

    The level of caution depends on volume and quality of available information.

  30. 30.

    This point is all the more important if we apply ORSA scenarios in the form of stress that disturbs the distribution underlying the Best Estimate (as the biometric shocks are calibrated under Pillar 1). In this case any discrepancy on the best estimate is amplified at the level of calculation of the overall solvency requirement.

References

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  5. Règlement délégué (UE) 2015/35 de la Commission du 10 octobre 2014 complétant la directive 2009/138/CE du Parlement européen et du Conseil sur l’accès aux activités de l’assurance et de la réassurance et leur exercice (solvabilité II)

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Correspondence to Marc Juillard .

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Juillard, M., Juillard, G. (2019). Solvency II Own Risk and Solvency Assessment for Long Term Care Insurance. In: Dupourqué , E., Planchet, F., Sator, N. (eds) Actuarial Aspects of Long Term Care. Springer Actuarial. Springer, Cham. https://doi.org/10.1007/978-3-030-05660-5_10

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