The European Insurance and Occupational Pensions Authority (EIOPA) published today the results of its peer review on the supervision of the stochastic valuation method insurers use for products with options and guarantees. Following the review, EIOPA is issuing recommended actions to national supervisors, where necessary, and also publishing a number of best practices identified during the peer review.
Insurers use stochastic valuation – usually based on simulation techniques – to account for products that have material options or guarantees, as deterministic valuation does not always capture how the value of such products may change depending on the economic environment (i.e. their time value).
Although stochastic valuation is often highly complex – both to implement and to supervise –(re)insurers are increasingly adopting it, among others, as a result of the move to risk-based regimes like Solvency II and the growing availability of reserving software that facilitates stochastic valuation.
In response to this trend and the potential material impact on undertakings’ solvency position, EIOPA conducted a peer review with National Competent Authorities (NCAs) across Europe to assess their supervision of this area. The peer review was structured in two parts:
- the supervision of the identification of options and guarantees that require stochastic valuation, and
- the supervision of the valuation of options and guarantees.
Scope and findings
21 Member States participated in the review, with 14 under the full scope (identification and valuation of options and guarantees) and 7 taking part with a limited scope (only valuation of options and guarantees), reflecting the relevance of stochastic valuation in their respective markets.
7 NCAs received recommendations to improve their identification of options and guarantees in their markets and to actively monitor their materiality over time. 6 NCAs were advised to develop specific national guidance and/or further develop their supervisory activities related to stochastic valuation.
The Peer Review also identified best practices that could support NCAs in their supervision of stochastic valuation. These concern the implementation of the relevant regulatory framework, the supervision of the identification of options and guarantees, the valuation of options and guarantees and tools used by different NCAs to supervise the use of stochastic valuation.
Background
In the context of enhancing supervisory convergence and in accordance with its mandate, EIOPA regularly conducts peer reviews in close collaboration with NCAs and with the aim of strengthening both the convergence of supervisory practices across Europe and the capacity of NCAs to conduct high-quality and effective supervision.