Tag Archives: LTGA

First long-term guarantee assessment Q&A published

The European Insurance and Occupational Pensions Authority (EIOPA) recently released its initial set of questions and answers (Q&A) regarding the long-term guarantee assessment (LTGA). The LTGA began on 28 January.

This InsuranceERM.com article (subscription required) cites William Coatesworth’s perspective on the Q&A. Here is an excerpt:

EIOPA confirmed that the firms that are taking part in the assessment, which it is hoped will smooth out disagreements between EU policy-makers in the Omnibus II directive, should use a base reference date of 31 December 2011, even where more recent data is available.

As such, for firms whose asset portfolios have changed significantly since the end of 2011, the results from the LTG impact assessment are “unlikely to represent a realistic view of their financial position, particularly where such changes have been made in reflection of expected Solvency II requirements,” according to consulting firm Milliman.

The first set of questions cover a wide range of issues, and, as noted by Milliman in its round-up of the Q&A, many respondents have taken the opportunity to ask questions relating to wider Solvency II issues including the calculation of technical provisions and the solvency capital requirements as set out in part I of the technical specifications, released by EIOPA in January.

In relation to part II of the technical specifications, end of December is a base reference date and no hypothetical eligible assets should be quantitatively tested – whereby assets are assumed to be sold and hypothetical eligible assets instantaneously purchased in order to optimise the matching adjustment, Milliman explained.

Milliman e-Alert on EIOPA LTGA discount rates


On 22 January 2013, the European Insurance and Occupational Pensions Authority (EIOPA) released a pre-publication spreadsheet setting out the discount rates curves for each major currency to be used by firms in the upcoming Long-Term Guarantee Assessment (“LTGA”).

The LTGA is currently scheduled to run from 28 January 2013 and is intended to assess the impact of the proposed Long-Term Guarantees package (“LTG”) as part of the on-going discussions on Omnibus II. While the Terms of Reference for the LTGA have not been made publicly available, the assessment is expect to test different applications of the following components through a number of scenarios:

  • The counter-cyclical premium
  • The matching adjustment
  • Extrapolation of the risk-free rate
  • A transitional measure.

The spreadsheet sets out discount rates for 13 scenarios, of which scenario 0 represents the base position (with no LTG measure applied), scenarios 1 to 9 test different applications of the LTG measures using a reference date of 31/12/2011, and scenarios 10, 11 and 12 test how the measures would have fared under the economic conditions at 31/12/2009 and 31/12/2004.

The scenario summary tab, included with the spreadsheet, details the extrapolation parameters used to derive the curves beyond the point where market data can be used, and the level of any counter-cyclical premium (“CCP”) that has been applied under each scenario, as follows:

  • The last liquid point (“LLP”), representing the point at which extrapolation starts, for the Euro and Sterling is set at 20 years and 50 years respectively (with an Euro LLP of 30 years used for the base position in scenario 0).  The rates for all currencies converge to the ultimate forward rate within 10 years for all scenarios, except scenarios 0 and 4 where a convergence of 40 years is used
  • The credit risk adjustment has been increased from 10 basis points, as used under QIS5, to 35 basis points, for all scenarios using a reference date of 31/12/2011, and 20 basis points as at 31/12/2009 (consistent with the increased credit concerns observed in the market as indicated by the widening differences between 3 month and overnight swap rates); and
  • For the purposes of the LTGA, the CCP to be tested is applied as fixed rates, set at 50, 100 and 250 basis points under the various scenarios.

The discount rates are published in advance of Part 2 of the technical specifications for the LTGA, which are currently expected to be released by EIOPA on 28 January 2013. Part 1 of the technical specifications to be used by firms participating in the assessment were published by EIOPA on 18 October 2012, and subsequently revised on 22 December 2012 (and are discussed in three Milliman summary papers which are available on our website).

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found at UK.Milliman.com.

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant for more information.

This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.

Will the lack of specifications and timing jeopardise the quality of results from the LTGA?

Insurers’ ability to properly conduct the long-term guarantee assessment (LGTA) may be at risk due to insufficient specifications and scheduling by the European Insurance and Occupational Pensions Authority (EIOPA). The final part of the technical specifications are not due to be released until the start of the LTGA, which, due to delays in the political processes, is now currently scheduled by EIOPA for 28 January, a date which coincides with the year-end reporting period for many firms.

In this Risk.net article (subscription required), William Coatesworth highlights concerns facing firms required to perform the test in light of these events. Here is an excerpt:

Actuaries say the absence of any detail on when the specifications will be published could jeopardise insurers’ ability to take part in the exercise, with smaller firms likely to be particularly challenged.

William Coatesworth, consulting actuary at Milliman in London, says: “Insufficient notice of the requirements may impose significant challenges for firms required [to] conduct the assessment.

“Many firms, and small and medium-sized firms in particular, may be at risk of significant resourcing issues caused by overlaps with year-end reporting timetables,” he adds.

…there are fears that the exercise will not be completed in time for the parliament’s plenary vote to finalise Omnibus II, scheduled to take place on June 10, regardless of when the LTGA begins. Eiopa will publish its report on the LTGA in June 2013.

“Given the proposed timelines for producing the final report, absorbing this and subsequently feeding the results into the trilogue discussions, it appears increasingly likely that Omnibus II will not be finalised in time for approval at the plenary session,” says Milliman’s Coatesworth.

“If this is the case, a more justified approach may be for Eiopa to either postpone the assessment until after the year-end reporting period, or extend the assessment deadlines. This would give greater flexibility to companies and national supervisors for the submission of the results, and would appear to increase the chances of greater participation and hence produce more accurate results from the assessment,” adds Coatesworth.