Issues with contract boundaries have been identified in the following topics:
a. Paid-in contract
The paragraph 18 (3) of the Delegated Acts 2015/35 states that future premiums are out of scope if the insurer can cancel the contract unilaterally. However, it says nothing about the treatment of paid-up premiums, which left unnecessary room for interpretation and inconsistencies. EIOPA proposes to amend the paragraph 18 (3) so that it is applicable only to future premiums and not to paid-up premiums. As such, the contractual obligations related to paid-up premiums remain valid even after the date the insurer can unilaterally cancel the contract.
There is some doubt whether the paragraph 18 (3), stating that contract boundaries should be applied until the date the insurer has a unilateral right to cancel the contact, should be applied to the different parts of the contract when this contract cannot be unbundled, because the paragraph 18 (4) does not require the ability to unbundle different parts of the contract. It is indeed not clear whether the paid-in and future premiums can be considered as different parts of a contract. This could lead to situations where coverages of the same contract have different contract boundaries as required by 18 (3), although the contract cannot be unbundled. Therefore, EIOPA proposes to amend 18 (4) so that it states clearly that 18 (3) can only be applied when the contract can be unbundled.
c. Exception in Article 18 (3)
18 (c) says that the obligations are within contract boundaries until the date the insurer can amend the premium to fully reflect the risk. In some cases, the insurers cannot evaluate the risk after the inception, so the insurer should evaluate at contract/portfolio level whether the premium is sufficient. Then the contract boundaries are extended until this date, which could increase the own funds thanks to future profits.
This situation can occur for example in group life insurances or in life insurances with death riders where the insurer cannot evaluate every individual risk regularly.
Due to differences in interpretation of this exception, the same risk can be handled differently by two insurance companies depending on whether they can assess or not the risk at the renewal date. EIOPA proposes to restrict the exception only to cases where the insurer cannot perform the reassessment for legal (and nor i.e. for technical) reasons.
d. EPIFP (Expected Profits in Future Premiums)
Currently, the calculation of the EPIFP is considered as not accurate for several reasons:
- All loss-making policies are excluded, while compensation by the profit-making ones is only allowed within the same HRG.
- The EPIFP are calculated gross of reinsurance and SPV.
- The EPIFP are calculated before taxes.
Therefore, three options are being considered to improve the calculations:
- Option 1: No change, i.e. maintain current wording.
- Option 2: Include all future losses and the impact of reinsurance in the EPIFP.
- Option 3: Include all future losses, impact of reinsurance and impact of taxation in the EPIFP.
EIOPA still believes that the non-compensation of profits by losses is still critical for the EPIFP calculation because it allows to see the structure of the EPIFP, so the information about loss- and profit-making policies should be available at least at line of business level.
There is still agreement that there should be non-compensation within an HRG, but in practice, it means that the loss- and profit-making policies are never in the same HRG. EIOPA raises the question whether it is practically possible that policies can be part of the same HRG while having different profitability levels.
Reinsurance is considered to provide valuable information. However, a calculation on contract level can be very burdensome, so it should be allowed to calculate the impact at undertaking level. On the other hand, the impact of taxation is believed to be very hard to estimate. Therefore, EIOPA advises to follow option 2 (listed above).
e. Other expected profits
The contribution of profits in management fees and charges for servicing and managing funds can represent a significant amount, but its contribution to own funds has been unexplored.
EIOPA advises to take this into account in the calculation of EPIFP.