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There are several other new concepts in the EBS framework that build on the statutory basis
toward a more economically consistent technical provision. Notably, insurers need to
calculate a risk margin, adjust reinsurance recoverables for default costs, and render an
actuarial opinion on the overall reasonableness of the TPs.
Other EBS considerations
Counterparty default
Under the EBS framework, reinsurance recoverables must
be adjusted for expected losses due to counterparty default.
The preferred methodology mirrors widely used expected
credit loss approaches.
Bound But Not Incepted (“BBNI”) Business
Provisions must also be set aside for business to which the
insurer is bound to as at the valuation date, even though the
underlying contracts may not yet have incepted.
Risk margin
A risk margin is added to the BEL to arrive at the
total EBS technical provision. Although the BEL by
definition reflects the expected value of insurance
benefits payable, there is inherent uncertainty in the
underlying cash flows.
Conceptually, the risk margin represents the
compensation required by the insurer to bear this
uncertainty. The preferred methodology is the Cost
of Capital approach, but certain approximations are
permissible. Under this approach, the insurer
calculates the cost of holding its required capital over
the lifetime of its insurance obligations, as follows:
•
is the insurers required capital at time t, per
the standard formula or its own internal model.
•
is the risk-free discount rate
• is the cost of capital – currently 6%
Actuarial opinion
Under the new reporting regime, an actuarial opinion is
required on the reasonableness of EBS TPs.
The Loss Reserve Specialist should specifically discuss the
following:
• Commentary on data underlying the EBS TPs
• Discussion of how Events Not In Data (ENIDs) are
incorporated into their actuarial estimates
• Discussion of how the Loss Reserve Specialist arrived at
their actuarial estimates of the insurer’s aggregate TPs
• Commentary on the methodology used to arrive at the
adjustment included in the best estimate of reinsurance
recoveries that was made to reflect expected losses due
to counterparty default