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Dr Florian Ueltzhöfer

Actuary DAV/IVS

Teoman Kaplan

Actuary DAV

In our last instalment, we talked about the “winners” in the CoViD-crisis and the overshooting effect of the VA, and why Italy did not benefit from it. Today, we turn to the “losers”, where the Transitional on Technical Provisions (TTP) plays a crucial role.

What is the TTP about and why do only some of the countries use it? Reasons for applying the TTP are mostly driven by very long-term liabilities accompanied by high legacy guarantees, as we can see especially in Germany. Being a “transitional measure”, its impact is temporary in nature. The TTP allows insurance companies to gradually account for the impact on the Liabilities that Solvency 2 had when first introduced. Broadly speaking, the value of the statutory reserve (pre-S2) is increased by one sixteenth every year until the “real” economic value of the Technical Provisions is reached in 2032.

But why does this lead to such a discrepancy in the result in Q1/2020? One reason was already obvious in the graphic of our third instalment: the impact of the TTP in Germany, Austria and France is far bigger than the effect of the VA. As we observe in today’s graph, relatively small increases in the Technical Provisions cause massive decreases of Own Funds (EOF) and (mostly) strong increases in SCR as well.

A not so obvious – more technical – reason may have then contributed to the losses seen in the very first instalment. Let’s recall: 1/16th of the initial TTP is added every year on top of the technical provisions due to the concept described above.* This always “hits” in the first quarter of each year. Practically speaking, it’s likely that a substantial part of the losses seen in Q1/2020 had happened already on January 1st, far earlier than the market turmoil we saw in March.

But even more can be said about the foreseeable “losses by construction”: since we look at countries with a rather long Liability Duration, yet another effect needs to be considered. As you all know, the Ultimate Forward Rate (UFR) is not as “ultimate” as originally defined. For the time being, the UFR decreases 15 bps every year. Hence the rates used for discounting long-term liabilities decrease systematically. Combined with lower asset values during the crisis, this leads to a lower Solvency Ratio.

In Norway, these effects may have been even stronger, which we are going to discuss next time as well.

Again, this short analysis won’t capture all the reasons why we have seen these strong movements in Solvency ratio, but should be the basis for further thoughts.

LOOKING FORWARD TO FUTURE DISCUSSIONS ON THIS CHANNEL!

Impact of the removal of the TTP on the TP, and the EOF and SCR, as of Dec 2019 and Dec 2020

Source: EIOPA, Report on long-term guarantees measures and measures on equity risk 2019 and 2020.
*The comparison with the remaining TTP impact at year-end 2020 gives a good indication of the annual impact.

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