SCR Engine – JMD Consulting

About SCR Engine

SCR Engine is used for the calculation of technical provisions and solvency capital requirements for life and income protection underwriting risks.

Calculation of cash flows

The cash-flow projection used in the calculation of the best estimate takes into account all of the cash in- and out-flows required to settle the insurance and reinsurance obligations over the lifetime thereof.

Cash flow calculation is used when only best estimate liabilities need to be calculated for a certain policy, product or type of insurance. Cash flow calculation requires the following steps:

Prepare the data and place the files in SCR ENGINE folder.
Clear the previous results if exists with SERVICES CLEAR function
Enter file names in DATABASE part of the screen
Select the PRODUCT under VALUATION screen
Check the data with SERVICES CHECK DATA function
Run GENERATE CF submodule
Check the result for your selected policy, product or type of insurance. Result are always written into sheets starting with CF. In case a single policy calculation mode is used, detailed results can be seen on sheet Policy.

Calculation of financial guarantees

When calculating technical provisions, we have to take into account of the value of financial guarantees and any contractual options included in insurance policies. Any assumptions with respect to the likelihood that policy holders will exercise contractual options, including lapses and surrenders, have to be realistic and based on current and credible information. The assumptions have to take into account, either explicitly or implicitly, the impact that future changes in financial and non-financial conditions may have on the exercise of those options.

Financial options and guarantees calculation requires the following steps:

Prepare the data and place the files in SCR ENGINE folder.
Clear the previous results if exists with SERVICES CLEAR function
Enter file names in DATABASE part of the screen
Select the PRODUCT under VALUATION screen
Check the data with SERVICES CHECK DATA function
Run CALCULATE VALUES OF GUARANTEES submodule
Check the result for your selected policy, product or type of insurance. Result are always written into B_S sheet. In case of a single policy calculation mode detailed results can be seen on sheet Policy.

Solvency capital requirement for life and non-life underwriting risk and technical provisions

The value of technical provisions is equal to the sum of a best estimate and a risk margin.

Life insurance obligations

The cash-flow projection used in the calculation of the best estimate takes into account all the cash in- and out-flows required to settle the insurance and reinsurance obligations over the lifetime thereof.

The best estimate corresponds to the probability weighted average of future cash-flows, taking account of the time value of money (expected present value of future cash-flows), using the relevant risk-free interest rate term structure. The best estimate is calculated gross, without deduction of the amounts recoverable from reinsurance contracts. Those amounts are calculated separately. The risk margin is such to ensure that the value of the technical provisions is equivalent to the amount that insurance company would be expected to require in order to take over and meet the insurance obligations.

For unit-linked business future cash-flows associated with insurance obligations can be replicated reliably using financial instruments for which a reliable market value is observable, the value of technical provisions associated with those future cash flows is determined on the basis of the market value of those financial instruments. The risk margin is calculated by determining the cost of providing an amount of eligible own funds equal to the Solvency Capital Requirement necessary to support the insurance obligations over the lifetime thereof.

Non-life insurance obligations

The best estimate for non-life insurance obligations is calculated separately for the premium provision and for the provision for claims outstanding.

The premium provision relates to future claim events covered by insurance and reinsurance obligations falling within the contract boundary. Cash-flow projections for the calculation of the premium provision includes benefits, expenses and premiums relating to these events.

The provision for claims outstanding relates to claim events that have already occurred, regardless of whether the claims arising from those events have been reported or not.

Cash-flow projections for the calculation of the provision for claims outstanding shall include benefits, expenses and premiums relating to that event.

Counterparty default adjustment

The adjustment to take account of expected losses due to default of a counterparty is calculated as the expected present value of the change in cash-flows underlying the amounts recoverable from that counterparty that arises if the counterparty defaults, including as a result of insolvency or dispute, at a certain point in time.

Valuation of financial options

When calculating technical provisions, we have to take account of the value of financial guarantees and any contractual options included in insurance policies.

SCR calculation

The Solvency Capital Requirement is calculated on the presumption that the undertaking will pursue its business as a going concern. The Solvency Capital Requirement is calibrated so as to ensure that all quantifiable risks to which an insurance company is exposed are taken into account. It covers existing business, as well as the new business expected to be written over the following 12 months. With respect to existing business, it covers only unexpected losses. It corresponds to the Value-at-Risk of the basic own funds of an insurance company subject to a confidence level of 99,5 % over a one-year period.

The Solvency Capital Requirement in SCR ENGINE covers the following risks:

non-life underwriting risk;
life underwriting risk;
health underwriting risk;

SCR calculation requires the following steps:

Prepare the data and place the files in SCR ENGINE folder.
Clear the previous results if exists with SERVICES CLEAR function
Enter file names in DATABASE part of the screen
Select the PRODUCT under VALUATION screen
Check the data with SERVICES CHECK DATA function
Run GENERATE CF submodule
Run CALCULATE VALUES OF GUARANTEES submodule
Run CALCULATE TP/SCR underwritting RM submodule
Check the result for your selected policy, product or type of insurance. SCR report can be seen on sheet SCR PRVA. Risk margin can be found on sheet RISK_MARGIN. Adjustment and recoverables as value of guarantees can be found in B_S sheet.

Calculation of sensitivity of technical provisions on market risk

The guideline on the treatment of market and counterparty risk exposures in the standard formula issued as EIOPA-BoS-14/174 in Guideline 4 – Interest rate risk sub-module requires that insurance company includes all interest rate sensitive assets and liabilities in the calculation of the capital requirement for the interest rate risk sub-module. The technical provisions should be recalculated under the scenarios using the risk-free interest rate term structure after the shock, which is determined by stressing the basic risk-free interest rate term structure.

For unit-linked business future cash-flows associated with insurance obligations can be replicated reliably using financial instruments for which a reliable market value is observable, the value of technical provisions associated with those future cash-flows is determined on the basis of the market value of those financial instruments. Technical provisions as a whole are then sensitive to other market risk as:

equity risk
property risk
currency risk
spread risk
concentration risk.

The technical provisions should be recalculated for named risks.

Market risk recalculation of technical provisions requires the following steps:

Prepare the data and place the files in SCR ENGINE folder.
Clear the previous results if exists with SERVICES CLEAR function
Enter file names in DATABASE part of the screen
Select the PRODUCT under VALUATION screen
Check the data with SERVICES CHECK DATA function
Enter the change of assets of each risk (Figure 54)
Run CALCULATE TP – market risk module submodule
Check the results under the MarketRisk sheet