Can a lapse assumption that lowers reserves be used under Solvency II?

[curiousactuary]

Question 7iii of ST2 Septemeber 2009 compares embedded value assumptions against assumptions used to calculate statutory reserves.

1. I assume statutory reserves in the UK mean solvency II reserves, specifically the best estimate liability?

It says "It is likely that supervisory reserves will not allow for any assumptions regarding lapses, going paid up or surrenders, unless to do so would increase reserves".

2. Is this true about Solvency II - so we can't use lapse assumptions if this would lower the reserves?

 

[mugono]

Question 7iii of ST2 Septemeber 2009 compares embedded value assumptions against assumptions used to calculate statutory reserves.

1. I assume statutory reserves in the UK mean solvency II reserves, specifically the best estimate liability?

It says "It is likely that supervisory reserves will not allow for any assumptions regarding lapses, going paid up or surrenders, unless to do so would increase reserves".

2. Is this true about Solvency II - so we can't use lapse assumptions if this would lower the reserves?

1, No - Solvency II only came into effect on 1.1.16. The statutory reserves would have included prudence within the reserves (i.e. best estimate + a margin)

2. Solvency II permits insurers to recognise negative reserves.

 

[curiousactuary]

Thanks - so do statutory reserves refer to the Solvency I regime (i.e. before 1.1.16?). I always interpreted statutory as meaning regulatory (= solvency II), hence why I thought they were equal to Solvency II reserves.

 

[Lindsay Smitherman]

Thanks - so do statutory reserves refer to the Solvency I regime (i.e. before 1.1.16?). I always interpreted statutory as meaning regulatory (= solvency II), hence why I thought they were equal to Solvency II reserves.

In the UK / EU, Solvency I was replaced by Solvency II as from 2016.
Therefore, UK / EU regulatory / supervisory balance sheets in 2009 were constructed in accordance with Solvency I, ie on a prudent basis. You are quoting something from 2009, so it would reflect the prevalence of prudential reserving regimes at that time.
Currently, regulatory / supervisory balance sheets are done under Solvency II, ie with base liabilities determined using a best estimate basis.

Under Solvency II, for the calculation of the BEL you would simply use your best estimate lapse assumptions.