French Insurance Code
In forceI - The value of the prudential technical provisions referred to in Article L. 351-2 is equal to the sum of the best estimate and the risk margin.
II - The best estimate corresponds to the probability-weighted average of future cash flows taking into account the time value of money estimated on the basis of the relevant risk-free rate curve, i.e. the expected present value of future cash flows.
The calculation of the best estimate is based on up-to-date and credible information and realistic assumptions, using appropriate, applicable and relevant actuarial and statistical methods.
The cash flow projection used in the calculation of the best estimate takes into account all cash inflows and outflows required to meet the insurance and reinsurance obligations, over their entire duration.
The best estimate is calculated gross, without deducting receivables arising from reinsurance contracts and securitisation vehicles. The amount of these receivables is calculated separately, in accordance with article R. 351-12.
The set of contracts giving rise to the aforementioned liabilities to be taken into account is defined in Article 17 of Commission Delegated Regulation (EU) No 2015/35 of 10 October 2014. The boundaries of these contracts are defined in Article 18 of the same Regulation.
The requirements for data quality and the conditions under which approximations are allowed are defined in Articles 19 to 21 of the same Regulation.
The assumptions to be used for the calculation of prudential technical provisions are defined in articles 22 to 26 of the same regulation.
The methods for projecting cash flows are defined in articles 28 to 36 of the same regulation.
The relevant risk-free rate curve is defined in articles 43 to 61 of the same regulation.
III-The risk margin is calculated in such a way as to ensure that the value of the prudential technical provisions referred to in Article L. 351-2 is equivalent to the amount that an undertaking authorised to carry on insurance or reinsurance business would require in order to take over and honour the insurance and reinsurance commitments.
IV - Insurance and reinsurance undertakings carry out a separate valuation of the best estimate and the risk margin.
However, where future cash flows relating to insurance and reinsurance commitments can be reliably replicated using financial instruments for which there is a reliable observable market value, the value of prudential technical provisions referred to in Article L. 351-2, relating to these future cash flows, is determined using the market value of these financial instruments. In this case, it is not necessary to calculate the best estimate and the risk margin separately.
Article 40 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 specifies the circumstances in which a separate calculation of the best estimate and risk margin is not required.
Where insurance and reinsurance undertakings carry out a separate assessment of the best estimate and the risk margin, they shall calculate the risk margin by determining the cost of raising an amount of eligible own funds equal to the Solvency Capital Requirement necessary to meet their liabilities for the full duration of those liabilities. For the purposes of assessing the risk margin, the Solvency Capital Requirement does not include the additional capital requirements imposed by the Autorité de contrôle prudentiel et de résolution, pursuant to Article L. 352-3.
The cost of capital rate is the rate used to determine the cost of raising this amount of eligible own funds. This rate is the same for all insurance and reinsurance undertakings and is revised periodically.
The cost of capital rate used is equal to the additional rate, over and above the relevant risk-free interest rate, which would be borne by an undertaking holding an amount of eligible own funds, referred to in Article L. 351-6, equal to the Solvency Capital Requirement which is necessary to meet the insurance and reinsurance commitments throughout their term.
The cost of capital rate is set in Article 39 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014.
The methods for calculating the risk margin are set out in Articles 37 and 38 of the same Regulation.
The simplification methods for calculating prudential technical provisions, the risk margin and the conditions precedent to their use are defined in Articles 56 to 61 of the same Regulation.
