German market standard for PRIIP category 4 products

German market standard for PRIIP category 4 products


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Speaker(s): Andreas Niemeyer (Allianz Lebensversicherung), Tobias Rieck (Allianz Deutschland)

At the beginning of 2018 the regulation on Packaged Retail and Insurance-based Investment Products (PRIIPs) of the EU becomes effective (EU regulation No. 1286/2014). This regulation requires the manufacturers of PRIIPs to provide a Key Information Document (KID) to the policyholder that includes standardized information such as a cost overview, performance scenarios, and a summary risk indicator (SRI).

For the practical calculation of these information the regulatory technical standards (RTS, EU regulation No. 2017/653) provide different approaches. Therefore, all products are split into four categories for which different methods have to be applied. Products which at least partly depend on factors not completely observed in the financial market (e.g. profit sharing) fall into category 4. The RTS allow the use of robust and well recognized industry and regulatory standards for the calculations of category 4 products.

We present the advice of the German Association of Actuaries (DAV) on a market standard for category 4 products in Germany which is based on an already existing regulatory standard for German Riester products. The methodology is based on a forward looking simulation model. The basic capital market processes include the development of the short rate and of the share prices over time. The short rate is modeled by a generalized two-factor Vasicek model while the share prices are modeled by a generalized Black-Scholes model. Based on these models it is possible to derive developments of e.g. shares, mixed funds, and stock indices. In particular, the market standard also includes a method to derive a development of the credited rate of an insurance’s general account. Therewith it is possible to simulate the maturity payment and these results are used to calculate the performance scenarios and the market risk measure. The latter is the major component of the SRI.

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