Solvency ii -
Final CEIOPS Advice for Level 2 Implementing Measures on Solvency
II: Technical Provisions – Article 86 (d) Calculation of the
Risk Margin
The reference undertaking
A. Assumptions to be fulfilled by the reference undertaking
In order to be able to determine “the
cost of providing an amount of eligible own funds equal to the
Solvency Capital requirement necessary to support the insurance
and reinsurance obligations” (Article 77(5)) in a clear and
unambiguous manner, the
definition of the
reference undertaking is a key issue.
The assumptions that the reference undertaking has to fulfil if
this object shall be achieved, as well as a rationale for these
assumptions, are presented and discussed in the paragraphs below.
Assumption 1:
The reference undertaking is not the undertaking itself (i.e. the
original undertaking), but another undertaking.
This assumption is reasonable in light of the wording of Article
76(2) where reference is made to the current amount a
(re)insurance under-taking
will have to pay if the (re)insurance obligations are transferred
“immediately to
another insurance or reinsurance undertaking”.
Moreover, by assuming that the reference
undertaking is another undertaking (than the original undertaking)
there is no need to make artificial assumptions regarding the
original undertaking (e.g. with respect to the available capital
of the original undertaking) as was the case in QIS3 –when the
reference undertaking was defined as the original undertaking.
In general, it seems reasonable to
believe that this assumption will reduce (if not eliminate
completely) potential inconsistencies in the framework for risk
margin calculations.
Assumption 2:
The reference undertaking is an empty
undertaking in the sense that it does not have any insurance or
reinsurance obligations and any own funds before the transfer
takes place.
By making this assumption
the risk
margin will depend only on the insurance and reinsurance
obligations transferred to the reference undertaking and the
assets covering these obligations.
On the other hand, if the reference
undertaking is assumed to be nonempty there will be ambiguities
related to the assumptions to be made regarding (the composition
of) the reference undertaking’s assets and liabilities before the
transfer takes place.
The assumptions made may have a substantial
impact on the risk margin due to the fact that the SCR calculations
allow for diversification (correlation effects)
between the
business existing prior to the transfer and the transferred
business.
Moreover, if the reference
undertaking is assumed to have positive eligible own funds (but no
(re)insurance obligations) before the transfer, the risk margin
would not measure the cost of holding an amount of eligible own
funds to cover the SCR, but the cost of holding an amount of
eligible own funds (at least partially) in excess of the SCR.
This is not intended by the definition given
in Article 77(5) of the Level 1 text and would not make much sense
from an economic point of view.
Assumption 3:
After the transfer the reference undertaking
has eligible own funds corresponding exactly to the amount of SCR
that is necessary to support the transferred insurance and
reinsurance obligations.
If the reference undertaking is
assumed to be an empty undertaking before the transfer takes place
(cf. assumption 2), Article 77(5) can be interpreted in such a way
that after the transfer all eligible own funds in this undertaking
will be necessary to support the transferred obligations.
On the other hand, if it is assumed
that the reference undertaking is nonempty, the interpretation of
Article 77(5) will be more difficult, due to the fact that this
undertaking will have eligible own funds and be subject to a
capital requirement related to its existing business prior to the
transfer.
After the transfer the eligible own funds
would exceed the amount being necessary to support the transferred
obligations.
Assumption 4:
After the transfer of insurance and
reinsurance obligations, the reference undertaking
has assets to
cover the Best Estimate net of reinsurance and SPVs, the risk
margin and the SCR.
For the purposes of calculating the risk
margin these assets should be considered to minimize the market
risk of the undertaking.
The reference undertaking
should only be
subject to market risk that is unavoidable in practice.
After the transfer the reference
undertaking will have on its balance sheet both assets covering
(re)insurance obligations (technical provisions) and assets
covering capital.
In a transfer of (re)insurance
obligations, a transfer of assets that cover those obligations
will typically also take place.
Therefore, immediately after the
transfer, part of the assets of the reference undertaking would be
formed of assets that originate from the original undertaking. As
a result it is possible that there would be market risk linked to
those assets.
In this context, it can be assumed that
the reference undertaking will derisk these assets in order to
reduce the part of SCR related to market risk.
For example, the
reference undertaking can sell investments in equity or property
to avoid the corresponding risks.
It can sell corporate bonds and
buy government bonds instead to avoid credit spread risk, or it
can restructure the investments to achieve a better cash-flow or
currency matching and thereby reduce interest rate and currency
risk.
In principle, the time needed for
this de-risking will depend on the selection of assets that are
transferred from the original undertaking. For
reasons of
practicability it should be assumed that the de-risking takes
place immediately after transfer.
On the other hand, Article 76
mentions the transfer of obligations and Article 77 refers to the
amount of eligible own funds that would be needed to take over and
meet these obligations. Neither of the two articles makes
reference to any transferred assets.
Therefore it could also be
argued that the nature of assets held in the reference undertaking
is independent of those of the original undertaking.
This would
also be supported by the requirement that the assumptions made
about the reference undertaking should be harmonised throughout
the European Union and that undertaking-specific information
should only be used where it better reflects the underlying
portfolio characteristics.
Hence, even according to this argument
it is justified to assume that the reference undertaking covers
the transferred obligations with assets that minimise the market
risk.
In QIS4, CEIOPS proposed that
market risk should not been taken into account in the calculation
of the risk margin for reasons of practicability. In many cases
this is justified as the assets can be completely de-risked.
However, for particular kinds of insurance obligations
not all
market risk can be avoided.
For example, if the insurance
obligations have a very long duration, it may not be possible to
match the cash-flows completely.
The mismatch may give rise to a significant
interest rate risk.
Stakeholders noted that the
QIS4 approach
neglected the unavoidable market risk.
For example, the CRO Forum gave in its paper
“Market Value of Liabilities for Insurance Firms” the following
examples of market risks which cannot be avoided in practice:
(i) 60-year USD, EUR or Yen cash flow or
interest rate option,
(ii) 15-year emerging markets cash flow,
(iii) 30-year equity option.
If market risk is excluded from the risk
margin calculation also in cases where it cannot be eliminated in
practice, the resulting technical provisions would be lower than
the transfer value, because any undertaking taking over insurance
obligations bearing unavoidable market risk would require a
compensation for the risk bearing.
The unavoidable market risk can be
determined by analysing the possibilities to reduce the SCR for
market risk.
For example, let CF1, CF2, …, CF30 be the
expected cash-flows of an insurance portfolio.
Let it be possible
in practice to match cash-flows up to 20 years with risk-free
instruments but not above this threshold.
The reference
undertaking could match the cash-flows CF1, …, CF20 and cover the
cash-flows CF21, …, CF30 with instruments of 20-year duration.
In this way, the market risk would only
consist of a residual interest rate risk.
Alternatively, the
reference
undertaking could match the cash-flows CF21, …, CF30
with corporate bonds or risk-free instruments of another currency
(where risk-free instruments of longer duration are available).
In these cases, the market risk would only
consist of credit spread risk or currency risk. The investment
portfolio
with the lowest market risk SCR determines the SCR
that needs to be allowed for in the risk margin.
A perfect replication of the
liability cash flows is one that completely eliminates all risks
(not only market risk) associated with the liability.
In practise,
perfect replication is expected to be relatively rare.
It should
therefore be noted that replication of cash-flows and elimination
of market risk SCR are different concepts.
It is not necessary to
perfectly replicate the cash-flows of the obligations to eliminate
the market risk SCR. It is sufficient to replicate the liability
cash-flows on best estimate level to reduce the standard formula SCR to an immaterial level for the purposes of calculating the
risk margin.
For non-life insurance obligations
and short-term life insurance obligations the market risk SCR can
usually be reduced to zero.
The Level 1 text defines the
Cost-of-Capital rate as an additional rate above the risk-free
interest rate that an undertaking would incur holding an amount of
eligible own funds equal to the SCR.
An underlying assumption
there is that the assets that cover the SCR provide a return that
equals the risk-free interest rate and therefore the cost of
holding capital comprises only the additional rate above that.
A consequence of this is that there may exist
market risk or counterparty default risk linked to these assets.
The market risk or counterparty default
risk linked to the assets that cover the SCR depends on the size
of the SCR.
While the size of the SCR in turn depends on
the individual risk modules, there arises a circular definition of
the SCR.
In order to avoid this, it is assumed that
the risk connected to the assets that cover the SCR is zero.
This
simplifying assumption leads to an understatement of the risk
margin but it is useful for practicability reasons.
It is furthermore assumed that both
the market risk and the counterparty default risk linked to the
assets that cover the risk margin is zero.
As the risk margin
depends on the SCR and the SCR depends among other things on
the risks linked to the assets that cover the risk margin, this
would lead to a recursive calculation of the risk margin. However,
this risk can be ignored for practicability and materiality
reasons.
As with all other risks which are
included in the risk margin calculation, the allowance for market
risk should be done in a practicable and proportionate way with
particular consideration of its materiality.
For example, in QIS3
market risk was captured in the calculation by allowing for the
current market risk SCR in the first year but not any of the
following years of the SCR projection.
CEIOPS will give advice on simplifications of
the risk margin calculation at a later stage.
Assumption 5:
The SCR of the reference undertaking
consists
of:
(a) underwriting risk with respect to the
transferred insurance and reinsurance obligations;
(b) counterparty default risk with
respect to ceded reinsurance and SPVs;
(c) operational risk; and
(d) unavoidable market risk.
The reference undertaking is subject to
underwriting risk corresponding to the transferred insurance and
reinsurance obligations, and these risks exist throughout the
lifetime of the obligations.
On the other hand, underwriting risk
related
to new business is not included.
With respect to the non-life
underwriting risk, the (non-life) catastrophe risk should only
include pre-claims obligations (i.e. claims related to catastrophe
events incurring after the balance sheet day).
Moreover, it seems reasonable to
take into account
• counterparty default risk related to
risk mitigation contracts (e.g. reinsurance contracts) covering
the transferred insurance and reinsurance obligations; and
• operational risk related to transferred
insurance and reinsurance obligations.
However, for reasons of practicability it
is assumed that the reference undertaking does not carry any risk
of default of counterparties to financial derivatives contracts.
Assumption 6:
The loss absorbing capacity of technical
provisions in the reference undertaking corresponds to those of
the original undertaking.
It seems reasonable to assume that
the profit sharing commitments of the original undertaking carry
over to the reference undertaking as far as they are confined to
the line of business.
Hence, the risk mitigating effects of
future profit sharing should be taken into account to the same
extent as in the original undertaking.
Assumption 7:
There is no loss absorbing capacity of
deferred taxes related to the reference undertaking.
It follows immediately from the
assumption that the reference undertaking is an empty undertaking
that the loss absorbing capacity of deferred taxes should be
excluded from the valuation of the risk margin.
Assumption 8:
The insurance and reinsurance obligations of
each line of business (as defined in Article 86(e)) are
transferred to the empty reference
undertaking in isolation.
Hence, no
diversification benefit between lines of business arises.
For the purpose of determining the risk
margin, the SCR of the reference undertaking should be calculated
(using a standard formula or internal model) at least by line of
business, based on the segmentation laid down by the implementing
measures referred to in Article 86(e).
If the SCR of the original undertaking is
calculated by using an internal model, the segmentation may differ
from the one laid down by the implementing measures referred to in
Article 86(e).
However, the risk margin shall always be valued at
least at the level of lines of business laid down by those
implementing measures.
The approach referred to in
assumption 8 is reasonable since it is required according to
Article 86(e) of the Level 1 text (cf. also Article 80) to
calculate this margin (at least) by the individual lines of
business.
Especially, there will be no ambiguity
involved in the allocation of the risk margin as long as this
approach is applied.
The requirement that the (re)insurance
obligations of the individual lines of business are transferred in
isolation can make the risk margin calculations
somewhat more
complex (or may at least increase the number of calculations),
since it requires the SCR to be calculated by line of business.
However, CEIOPS does not believe that the
calculation of the SCR by line of business poses a significant
practical problem particularly since the main contribution to the
risk margin calculation stems from the SCR for underwriting risk
where the relevant input is available by line of business.
Furthermore, as mentioned above
simplifications will be introduced in order to make these
calculations more feasible.
If instead an approach starting from the risk
margin calculations for the overall portfolio – taking into
account all possible diversification effects (related to the SCR-calculation)
– would be applied, several complicating
aspects would be
introduced, including the following:
• It is not obvious how the
overall risk
margin should be distributed among the individual lines of
business. (E.g. the earned premiums will not be a suitable set of
weights for the calculations to be carried out in this context.
Nor will the best estimate technical provisions (in nonlife
insurance) do, cf. the percentages used in the risk margin proxy
proposed for QIS4 purposes.)
• If only a part of the (re)insurance
obligations (e.g. the obligations related to a single line of
business) are transferred from the original undertaking to the
reference undertaking, this will require a recalculation of risk
margins – both for the portfolio of obligations that are being
transferred and for the portfolio of obligations remaining in the
original undertaking – and the sum of these risk margins will be
higher than the risk margin originally calculated for the overall
portfolio (taking into account all diversification effects).
In
general, this would mean that after the transfer has been carried
out, the risk margin related to the (re)insurance obligations that
remain in the original undertaking must be increased.
Since the risk margin depends on
the present and future SCRs as calculated per line of business and
the margin – in the same manner as the best estimate – in any case
shall be calculated per line of business, a natural solution would
be to use the same segmentation for the calculation of best
estimate technical provisions, risk margins and the SCR,
respectively.
Especially, there seems to be
no
reason for a (re)insurance undertaking using the
standard formula
for the SCR-calculations to apply a more granular segmentation
than the one that follows from the implementing measures regarding
Article 85(e) as this in general will increase the overall risk
margin.
Moreover, a finer segmentation will lead to laborious
recalculations of the (standard) SCR (e.g. per homogenous risk
groups) and this may also raise some issues related to the
reliability of the (input) data for these calculations.
The requirement that the risk
margin should be valued at least at the level of lines of business
also in cases where the SCR of the reference undertaking is
calculated by an internal model is introduced in order to ensure
that all reference undertakings apply the same granularity with
respect to these calculations, i.e. in order to avoid ambiguities
in the assessing of the relevant technical provisions when a
portfolio of (re)insurance obligations is transferred between two
undertakings.
Moreover, this requirement should be seen as
a measure to achieve harmonisation of the (calculated) technical
provisions between undertakings, including improved comparability
etc. (see also assumption 9 hereunder).
Assumption 9:
The internal model of the original
undertaking (partial or full) can be used to measure the SCR of
the reference undertaking to the extent that these models cover
at least the risks referred to in assumption 5 as defined by
the standard formula.
When Article 77(5) of the Level 1
text refers to the “amount of eligible own funds equal to the
Solvency Capital Requirement necessary to support the insurance
and reinsurance obligations” it does not distinguish between
SCR calculations based on the standard model and internal models,
respectively.
Hence it may be argued that the SCR-calculations
to be applied in the Cost-of-Capital assessment can be based on
either the standard model or internal models.
An
argument in favour of applying SCR calculations based on internal
models when determining the risk margin, may be that these models
are designed in order to capture the risk of the portfolio in
question (i.e. the portfolio of the original undertaking) in a
better way.
However, if an internal model portrays levels of
risks that are specific for the original undertaking but cannot
be assumed to be similar for the reference undertaking, this
may be an argument for not relying on internal model calculations
when determining the risk margin.
Hence, some conditions should be
in place with respect to using SCR-results from internal models
in the risk margin calculations.
In general an
internal model is approved for the calculation of the current
SCR, while the determination of the risk margin requires the
calculation of all future SCRs as well.
However, an approved
internal model may not be fully adequate for the latter
calculations.
Assumption 10:
The Cost-of-Capital risk margin is defined
net of reinsurance and SPVs.
This assumption is
consistent with assumption 5 regarding the SCR calculations to
be carried out for the reference undertaking and especially the
calculation of the partial SCR for underwriting risk as this
partial SCR is only calculated net of reinsurance and SPVs.
A requirement to calculate the risk margin also gross of
reinsurance would imply a doubling of the number of
calculations regarding future SCRs for underwriting risk and
these gross calculations would be relevant only for
the
determination of the risk margin.
Moreover, a likely
consequence of calculating the risk margin both gross and net
of reinsurance could be that a (positive) risk margin is attached
also to the reinsurance assets (the reinsurance recoverables),
when these results are presented in the financial statement (of
the original undertaking).
However, this would probably not be
in line with the accounting standards for insurance contracts,
see e.g. the relevant provisions in IFRS4 regarding valuation
of reinsurance assets.
The Cost-of-Capital
rate
A general approach for
stipulating the Cost-of-Capital rate
According to
Article 77(5) of the Level 1 text the Cost-of-Capital rate “shall
be the same for all insurance and reinsurance undertakings and
shall be reviewed periodically”.
Moreover, the
Cost-of-Capital
rate used shall be equal to the additional rate, above the
relevant risk-free interest rate, that an insurance or
reinsurance undertaking would incur holding an amount of
eligible own funds, […], equal to the Solvency Capital
Requirement necessary to support the insurance and reinsurance
obligation […].
As the
“additional rate, above the relevant risk-free interest rate”
referred to in Article 77(5) shall be the same for all
insurance and reinsurance undertakings, it should be calibrated
in a manner that is consistent with the assumptions made for
the reference undertaking.
In practise this means that the
Cost-of-Capital rate should be consistent with the Value-at-Risk-assumption corresponding to a confidence level of 99.5 per
cent over the stipulated one-year time horizon as laid down for
the calculation of the Solvency Capital Requirement (SCR).
Especially, the Cost-of-Capital rate should be
independent of
the actual solvency position of the original undertaking.
In the third
and fourth Quantitative Impact Study for Solvency II (QIS3 and
QIS4) the Cost-of-Capital rate had been fixed at 6 per cent
as
such a rate has been assumed to reflect the cost of holding an
amount of eligible own funds for an insurance or reinsurance
undertaking being capitalised corresponding to a confidence
level of 99.5 per cent Value-at-Risk over a one year time
horizon.
The required
consistency between the stipulated Cost-of-Capital rate and the
(Value-at-Risk) assumptions for the SCR-calculations was explained
as follows: the 6 per cent Cost-of-Capital rate corresponds to
the cost of providing eligible own
funds for BBB-rated insurance or reinsurance undertakings, cf.
the Cost-of-Capital rate used by the Swiss regulator in its
Solvency Test for BBB-rated reference undertakings.
As part of the
QIS4-feedback, questions have been raised regarding the
appropriateness of the assumed Cost-of-Capital rate of 6 per cent.
Especially, reference was made to the work carried out by the
Chief Risk Officer Forum (CRO Forum), and a substantially lower
Cost-of-Capital rate has been indicated (cf. also section
3.1.2.2 above).
However, a
critical analysis of the CRO Forum’s report – as well as other
reports on this issue – does not support the QIS4-feedback
referred to above.
On the contrary, indicates that an assumed
Cost-of-Capital of 6 per cent or higher could be seen as
appropriate – given the information currently available
regarding this issue.
In this context it should be noted that
although the CRO Forum has indicated in its report that its
research suggests a Cost-of-Capital rate in the range of 2 ½ -
4 ½ per cent, it also acknowledges that its research did not
prove conclusive.
Moreover, it seems that the CRO Forum first
and foremost has focussed on results leading to the lowest
estimates of the Cost-of-Capital rate.
The analysis summarised in the following subsection does not discuss the
required periodical review as referred to in Article 76(5) of the
Level 1 text.
However, CEIOPS points out that the frequency and
procedures to be followed for this review would need to be
developed.
A possible approach could be to
test the
appropriateness of the Cost-of-Capital rate every five years.
In this context, it should be stressed that due to the long-term
nature of the Cost-of-Capital rate, this does not necessarily mean
that the rate has to be changed as a consequence of a periodic
review.
Assessment of the Cost-of-Capital Rate
(a) Introductory
remarks
The
Cost-of-Capital rate is an annual rate applied to a capital
requirement in each period.
Because
the assets covering the
capital requirement themselves are assumed to be held in
marketable securities, this rate does not account for the total
return but merely for the spread over and above the risk free
rate.
The risk
margin shall guarantee that sufficient technical provisions for a
transfer are available even in a stressed scenario.
Hence, the
Cost-of-Capital rate has to be a long-term average rate,
reflecting both periods of stability and periods of stress.
Otherwise, the rate would vary from year to year, and would be
higher in times of economic uncertainty (when providers of
capital would be expected to seek greater returns for the comparatively higher
risk) and would therefore contribute to higher technical
provisions than in more stable economic situations.
A rate of at
least 6 per cent is assessed to be an adequate placeholder for
the Cost-of-Capital rate in the current context of the Solvency II
regulation.
In order to reach this conclusion it may be argued
along the following lines:
• Shareholder return
models provide the initial input.
• Some objective
criteria may cause upward and downward adjustments of the
initial input.
• A final
calibration of the Cost-of-Capital rate, in order to obtain risk
margins consistent with observable prices in the marketplace, may
be necessary.
(b) Funding of the capital requirement
In CRO
Forum’s report, the Cost-of-Capital rate is calculated as a
weighted average of the cost of equity and the cost of debt.
It is
assumed that 20 per cent of the capital requirement can be
funded by issuing debt and that only the remaining 80 per cent
have to be funded by raising equity capital.
Moreover, by
assuming an effective company rate of taxation of 35 per cent
over all jurisdictions, the estimated cost of debt is in
practise outweighed by the adjustments for tax relief on interest
payments made to service the debt.
As a result the Cost-of-Capital
rate equals only approximately 80 per cent of the estimated
cost of equity rate.
It should be
noted that the assumed funding based on 80 per cent equity and
20 per cent debt cannot be justified in light of the feedback
received during the QIS4-exercise.
According to the QIS4-report
the participating undertakings reported that 95 per cent of
their own funds are classified as tier 1 capital of which only
2 per cent are classified as “subordinated loans” and only 4
per cent as “other reserves (with restricted loss absorbency)”.
Moreover, only 50 per cent of the tier 2 and tier 3 capital are
classified as subordinated loans or other hybrid capital.
Consequently, the QIS4-results indicate clearly that the
assumed debt-funding in any case cannot constitute more than
6-8 per cent of the capital base.
Moreover, it
may be referred to the high-level political guidance to
increase the quality of the external funding (subordinated loans,
hybrid capital instruments etc.) of financial institutions.
It
follows from this that subordinated loans and hybrid capital
should have a high loss-absorbing capacity rather similar to
“core” capital, cf. the revision carried out in the banking
sector.
Accordingly, it
seems reasonable to expect the cost-differences between equity funding and allowed external funding to
diminish.
In this context it should also be
stressed that since the capital base is defined as the solvency
capital requirement in an adverse situation, i.e. as the amount
of capital that is substantially at risk, it would be inconsistent
to assume at the same time that this requirement can be funded by
debt investors at costs substantially below equity.
With respect to the assumed impact
of taxation (i.e. the tax relief on interest payments) on the
assessment of the Cost-of-Capital rate, this aspect will be
less important than assumed in CRO Forum’s report due to the
QIS4-feedback referred to in paragraph 3.102 above.
However, it
still remains to decide on the tax rate(s) to be used if a more
detailed analysis of this aspect of the Cost-of-Capital
calculations should be carried out.
Based on the considerations given
in the previous paragraphs CEIOPS finds that an approach based
on the market situation (i.e. the actual combination of equity
and debt funding) leads to conclusions similar to the approach
used up to now (i.e. 100 per cent equity funding), in particular
for the purposes of the assessments summarised in subsection (c)
below.
Calculation of the risk
margin
The general approach
Based on the assumptions laid down for the reference
undertaking and the assessment regarding the Cost-of-Capital
rate referred to in sections above, a general approach for the
risk margin calculations according to the
Cost-of-Capital
methodology can be summarised as shown in paragraphs below.
It follows from assumption 8 regarding the reference
undertaking that the risk margin should be calculated per line
of business and that no diversification effects should be taken
into account.
This means that
According to assumption 2 and 3 laid down for the reference
undertaking, this undertaking is empty before a transfer of
(re)insurance obligations takes place, whereas it after the
transfer has eligible own funds corresponding
exactly to the
SCR that is necessary to support the transferred (re)insurance
obligations.
This means that the reference undertaking at time
t = 0 (when the transfer takes place) will capitalise itself to
the
required level of eligible own funds, i.e.
The cost of providing this amount of eligible own funds equals the
Cost-of-Capital rate times the amount.
An assessment as sketched in the previous paragraph
applies to the eligible own funds that the reference
undertaking needs to provide in all future years, in order “to
support the insurance and reinsurance obligations over the
lifetime thereof” (Article 76(5)).
As the transfer of
(re)insurance obligations is assumed to take place immediately
(cf. Article 76(3)), the method for calculating the overall risk
margin can in general terms be expressed in the following manner:
The Cost-of-Capital rate “shall be the same for all
insurance and reinsurance undertakings” (Article 76(5)).
According to CEIOPS’ view this rate should be fixed to 6 per
cent (or higher), cf. the assessment made in the
previous
sub-section.
However, a reservation should be made with respect
to the outcome of the periodic reviews to be carried out.
The general rules for calculating the risk margin as laid
down in the previous paragraphs should apply to all
undertakings irrespective of whether the calculation of the SCR
of the (original) undertaking is based on the standard formula
or an internal model.
Calculations based on
the standard formula
3.128. If the SCR of the (original) undertaking is calculated
using the standard formula, all SCRs (for t ≥ 0) for a given
line of business should be calculated as follows:
It should be ensured that the assumptions made regarding
loss absorbing capacity of technical provisions that need to be
taken into account in the SCR-calculations per line of
business, are consistent with the assumptions made for the
overall portfolio (of the original undertaking).
The Basic SCRs for a given line of business (i.e.
BSCRRU,lob(t) for all t ≥ 0) should be calculated by
using the
relevant SCR-modules and sub-modules per line of business
(meaning that the input to be used in the relevant modules
should be restricted to the line of business in question).
Moreover, the calculation of the Basic SCRs (as
referred to in para. 3.128) should be based on the correlation
assumptions laid down in Annex IV of the Level 1 text although
only the unavoidable market risk and the counterparty default
risk with respect to ceded reinsurance is taken into
consideration.
It should be noted that to the extent that market risk
can be considered avoidable for a line of business (either from
the very beginning (i.e. from t = 0) or after some years (i.e.
from t ≥ t*)), the calculation of the Basic SCR would be
simplified. Further simplifications may arise if the
underwriting risk of a given
line of business is confined to only
one of the three modules
for this risk.
Risk Margin in the QIS4
Risk Margin in the QIS5
CEIOPS Advice for Level 2 Implementing Measures on Solvency
II: Technical Provisions – Article 86 (d) Calculation of the
Risk Margin
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