The Solvency Capital Requirement (SCR)
from the Solvency ii Association, the largest Association
of Solvency ii Professionals in the world
Solvency Capital Requirement
(SCR) -
SCRop
operational risk
Operational risk is the risk of loss arising
from inadequate or failed internal processes,
people, systems or external events.
Operational risk also includes legal risks.
Reputation risks and risks arising from
strategic decisions do
NOT count as operational risks.
The operational risk module is designed to address operational risks
to the extent that these have not been
explicitly covered in other risk modules.
Solvency Capital Requirement
(SCR) -
SCR market risk
Market risk arises from the level or
volatility of market prices of financial instruments.
Exposure to market risk is measured by the
impact of movements in the level of financial
variables such as stock prices, interest
rates, real estate prices and exchange rates.
For policies where the policyholders bear the investment risk (such
as unit-linked
policies), the undertaking will remain exposed to market risks where
the value of the charges
taken from these policies is dependent on fund performance.
Exposure to interest rates will occur
where fixed charges are received in the future.
The value of any options and guarantees embedded within these
contracts may also be exposed to market risk.
Where an undertaking has purchased
derivatives, provided they accord with the principles of
TS.VII, the risk mitigating/increasing effect should be considered
within each sub-module (for example, currency forwards should be
considered alongside the insurers other exposures within the
currency risk sub-module).
Where the financial instrument does not accord to the principles of
TS.VII, their risk mitigating effect should be
excluded from the calculation of the
Solvency Capital Requirement (SCR).
Risk exposures of collective investment
schemes should be allocated to sub-modules on a look-through
basis if possible and on a best effort basis otherwise.
Where a collective investment scheme is not
sufficiently transparent to allow a reasonable best
effort allocation, reference should be made to the investment
mandate of the scheme.
It should be assumed that the scheme invests in accordance with its
mandate in such as manner as to produce the maximum overall charge.
For example, it should be assumed that the scheme invests in
currencies other than the undertaking’s
reporting currency to the maximum possible extent permitted by the
investment mandate. It should be assumed that the scheme invests
assets in each rating category, starting at the lowest category
permitted by the mandate, to the maximum extent.
If a scheme may invest in a range of assets exposed to the risks
assessed under this module, then it should be assumed that the
proportion of assets in each exposure category is such that the
overall charge is maximised.
As a third choice to the look-through
and mandate-based methods, participants should consider the
collective investment scheme as an equity investment and apply the
global equity risk charge (if the assets within the collective
investment scheme are predominately listed) or other risk charge (if
the assets within the collective investment scheme are predominately
unlisted).
Solvency Capital Requirement
(SCR) -
Mktint
interest rate risk
Interest rate risk exists for
all assets and liabilities of which the
net asset value is sensitive to changes in the term structure of
interest rates or interest rate volatility.
Assets
sensitive to interest rate movements will include fixed-income
investments, insurance
liabilities, and financing instruments (loan capital) and
interest-rate derivatives.
Liability
cash flows received in the future will be sensitive to a
change in the rate at which those cash-flows are discounted.
Solvency Capital Requirement
(SCR)
- Mkteq
equity risk
Equity risk arises from the
level or
volatility of market prices for equities.
Exposure to equity risk refers to
all assets and liabilities whose value is sensitive to changes in
equity prices.
For equity risk, a distinction can be made between
*systematic risk* and *idiosyncratic risk*.
The latter
one arises out of inadequate
diversification.
Systematic
risk refers to the
sensitivity of the
equity's returns to the returns of market portfolios, and cannot be
reduced by diversification.
Therefore it is also called
undiversifiable risk.
The equity risk sub-module is intended to capture systematic risk,
whereas idiosyncratic equity risk is addressed in the concentration
risk sub-module.
The equity risk module uses indices as risk proxies, meaning that
the volatility and
correlation information is derived from these indices. It is assumed
that all equities can be
allocated to an index of the provided set.
The assumed shock scenarios for the individual indices reflect the
systematic risk inherent to this market portfolio. It is assumed
that the equity portfolio of the insurance companies have the same
exposure to systematic risk as the index (the risk proxy) itself.
Solvency Capital Requirement
(SCR) - Mktprop
property risk
Property risk
arises from the level or volatility of market
prices of property.
Solvency Capital
Requ irement
(SCR) - Mktfx
currency risk
Currency risk
arises from the level or volatility of
currency exchange rates.
Solvency Capital Requirement (SCR)
-
Mktsp
spread risk
Spread risk is the part of risk originating from financial
instruments that is explained by the
volatility of credit spreads over the risk-free interest rate term
structure.
It reflects the change in value due to a move
of the yield curve relative to the risk-free term structure.
Assets which are allocated to policies where the policyholders bear
the investment risk should be excluded from this risk module.
However, as these policies may have embedded options and guarantees,
an adjustment (calculated using a scenario-based approach) is added
to the formula to take into account the part of the risk that is
effectively borne by the insurer.
For the purposes of determining the
Solvency Capital Requirement (SCR)
for spread risk companies should assume the more onerous (in
aggregate) of a rise or fall in credit
spreads.
It is not required to assume different directional movements in
credit spreads when determining the different components of the
spread risk sub-module.
Currently, default and migration risks are not explicitly built in
the spread risk module.
However, the spread risk module will include parts of these risks
implicitly via the movements in credit spreads.
The credit indices used for the calibration rebalance on a monthly
basis and, consequently, the change of their constituents, due to
downgrades or upgrades, has a monthly frequency as well. Hence, the
impact of intra-month downgrades/upgrades will partly be reflected
in the movements of credit spreads.
Government bonds are exempted from an
application of this module.
The exemption relates to borrowings by the
national government, or guaranteed by the national government, of an
OECD or EEA state, issued in the currency of the government.
The spread risk module is applicable to all
tranches of structured credit products like
asset-backed securities and collateralised
debt obligations.
In general, these products include transactions or schemes, whereby
the credit risk associated with an exposure or pool of exposures is
tranched, having the following characteristics:
(a) payments in the transaction or scheme are dependent upon the
performance of the exposure or pool of exposures; and
(b) the subordination of tranches determines the distribution of
losses during the ongoing life of the transaction or scheme.
The spread risk module further covers credit derivatives e.g. credit
default swaps
(CDS), total return swaps (TRS), credit linked notes (CLN), that are
not held as part of a
recognised risk mitigation policy
Solvency Capital Requirement (SCR) - Mktconc
market risk concentrations
Market risk concentrations present
an additional risk to an insurer because of:
• additional volatility that exists
in concentrated asset portfolios; and
• the additional risk of
partial or total
permanent losses of value due to the default of an
issuer
Assets which are allocated to policies where the
policyholders bear the investment risk
should be excluded from this risk
module.
However, as these policies may have
embedded options and guarantees, an adjustment (calculated using a
scenario-based approach) is added to the formula to take into
account the part of the risk that is effectively borne by the
insurer.
For the sake of simplicity and consistency, the definition of market
risk concentrations
is restricted to the risk regarding the accumulation of exposures
with the same counterparty.
It does not
include other types of concentrations (e.g. geographical area,
industry sector etc.).
In case an undertaking owns shares representing more than 20% of the
capital of another insurance or financial undertaking which:
1) is not included in the scope of
consolidation or supplementary supervision and
2) where the value of that
participation or subsidiary exceeds 10% of the participating
undertaking's own funds, these shares are exempted from the
application the concentration risk module when using option 1
described in Annex SCR 1 – TS.XVII.C for the treatment of
participations (deduction-aggregation method).
In line with this approach, when
using option 3 described in the Annex for the treatment of
participations (look-through approach), the concentration risk
module should not be applied.
Government bonds are exempted from the
application of this module.
The exemption concerns borrowings
by the national government, or guaranteed by
the national government, of an OECD or EEA state, issued in the
currency of the government.
Bank deposits with a term of less than 3
months terms, of up to 3 million Euros, in a bank that has a minimum
credit rating of AA are also exempted from an application of
this module.
Solvency Capital Requirement
(SCR) -
SCRdef
counterparty default risk
Counterparty default risk is the
risk of possible losses due to unexpected
default, or
deterioration in the credit standing of the counterparties or debtors
in relation to risk mitigating contracts, such as reinsurance
arrangements, securitisations and derivatives,
and receivables from intermediaries, as well as any other
credit exposures which are not covered in the spread risk
sub-module.
For each counterparty, the counterparty default risk module shall
take account of the overall
counterparty risk exposure of the insurance or reinsurance
undertaking concerned to that
counterparty, irrespective of the legal form of its contractual
obligations to that undertaking.
The main inputs of the counterparty default risk module are the
estimated loss-given default (LGD) of an
exposure and the probability of default (PD) of the counterparty.
Solvency Capital Requirement
(SCR)
-
SCRlife
life underwriting risk module
This module concerns the risk arising from the
underwriting of life insurance contracts,
associated with
both the perils covered and
the processes followed in the conduct of the
business.
Life underwriting risk is split into
biometric risks (comprising mortality risk, longevity
risk and disability/morbidity risk), lapse risk, expense risk,
revision risk and catastrophe risk.
Based on the principle of substance over form, set out in paragraph
TS.VI.A.3, agreed
claims arising from non-life business payable in the form of an
annuity should normally be
part of SCRlife
(subject to materiality considerations).
In particular, the risk of revision is applicable only to this type
of annuities.
Solvency Capital Requirement
(SCR)
-
Lifemort
mortality risk
Mortality risk is intended to reflect the uncertainty
in trends and parameters, to the extent
these are not already reflected in the valuation of technical
provisions.
It is applicable to the insurance
contracts contingent on mortality risk (i.e.
where the
amount currently payable on death exceeds the technical provisions
held, and therefore an
increase in mortality rates is likely to lead to an increase in
technical provisions).
For those contracts that provide benefits both
in case of death and survival, one of the
following two options should be chosen
and applied consistently to all contracts in the various lines of
business concerned:
Option 1:
Contracts where the death and survival benefits are contingent on
the life of
the same insured person(s) should not be unbundled.
For these contracts the mortality scenario should be applied fully
allowing for the netting effect provided by the ‘natural’ hedge
between the death benefits component and the survival benefits
component (note that a floor of zero applies at the level of
contract if the net result of
the scenario is favourable to the (re)insurer).
Option 2:
All contracts are unbundled into 2 separate components: one
contingent on
the death and other contingent on the survival of the insured
person(s).
Only the former component is taken into account for the application
of the mortality scenario.
TS.XI.B.4 Participants are asked to identify the option chosen and
the underlying reasons.
Solvency Capital Requirement
(SCR) -
Lifelong
longevity risk
Longevity risk is intended to
reflect the uncertainty in trends and
parameters, to the
extent these are not already reflected in the valuation of technical
provisions.
It is applicable to the class of insurance contracts contingent on
longevity risk (i.e. where there is no death
benefit, or where the amount currently payable on death is less than
the
technical provisions held, and therefore a decrease in mortality
rates is likely to lead to an
increase in technical provisions).
For those contracts that provide benefits both in case of death and
survival, the
procedure set in the corresponding "mortality risk" paragraphs
TS.XI.B.3 concerning mortality risk should be applied in an
analogous and consistent manner.
Solvency Capital Requirement
(SCR)
- Lifedis
disability risk
The treatment of disability risk is intended to reflect uncertainty
risk in trends and parameters, to the
extent these are not already reflected in the valuation of technical
provisions.
It is applicable to the class of insurance contracts where benefits
are payable contingent
on a definition of disability
Solvency Capital Requirement
(SCR)
- Lifelapse
lapse risk
Lapse risk
relates to the loss, or adverse change
in the value of insurance liabilities,
resulting from changes in the level or
volatility of the rates of policy lapses, terminations,
changes to paid-up status (cessation of premium payment) and
surrenders.
The standard
formula allows for the risk of a permanent change of the rates as
well as for the risk of a mass lapse event.
Solvency Capital Requirement
(SCR)
-
Lifeexp
expense risk
Expense risk
arises from the variation in the expenses
incurred in servicing insurance
or reinsurance contracts.
Solvency Capital Requirement
(SCR)
- Liferev
revision risk
In the context of
the life underwriting risk module,
revision risk is intended to capture
the risk of adverse variation of an annuity’s
amount, as a result of an unanticipated revision
of the claims process.
This risk should
be applied only to annuities and to those benefits that can be
approximated by a life annuity arising from non-life claims
(including accident insurance, but excluding workers compensation)
that are allocated to the SCRlife
module according to the principle set out in paragraph
TS.VI.A.3 and following
Solvency Capital Requirement
(SCR)
- Lifecat
catastrophe risk
Life CAT risks stem from
extreme or
irregular events (e.g. a pandemic) that are not
sufficiently captured by the capital charges of the other life
underwriting risk sub-modules.
Solvency Capital Requirement
(SCR)
- Healthexp
expense risk
Expense risk arises if the expenses
anticipated in the pricing of a product are insufficient to
cover the actual costs accruing in the accounting year.
There are
numerous possible causes of such a shortfall, therefore all cost
items of private health insurers have to be taken into account.
In order to
ensure comparability among the financial years, all annual results
will be related to the gross premiums earned in the specific
financial year.
Solvency Capital Requirement
(SCR)
- Healthcl claim/mortality/cancellation risk
This risk covers:
• claim risk or per capita loss risk arising in cases where the
actual per capita loss is greater than the
loss assumed in the pricing of the product;
• mortality risk arising when the
actual funds
from technical provisions becoming available due to death are
lower than those assumed in the pricing of the product; and
• cancellation risk arising when the actual
funds from technical provisions becoming
available due to cancellations are lower than those assumed in the
pricing of the
product.
Solvency Capital Requirement
(SCR)
- Healthac
epidemic / accumulation risk
Epidemic /
accumulation risk concerns the risks arising from the
outbreaks of major epidemics (e.g., a severe
outbreak of influenza).
Such events
typically also lead to accumulation risks, since the usual
assumption of independence among persons would be nullified.
Solvency Capital Requirement
(SCR)
-
SCRnl
non-life underwriting risk module
Underwriting risk
is the specific insurance risk arising from insurance contracts.
It relates to the uncertainty about the results of the insurer's
underwriting.
This
includes
uncertainty about:
• the amount and timing of the eventual claim settlements in
relation to existing
liabilities;
• the volume of business to be written and the premium rates at
which it will be written;
and
• the premium rates which would be necessary to cover the
liabilities created by the
business written.
Solvency Capital Requirement
(SCR)
-
NLpr
Non-life premium & reserve risk
This module
combines a treatment for the two main sources of underwriting risk,
premium risk and reserve risk.
Premium risk is understood to relate to
future claims arising during and after the period until the time
horizon for the solvency assessment.
The risk is that
expenses plus the volume of losses (incurred and to be incurred) for
these claims (comprising both amounts paid during the period and
provisions made at its end) is higher than the premiums received (or
if allowance is made elsewhere for the expected profits or losses on
the business, that the profitability will be less than expected).
Premium risk is present at the time the
policy is issued, before any insured events occur.
Premium risk also
arises because of uncertainties prior to issue of policies during
the
time horizon.
These
uncertainties include the premium rates that will be charged, the
precise terms and conditions of the policies and the precise mix and
volume of business to be written.
Premium risk relates to policies to be written (including renewals)
during the period,
and to unexpired risks on existing contracts.
Reserve risk stems from two sources: on
the one hand, the absolute level of the claims provisions may be mis-estimated.
On the other
hand, because of the stochastic nature of future claims payouts, the
actual claims will fluctuate around their statistical mean value.
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