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Nematrian Reference Library

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Introduction (partial) "Introduction This document presents the underlying assumptions of the standard formula that are used for the SCR calculations. It should be read in conjunction with the Guidelines on the forward looking assessment of own risks (based on the ORSA principles) and, from 2016 onwards, with the Guidelines on ORSA. The assessment of the significance with which the risk profile of an insurance or reinsurance undertaking (“undertaking”) or group deviates from the assumptions underlying the SCR calculation, is an important process which undertakings and groups are required to perform starting from 2015. It should ensure that the undertaking or group understands the assumptions underlying its SCR calculation and considers whether the relevant assumptions are appropriate for the undertaking or group. To do so, the undertaking or group will have to compare those assumptions with its risk profile. The purpose of the assessment is not to review the appropriateness or calibration of the standard formula. The standard formula for Solvency Capital Requirement (SCR) aims to capture the material quantifiable risks that most undertakings are exposed to. The standard formula might however not cover all material risks a specific undertaking is exposed to. A standard formula is, by its very nature and design, a standardised calculation method, and is therefore not tailored to the individual risk profile of a specific undertaking. For this reason, in some cases, the standard formula might not reflect the risk profile of a specific undertaking and consequently the level of own funds it needs. The document at hand covers all risk modules of the standard formula, addressing the assumptions related to the risks covered by the respective modules as well as the assumptions for the correlation between the modules. It does not address why some risks are not explicitly formulated in the standard formula. However, this does not mean that these risks do not need to be considered for the purpose of the assessment of the significance of the deviation. The fact that the document does not specifically refer to every assumption underlying the standard formula should also not automatically lead an undertaking or group to assume that it does not need to consider whether the application of the standard formula in those parts, where no underlying assumptions are specified, results in adequate capital requirements for the risks it is exposed to."

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