Functions in the Nematrian Function
Library relevant to Solvency II
[this page | pdf | references | back links]
The Nematrian function library
includes some online tools that can help insurers implement Solvency II more
effectively.
Solvency II involves an overhaul in how EU insurers are
regulated and a significant increase in the sophistication of regulatory
capital computations. The regulators have sought to consult extensively with
the industry, to minimise the likelihood that the resulting regulatory
frameworks fail to pass the test of time. This consultation process has in some
cases resulted in parameters used within the proposed regulatory capital
computations changing over time, particularly some parameters used within the
computation of the ‘standard formula’ SCR.
The Nematrian online tools bear this in mind and also bear
in mind the possibility that some parameters may change after Solvency II goes
live. For example DA
Recital 150 indicates that:
“In order to ensure that the
standard formula continues to meet the requirements set out in paragraphs 2 and
3 of Article 101 of Directive 2009/138/EC on an ongoing basis, the Commission
will review the methods, assumptions and standard parameters used when
calculating the Solvency Capital Requirement with the standard formula, in
particular the methods, assumptions and standard parameters used in the market
risk module as set out in Title I Chapter V Section 6, including a review of
the standard parameters for fixed-income securities and long-term
infrastructure, the standard parameters for premium and reserve risk set out in
Annex II, the standard parameters for mortality risk, as well as the subset of
standard parameters that may be replaced by undertaking-specific parameters
referred to in Article 218 and the standardised methods to calculate these
parameters referred to in Article 220. This review should make use of the
experience gained by insurance and insurance undertakings during the
transitional period and the first years of application of these delegated acts,
and be performed before December 2018.”
[Note, at the time of writing a change has already been
proposed in relation to some types of infrastructure investments]
Some of the Nematrian tools provide online access to factors
relevant to the computation of standard formula SCR stress tests. As the
factors have changed during the consultation process (and may change further in
the future) many of these tools include a parameter StressName which
allows historic factors to be identified as well as current ones. Please refer
to the EIOPA website and those of any national regulator to which your company
is subject before drawing any conclusions based on results derived from using
any Nematrian online tools. In particular, please update your analyses to
reflect any changes in guidance or practice since those available via the
online tools.
Solvency II aims to be ‘market consistent’. This, in the
main, means that it aims to value assets and liabilities using market valuations
on markets that are deep, liquid and transparent. Where these are not
available, then if possible the valuations are based on assumptions consistent
with currently observable market prices of comparable instruments that are
traded on such markets. For further background on this term, see Market Consistency.
The standard formula SCR is, in the main, calculated by stressing the insurer’s
balance sheet away from these ‘market consistent’ assumptions in a way that
aims to cater for 1 in 200 year events.
Please bear in mind that if you use any of the Nematrian
online tools and services then you will be deemed to have agreed to the
Nematrian License
Agreement. In particular please note the limitations on Nematrian’s
liability, if any, that apply because of this License Agreement if you make use
of these tools.
Links to Nematrian webpages
covering these standard formula SCR elements
-
Market risk
-
Counterparty
default risk
-
Life
underwriting risk
-
Correlations
between the above (and with Heath and Non-Life risk)
The overall capital position of a EU insurer, using the
standard formula SCR also depends on the magnitude of its technical (and other)
provisions and of its available capital base. Part of the technical provisions
in turn depend on the SCR (and how it is expected to evolve in the future) via
the Risk Margin.
Version dated 7 December 2015
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