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Functions in the Nematrian Function Library relevant to Solvency II

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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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