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Solvency II Standard Formula SCR: Counterparty Default Risk Module

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The counterparty default risk component of the Solvency II standard formula Solvency Capital Requirement (SCR) covers the following risk exposures, see in the Solvency II Delegated Act:

 

-          Risk-mitigating contracts, such as reinsurance arrangements, securitisations and derivatives;

 

-          Receivables from intermediaries; and

 

-          Any other credit exposures which are not covered in the market risk spread risk sub-module including e.g. (this list does not aim to be exhaustive):

 

- Policyholder debtors

- Cash at bank

- Deposits with ceding institutions

- Capital, initial funds, letters of credit (and any other called up but unpaid commitments)

- Guarantees, letters of credit, letters of comfort etc. provided by the undertaking as well as any other commitments which the undertaking has provided and which depend on the credit standing of a counterparty

 

Credit risk transferred via credit derivatives is typically covered by the spread risk sub-module rather than this module.

 

The methodologies proposed involved subdividing these exposures between two classes. Type 1 aims to cover exposures primarily of the sort that might well not be diversified and where the counterparty is likely to be rated (e.g. reinsurance arrangements), whilst Type 2 aims to cover exposures primarily of the sort that are usually diversified and where the counterparty is likely to be unrated (e.g. receivables from intermediaries or policyholder debtors).

 

Links to Nematrian webpages covering these standard formula SCR elements

 

-          Counterparty risk for Type 1 exposures

-          Counterparty risk for Type 2 exposures

-          Counterparty loss-given-default assumptions

 

-          Correlations

 

Version dated 7 December 2015

 


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