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Solvency II Standard Formula SCR: Counterparty Default Risk Module – Loss Given Default

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The final Solvency II Delegated Act includes an adjustment to counterparty exposures to reflect the partial recovery that often arises when a counterparty defaults. The precise adjustment mandated by the Delegated Act is reasonably complicated and readers are advised to refer to the Delegated Act for more details. The original CEIOPS (2009) advice indicated that the adjustment should:

 

-          Approximate loss given default, weighted by probability of default

 

-          Take account of possible default events during the whole run-off period of the recoverable

 

-          Be based on current, reliable and credible information, sources for which might include credit spreads, rating judgements, information on the supervisory solvency assessment, financial reporting etc.

 

-          Where possible use point-in-time estimates

 

-          Take account of the fact that cumulative probability typically increases with time horizon of assessment

 

-          Reflect the impact of risk mitigating instruments as well as any other risk connected with them

 

-          Be calculated separately for each business line and counterparty, to help with identification of risk concentrations

 

-          If no reliable estimate of recovery rate is available then the adjustment should be no higher than 50%.

 

Version dated 7 December 2015

 

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