Solvency II Standard Formula SCR: Market
Risk Module – ConcentrationRisk Sub-module
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The computation for this sub-module is specified in DA
Articles 182 – 187 and loosely speaking involves the following approach:
(a) Calculate 
= exposure at
default to counterparty 
(b) Calculate 
= amount of total
assets to which concentration risk sub-module applies
(c) Determine 
= credit quality
step applied to counterparty
(d) Calculate ‘excess’
exposure to that counterparty, 
, using the
following formula, where the specified concentration threshold, 
, varies according
to the credit quality step:
(e) Calculate risk
concentration charge, per name as follows, where 
is rating
dependent as below:
(f) Calculate
the overall capital requirement as:
Some overrides apply to specified types of assets, see DA
Article 187.
The approach went through a significant number of iterations
as Solvency II developed, much like the spread risk
sub-module.
For example in CEIOPS (2010)
the approach proposed involved:
Here 
and were:
|
Rating
|
CT
|
g*
|
|
AAA, AA
|
3%
|
0.12
|
|
A
|
3%
|
0.21
|
|
BBB
|
1.5%
|
0.27
|
|
BB or lower, or unrated
|
1.5%
|
0.73
|
Similar but not identical parameters were used for QIS4. The
ones finally adopted in the Delegated
Act are similar to those shown above, except that they refer to credit
quality steps rather than credit ratings.
In the above, 
(called 
in CP47 Final
Advice) was the impact on the undertaking’s liabilities (for policies where the
policyholders bear the investment risk) of a change in the value of the assets
of the issuer attracting a concentration risk charge by 
(subject to a minimum
of nil).
Aggregate exposures across different names were then to be
combined assuming a correlation of 0.25 between names, so:
However, by the time the Delegated
Act was adopted, the correlation between (unrelated) names had in effect
been reduced to zero.
Version dated 7 December 2015
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