Solvency II Standard Formula SCR: Market
Risk Module – Correlations
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In the standard formula SCR computation individual
sub-component capital charges (or individual component charges) are typically
aggregated using a correlation coefficient based approach. This involves
calculating the overall charge using a formula along the lines, where 
is the capital
charge for a given component element:
In the case of the market risk module, the correlations
proposed changed as the consultation process developed. For example, the Level
2 guidance from CEIOPS (EIOPA’s predecessor) introduced different correlations
between interest rate risk and some of the other subcomponents included in the
market risk module depending on whether the interest rate risk that applied
involved a fall in interest rates or a rise in interest rates. The
justification was that there was stronger support for a positive correlation
(with falls in equity values, falls in property values or spread movements) in
the case of falling interest rates than in the case of rising interest rates.
This approach has been retained in the correlations specified in DA
Article 164.
The Nematrian website makes available the following tools to
help manipulate these correlations:
(a) MnSolvencyII_SCRSFStressSetNames.
Indicates acceptable stress set names (e.g. “DA” for the correlations contained
in the Delegated
Act).
(b) MnSolvencyII_SCRSFMktStressNames.
Indicates acceptable stress names for a given StressSetName. For DA this
includes an ‘interest rate (down)’ and an ‘interest rate (up)’ rather than
merely ‘interest rate’.
(c) MnSolvencyII_SCRSFMktCorrs.
Provides an array containing the correlation matrix. If there are 
different
stress names then is an array with 
terms, ordered
consistently with the ordering of the stress names given in (b).
(d) MnSolvencyII_SCRSFCombineStresses.
Combines different stresses using the correlation matrix and stress names as
above. Works for other sub-modules as well as the market risk module. For e.g.
DA one or other of the ‘interest rate (down)’ and ‘interest rate (up)’ stresses
needs to be zero.
Version dated 7 December 2015
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