Solvency II Standard Formula SCR: Market
Risk Module – Equity Risk Sub-module
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The equity risk sub-module of the market risk module of the
standard formula SCR has evolved significantly through time. Currently it is
specified in the Solvency II Delegated
Act Articles 168 – 173 and has the following features:
(a) Equities are
split between Type 1 equities and Type 2 equities. Loosely speaking Type 1
equities refer to equities listed in regulated markets in developed economies
whilst Type 2 equities consist of equities listed in other countries (or other
assets treated as within the scope of the equity risk sub-module).
Contributions from the two different types are combined using a correlation
based approach;
(b) In the main, the
stress applied to Type 1 equities is a market decline of 39% plus or minus a
symmetric adjustment as specified in DA
Article 172 and in Article 106 of the Solvency
II Directive (2009), see below. For Type 2 equities the corresponding
decline is 49% plus or minus the symmetric adjustment. However, for some
equities a lower 22% decline is applicable;
(c) A lower (22%)
transitional equity stress applies in the first few years of Solvency II for
some equities, and was introduced by the Omnibus
II Directive
Symmetric adjustment
The symmetric adjustment is specified in DA
Article 172 and is referred to in Article 106 of the Solvency
II Directive (2009). It depends on the current level of a specified index
compared to its weighted average level of the last 36 months, subject to a
lower limit of -10% and an upper limit of +10%. The adjustment at any given
time is published by EIOPA.
Equity volatility stress
Equity market implied volatility can be important for some
types of insurance contract. CEIOPS (EIOPA’s predecessor) proposed including
such a stress but this was not carried through to the final Delegated
Act.
Version dated 7 December 2015
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