Question ID: 1186
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Article: 75, 188
Status: Final
Date of submission: 20 Mar 2018
Question
Article 188 of the delegated acts require an entity to calculate currency risk by applying 25% up or down shock to the foreign currency that would result in loss in basic own funds.
The market risk module shall reflect the risk arising from the level or volatility of market prices of financial instruments which have an impact upon the value of the assets and liabilities of the undertaking. It shall properly reflect the structural mismatch between assets and liabilities, in particular with respect to the duration thereof.
It shall be calculated, in accordance with point (4) of Annex IV, as a combination of the capital requirements for at least the following sub-modules:
(e) the sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of currency exchange rates (currency risk);
Given the financial instruments have are required to be valued in accordance with article 75 of the delegated acts, the question therefore, arises whether the shock shall be applied (in the case of a currency forward contract) on the value of the derivative on the Solvency II economic balance sheet or value of the notional subject to movements in currency.
EIOPA answer
The following covers only the treatment of a currency forward contract ("forward") in the currency risk sub-module. The treatment in any other sub-modules of the market risk module or other modules of the standard formula is not considered.
The following assumptions are made:
1. The forward has as reference currencies a. the local currency and b. currency X
2. The forward meets the requirements set out in Article 208 to 215 of the Delegated Regulation.
3. The value of the forward increases in case of a decrease in value of currency X against the local currency ("downward currency shock")
As the forward meets the requirements in Articles 208 to 215, the change in its value in accordance with Article 75 Solvency II resulting from the downward currency shock can be taken into account in the determination of the capital requirement capital requirement for the risk of a decrease in value of currency X against the local currency.