Question ID: 1327
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Article: 165
Status: Final
Date of submission: 30 Apr 2018
Question
In a situation where an insurer has an asset that perfectly hedges a liability, is it acceptable to exclude both the said liability and hedging asset from the SCR calculation?
Our thoughts relate to the situation when counterparty for the liability/asset is the same, and whether in this case would it be appropriate to net these two off before calculating the SCR ?
For example, if a captive has an asset in the form of a loan back to a parent company, but the captive has outstanding claims which are owed to the parent and to the parent only (for example, property damage claims), could we net the two off?
A worked example would be:
Asset: $100 million in loan back to parent
Liability: $50 million owed in property damage claims to the parent
Net Asset: $50 million in loan back to the parent.
EIOPA answer
In the case described the $50 million owed in property damage claims to the parent should not be netted with the $100 million loan to the parent for the purpose of the calculation of the SCR.
According to Guideline 4 "Interest rate risk sub-module" in the EIOPA Guidelines on market and counterparty risk "Undertakings should include all interest rate sensitive assets and liabilities in the calculation of the capital requirement for the interest rate risk sub-module".