Question ID: 2086
Regulation Reference: (EU) No 2009/138 - Solvency II Directive (Insurance and Reinsurance)
Topic: Solvency Capital Requirement (SCR)
Article: 88
Status: Final
Date of submission: 10 Dec 2019
Question
In terms of calculating the risk mitigation effect of derivitatives, i.e. interest rate swaps, which will only impact the interest rate sub-module of the market risk module. Is it possible to apply the simplified approach stated in this document by taking the SCR differences with and without the instrutment. i.e. the example sets out in the document paragraph 3.70.
Background of the question
CEIOPS’ Advice for Level 2 Implementing Measures on Solvency II:SCR standard formula - Counterparty default risk module - Paragraph 3.68 Simplified risk mitigation effect calculation on derivatives
EIOPA answer
It should be remembered that undertaking may use simplifications after fulfilling requirements of Article 88 of Commission Delegated Regulation (EU) 2015/35. If a simplification does not take into account risk in an adequate way it should not be used by the undertaking.
The case described in the question seems to correspond to the assumptions in paragraph 3.68. of cited CEIOPS Advice: financial instruments of counterparty affect only one sub-module of the market risk module. Therefore, in the described case, it is possible to apply the simplification according to which the difference SCRgross – SCRnet (where SCR = SCRmkt) (i.e. the definition of risk-mitigating effect on market risk in Art. 111 of the Commission Delegated Regulation (EU) 2015/35 written in the formula form) may be replaced by difference Mktgross – Mktnet (where Mkt = Mktsub-risk) of the sub-module affected. In the example in paragraph 3.70, the sub-module is the equity sub-module and in case described in this question the sub-module is the interest rate risk sub-module.