The answer to this question is provided by the European Commission.

The question concerns the treatment of derivatives exposures in the calculation of the solvency capital requirements with the standard formula. It is important to note that Article 132(4) of Directive 2009/138/EC permits the use of derivatives by insurance and reinsurance undertakings only insofar as they contribute to a reduction of risks or facilitate efficient portfolio management. 

Against this background, the provisions concerning the market risk module of the standard formula are based on the assumption that the sensitivity of assets and liabilities to changes in the volatility of market parameters is not material as stated in recital 55 of Commission Delegated Regulation (EU) 2015/35. 

Where insurers have material derivatives exposures, they should among others assess whether the sensitivity of their assets and liabilities to changes in the volatility of market parameters is material and shall take this into account in their assessment of the significance with which the risk profile of the undertaking deviates from the assumptions underlying the Solvency Capital Requirement calculated with the standard formula pursuant to Article 45(1)(c) of Directive 2009/138/EC. 

Bearing this in mind, the specific questions are answered below. 

1) According to Article 184(2)(d) of Commission Delegated Regulation (EU) 2015/35, exposures included in the scope of the counterparty default risk module must not be included in the calculation base of the market risk concentration sub-module. Accordingly, where derivatives are included in the calculation counterparty default risk module in accordance with Article 189(2)(f) of Delegated Regulation (EU) 2015/35, they should not be included in the calculation base of the market risk concentration sub-module. Credit derivatives that are included in the calculation of the spread risk submodule pursuant to Article 179 of that Regulation are not included in the counterparty default risk module pursuant to Article 189(2)(f). Therefore, they should be included in the calculation base of the market risk concentration sub-module, unless they are excluded for any of the reasons listed in Article 184(2) of that Regulation. 

2) For the purpose of the calculation of the capital requirement for market risk concentration with the standard formula, Article 182(2) of Delegated Regulation (EU) 2015/35 requires the determination of exposure at default to a counterparty as the sum of the exposures to that counterparty. Accordingly, derivative exposures should be counted towards the exposure at default to the counterparty under the derivative agreement (i.e., the ‘issuer’ of the derivative), and not towards the exposure at default of the issuer of the underlying asset of that derivative. 

Disclaimer provided by the European Commission:

The answers clarify provisions already contained in the applicable legislation. They do not extend in any way the rights and obligations deriving from such legislation nor do they introduce any additional requirements for the concerned operators and competent authorities. The answers are merely intended to assist natural or legal persons, including competent authorities and Union institutions and bodies in clarifying the application or implementation of the relevant legal provisions. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law. The views expressed in the internal Commission Decision cannot prejudge the position that the European Commission might take before the Union and national courts.

Answer provided by EIOPA:

Provided that the instrument is a credit derivative as referred to in Article 179 of the Delegated Regulation 2015/35 (DR), the underlying exposure should be included in the determination of the capital requirement for spread risk on credit derivatives unless the bond is included in the list of exposures set out in Article 180(2) DR.

For the treatment in the spread risk sub-module see Q&A 2162.