Question ID: 2370
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII), Guidelines on recognition and valuation of assets and liabilities other than technical provisions
Topic: Valuation of Assets and Liabilities other than TPs
Article: Article 176 of the Delegated Regulation (EU) 2015/35
Status: Final
Date of submission: 13 Dec 2021
Question
We understand that the optionality in the bond or loan should be taken into account when calculating modified duration for the purpose of SCR calculation. How should modified duration be calculated for amortizing loans ("sinkable" repayment profile) ? Those have contractual amortization schedule, but no (not necessarily) contractual call options embedded. Should remaining time to legal maturity be taken into account, without giving consideration to derisking of future exposure via contractually anticipated amortization, or is Weighted Average LIfe ("WAL") to be used as modified duration which prudently shortens the remaining time until legal maturity projecting the exposure decreasing as per contractual schedule until final payment date?
EIOPA answer
The modified duration as referred to in Article 176 of the Delegated Regulation (EU) 2015/35 should be calculated in accordance with the Appendix “Duration of cash flows" in EIOPA's Final Report on Public Consultation No. 14/036 on Guidelines on the treatment of market and counterparty risk exposures in the standard formula which also sets out the treatment of options. Compared with an otherwise identical non-amortising loan the modified duration for an amortising loan is lower.