Question ID: 2387
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Technical Provisions (TPs)
Article: 61
Status: Final
Date of submission: 11 Feb 2022
Question
In Article 61 the simplified calculation of the counterparty default adjustment is described. The PDs to be used are not explicitly written, but could perhaps be found via a lookup from credit quality step or solvency ratio as mentioned in Article 199. However, looking back at QIS 5 specifications, the PDs used for this simplification were different from the ones used in the counterparty default module. Could you kindly clarify whether PDs to be used in Article 61 are supposed to be aligned with specifications found in Article 199 or whether another "translation" from e.g. credit quality step is supposed to be used?
Background of the question
We noted that the PDs from a former simplification spreadsheet from EIOPA have different PDs than the ones used in the counterparty default module. We also realized that QIS 5 operated with two different mappings of PDs - one for the adjustment for counterparty default in TPs and another in the calculation of the counterparty default risk in SCR. We would like clarification on whether this interpretation should apply to the current regime as well.
EIOPA answer
There is no PD mapping table available for the calculation of the counterparty default adjustment. Undertakings must therefore make their own estimate of the probability of default that should be used in the calculation.
As noted in Q&A 2081, undertakings should use either a market consistent methodology or a best estimate methodology in order to assess an appropriate value to use, having regard to Guideline 81 of the Guidelines on the Valuation of Technical Provisions as to whether a 1-year PD is appropriate to use for the term of the exposure.