What is the matching adjustment in Solvency II?
Under Solvency II, insurers are required to calculate the value of their liabilities using a risk-free interest rate. The matching adjustment is an upward adjustment to the risk-free rate where insurers hold certain long-term assets with cashflows that match the liabilities.
How is the volatility adjustment calculated?
A Risk Management approach for the Volatility Adjustment The Best Estimate of the Liabilities are calculated by discounting future cash-flows using the risk-free rate (RfR).
What is the fundamental spread Solvency II?
The Fundamental Spread is used by firms as a part of their Matching Adjustment calculation and represents the expected cost of default and downgrade of assets which back providers’ annuity business and that firms are therefore exposed to.
What are Solvency II technical provisions?
Solvency II requires the technical provisions to be a “best estimate” of the current liabilities relating to insurance contracts plus a risk margin. This section covers the claims provision and the premium provision that together make up the best estimate.
What is risk margin?
The risk margin is the difference between the technical provisions and the best estimate liabilities. The technical provisions are intended to be market-consistent, and so are defined as the amount required to be paid to transfer the business to another undertaking.
What is the purpose of volatility adjustment?
The volatility adjustment is a measure to ensure the appropriate treatment of insurance products with long-term guarantees under Solvency II. (Re)insurers are allowed to adjust the RFR to mitigate the effect of short-term volatility of bond spreads on their solvency position.
What is the symmetric adjustment?
In simple terms, the SCR for equities goes up in a bull market, while the SCR goes down in a bear market. This mechanism – known as the symmetric equity adjustment – makes equities more capital expensive (i.e. less attractive) under Solvency II in an upward market and vice versa.
What is the volatility adjustment?
How risk margin is calculated in Solvency II?
Risk Margin is calculated by: Determining cost of providing amount of own funds equal to SCR needed to support runoff of your (re)insurance obligations; The rate used in determining this cost is called “Cost-of-Capital” rate; • CoC = 6% = spread above risk-free rate.
What is a fundamental spread?
Fundamental spreads (FS), used by insurers to calculate the risk-free curve for liabilities within a matching adjustment portfolio; Risk-free rate curves for liabilities where the insurers are permitted to use a volatility adjustment (VA).
How are capital charges calculated?
The capital charge depends on the return that investors expect on each class of capital. It is found by multiplying a project’s invested capital by a percentage. This percentage is a weighted average of the investors’ expectations.