Guidance

SS9/18 – Solvency II: Internal models – modelling of the volatility adjustment

Chapter

Reflecting EIOPA’s volatility adjustment methodology within the SCR calculation

Printed on: 26/06/2024

Rulebook at: 17/10/2018

3

Reflecting EIOPA’s volatility adjustment methodology within the SCR calculation

3.1

For the purposes of determining technical provisions (TPs), the VA is provided by EIOPA with technical information that the European Commission may adopt in implementing acts. Article 77d(3) of the Directive states that the risk-corrected currency spread should reflect ‘the portion of that spread that is attributable to a realistic assessment of expected losses or unexpected credit or other risk of the assets’. However, no similar technical information is provided in order to calculate the SCR.

  • 17/10/2018

3.2

The SCR should capture all material and quantifiable risks9 to which a firm is exposed. Internal model firms, in satisfying the tests and standards, should not be inappropriately constrained by the assumptions and parameters used to calculate TPs. The PRA considers that a ‘mechanistic approach’ based on the re-application of the approach used to calculate TPs is unlikely to result in an SCR that takes into account all quantifiable risks to which a firm is exposed.10 For example, the PRA does not expect firms to mechanically reproduce the fundamental spreads or the composition of the reference portfolio for the purpose of calculating the VA in stress.

  • 9. Solvency Capital Requirement - General Provisions 3.3(1) and Solvency Capital Requirement - Internal Models 11.6.
  • 10. The principles are consistent with those set out in SS8/18: Solvency II internal models – modelling of the matching adjustment.
  • 17/10/2018

3.3

Firms’ models may make adjustments to EIOPA’s VA methodology when modelling the DVA. The PRA expects that these adjustments should not result in a lower SCR than would have been the case had EIOPA’s VA methodology with no adjustments been used.

  • 17/10/2018