What is the matching adjustment 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 matching adjustment calculated?
“The matching adjustment is derived by taking the spread on the portfolio of matching assets and deducting the “fundamental spread”, an allowance for the credit risks retained by the insurer.
What is the volatility adjustment under Solvency II?
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.
How is Solvency II calculated?
It is calculated by estimating the cost of capital equal to the SCR necessary to support the insurance and reinsurance obligations over their lifetime in respect of those risks which cannot be hedged – these include underwriting risk, reinsurance credit risk, operational risk and “unavoidable market risk”.
What is the risk margin Solvency II?
It defines the risk margin as the discounted value of the future cost of capital relating to risks (other than hedgeable market risks) required to be held under Solvency II rules by the hypothetical trans- feree company (called the reference undertaking under Solvency II).
When did Solvency II go live?
1 January 2016
Primarily this concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. Following an EU Parliament vote on the Omnibus II Directive on 11 March 2014, Solvency II came into effect on 1 January 2016.
What is Dynamic Volatility Adjustment?
Dynamic Volatility Adjustment: Balance Sheet Protection Under Stress. The VA is a stabilising measure intended to avoid excessive short term volatility of own funds under SII. The dynamic application of this measure may extend an IM and generate benefits in terms of Solvency Capital Requirements and available own funds …
What is a good Solvency II ratio?
Each insurance company is required to maintain its Solvency Ratio at 100% over time. Many insurance companies may use a certain level of solvency to demonstrate financial health to their customers, e.g. 150% could be a strategic goal.
What is SCR and MCR?
Key Takeaways. Solvency capital requirements (SCR) are EU-mandated capital requirements for European insurance and reinsurance companies. The SCR, as well as the minimum capital requirement (MCR), are based on an accounting formula that must be re-computed each year.
What is Solvency II balance sheet?
A basic principle of Solvency II is that assets and liabilities are valued on the basis of their economic value. The value of the assets less the value of the liabilities must then be taken as the starting point for determining the available own funds.
Does Solvency II apply to UK?
Introduction to the UK implementation of Solvency II Other aspects of the Solvency II framework, made by the European Commission (Commission) under delegated authority given to it by the Solvency II Directive, have direct application in Member States and are not separately implemented in the UK.
Does Solvency II apply to brokers?
Although the Solvency II Directive has no explicit requirements towards insurance intermediaries, it has implications on insurance intermediaries.
Is there a Matching Adjustment in Solvency II?
Solvency II’s matching adjustment (MA), and the British actuarial profession’s defence of it, have been in the financial press recently.
When did the European Commission introduce Solvency II?
The matching adjustment and implications for long-term savings 3 Solvency II was initiated by the European Commission in 2000 and represents a fundamental change to European insurance regulations.
How does Solvency II affect the capital requirement?
Effect on capital requirements The main Solvency II capital requirement, the Solvency Capital Requirement (SCR) is a risk based capital requirement. This means that the risks inherent in the assets held by an insurer are taken into account in assessing its capital requirement.