• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Risk Margin and SCR

M

MLC

Member
Hi,

I've got a couple of questions on the RM and SCR if anyone is able to help me out?

1) RM is the cost of holding the SCR (i.e. locking away capital earning a lower rate) and to compensate a third party taking over an insurer's best estimate liabilities for the risk experience ends up worse than best estimate in practice. So does the RM include the cost of holding itself, i.e. the cost of holding the capital backing the RM?

2) Are there restrictions on what assets can be used to cover the Risk Margin like for SCR and MCR? In practice, it’s my understanding that to avoid a circular reference, the SCR is calculated based on Assets – BEL.
Therefore, the SCR would be no different if the RM is backed by equities or government bonds say. So if RM = cost of holding (SCR + RM) then surely if the RM is backed by equities this cost of holding would be lower than if backed by bonds. This would then mean the RM should be lower?

Any help getting my head round this would be appreciated.

Thanks,

Max
 
MLC said:
Hi,

I've got a couple of questions on the RM and SCR if anyone is able to help me out?

1) RM is the cost of holding the SCR (i.e. locking away capital earning a lower rate) and to compensate a third party taking over an insurer's best estimate liabilities for the risk experience ends up worse than best estimate in practice. So does the RM include the cost of holding itself, i.e. the cost of holding the capital backing the RM?

2) Are there restrictions on what assets can be used to cover the Risk Margin like for SCR and MCR? In practice, it’s my understanding that to avoid a circular reference, the SCR is calculated based on Assets – BEL.
Therefore, the SCR would be no different if the RM is backed by equities or government bonds say. So if RM = cost of holding (SCR + RM) then surely if the RM is backed by equities this cost of holding would be lower than if backed by bonds. This would then mean the RM should be lower?

Any help getting my head round this would be appreciated.

Thanks,

Max
Click to expand...

No, Solvency II regulations require the risk margin to be calculated as a subset of the SCR (of non-market risks) only. Justification being that under Solvency II regulations the risk margin is not a capital requirement but is part of the market consistent valuation on the balance sheet.
However, if a company was carrying out an embedded value calculation, they may decide to work out the cost of holding and raising capital against RM and SCR and any other internal capital requirement.
 
If a company calculates its SCR using an internal model and one of the risk modules is Basis Risk, should Basis Risk then be included in the non-hedgeable risk capital for the Risk Margin calculation ?
 
Imidinho said:
If a company calculates its SCR using an internal model and one of the risk modules is Basis Risk, should Basis Risk then be included in the non-hedgeable risk capital for the Risk Margin calculation ?
Click to expand...
Hi
If the basis risk is non-hedgeable, then yes it should in theory be included in the risk margin.
Thanks
Em
 
You must log in or register to reply here.
Back
Top