Ok, it suddenly dawned on me that I’m in the weeds .
In answer to your question: I’m not entirely convinced that there is a “1 year RM horizon” unless the contract has a one year maturity; and so I think you are trying to connect apples and oranges.
Conceptually, the risk margin is an amount that you need to add to the BEL to get to the market consistent value of the liability; that a knowledgeable participate would pay for it. Technically, it isn’t a capital requirement (though I have heard actuaries describe it as such); you don’t need to arbitrarily set a confidence level or time horizon to measure it.
The cost of capital approach, is ONE (but not the only) approach for how you might go about calculating the RM. The discussion to date has focussed on the implications of one proposed approach and I think has lost / is losing sight on what the RM is and is trying to achieve.
Contracts that could be valued by replication would be regarded as the market consistent liability value and wouldn’t have a RM for eg.
Last edited: Nov 28, 2019