Risk margin run off profile

Hi

My understanding is RM is calculated by using Diversified SCR. But the answer in Sept 2016, Q2, Part iii says that we can have seperate run off profile for some risks let’s say expenses.
So will now risk margin in respect of this risk will be calculated on undiversified SCR of expense?

Let me know If this is not clear

Thanks

 

Not quite.

For the avoidance of doubt, the RM would be calculated on the non-hedgeable SCR elements (e.g. longevity, expenses, operational risks etc) and not the entire SCR.

At each time period,
1. an insurer would need to calculate the undiversified SCR for its non-hedgeable risks (e.g. expenses, longevity, counterparty risk etc). This is a complex task and in practice firms may use risk drivers based on the run off profile of the risk under consideration. E.g. project future SCR (expenses) by the change in the number of policies over time.
2. allow for diversification between between the non-hedgeable risks to arrive at a single diversified (non-hedgeable risk) SCR

Finally, a firm would then discount the future diversified non-hedgeable risk SCRs by a suitable discount curve (risk-free rates in SII) and multiply the result by the cost of capital rate (currently 6% in SII).