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forwards (derivative) and S2

I

i-actuary

Member
Hi all,

in case a life insurer has a long position in a forward contract to sell a bond in 1 year.
what are the scr charges within SF S2?
I guess counter party default risk - type 1 ; when the net position is +ve for the insurer against the counterparty (say the clearing house or the investment bank that is responsible for clearing the derivative)
1. is there anything else ? for example interest rate risk or any concentration risk if the insurer has a large exposure in this bond - hence the forward has a large value (without netting of)
2. until the physical delivery of the bond is my understanding correct that the insurer keeps any relevant market risk in respect of the bond eg int rate risk, spread risk etc

thank you
 
i-actuary said:
Hi all,

in case a life insurer has a long position in a forward contract to sell a bond in 1 year.
what are the scr charges within SF S2?
I guess counter party default risk - type 1 ; when the net position is +ve for the insurer against the counterparty (say the clearing house or the investment bank that is responsible for clearing the derivative)
1. is there anything else ? for example interest rate risk or any concentration risk if the insurer has a large exposure in this bond - hence the forward has a large value (without netting of)
2. until the physical delivery of the bond is my understanding correct that the insurer keeps any relevant market risk in respect of the bond eg int rate risk, spread risk etc

thank you
Click to expand...
Hi
First of all I think this is too much detail required for SA2. It feels more like SA7 territory.
But I will give it a try:
In the situation you describe, the life insurer has a short position (not long) because when the contract is settled the party will be short of the asset.

Yes, if this is an OTC derivative then type 1 counterparty default risk is the main SCR risk and will be minimised by any collateral arrangements in place, such as variation margins.

Regarding market risks, these should not adversely impact the holder of the short position directly from the change in the underlying asset as the price will be agreed in advance. However, it could be assumed that the party has taken this short position to manage, say interest rate risk from a liability, in that respect it should act to reduce the SCR from interest rate risk.

Thanks
Em
 
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