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Derivatives s2 risks

Discussion in 'SA7' started by i-actuary, Feb 25, 2022.

  1. i-actuary

    i-actuary Active Member

    Hello,

    in case an insurer has a short position in a forward contract (say bond) what are the main S2 risks that needs to account for?
    In my view if the maturity is say 3months it should be Type 1 counterpart default risk.

    However in a case where the maturity is say 10years in addition to the above risk i think it needs to calculate an interest rate risk (and no concentration of course). Is my understanding correct?

    Similarly in the case of an equity derivative what would be the case ? counter party and equity risks?

    Thank you

    ps. assuming that both examples are otc derivatives
     
    i-actuary, Feb 25, 2022
    #1
  2. Colin McKee

    Colin McKee ActEd Tutor Staff Member

    Hi, This is a tricky one for me as I have never worked on the liability side or indeed on Solvency II. It sounds like you know more than you probably need on this topic for the purposes of SA7. My understanding is that S2 requires the modelling of all risks on a realistic basis for the SCR, including counterparty, market (equity, property, spread, concentration, interest rate, currency liquidity) and operational, plus a host of insurance risks as well. If a derivative adds to any of these risks it would have to be included in the risk modelling. A short position in a bond future certainly has counterparty and interest rate risk, and a position in an equity derivative would have equity and counterparty. The maturity of the contract seems to have little impact (but I may be wrong). Sorry I cant help you more.
     
    Colin McKee, Feb 28, 2022
    #2

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