Hello,
Following up for April 2017 Q1 iv) what is the impact of matching adjustment on standard formula SCR?
Whenever we talk about SCR impact, mainly three aspects to consider. (Please confirm if my thought process about SCR impact aspects is correct)
1. impact on assets
2. impact on BEL
3. which risk module of SCR should be considered (to identify the impact of stress applied post change in assets/BEL)
Here, it is easy to follow that BEL will reduce as matching adjustment increases the discount rate for BEL.
Now, as matching adjustment = spread on underlying portfolio - EIOPA fundamental spread = (illiquidity risk+default risk)- EIOPA spread which is ~ illiquidity risk as EIOPA spread is also a default risk premium
Why are we considering this as credit spread risk module? Practically speaking, after applying MA, the level of matching between assets and liabilities will be very high and assets will be held till maturity. Hence, liquidity risk reduces. Is this why we are considering credit spread (which is mainly due to liquidity risk and default risk from corporate bond vs govt bond)?
Please help in connecting the dots and understanding better. Thank you in advance!
Following up for April 2017 Q1 iv) what is the impact of matching adjustment on standard formula SCR?
Whenever we talk about SCR impact, mainly three aspects to consider. (Please confirm if my thought process about SCR impact aspects is correct)
1. impact on assets
2. impact on BEL
3. which risk module of SCR should be considered (to identify the impact of stress applied post change in assets/BEL)
Here, it is easy to follow that BEL will reduce as matching adjustment increases the discount rate for BEL.
Now, as matching adjustment = spread on underlying portfolio - EIOPA fundamental spread = (illiquidity risk+default risk)- EIOPA spread which is ~ illiquidity risk as EIOPA spread is also a default risk premium
Why are we considering this as credit spread risk module? Practically speaking, after applying MA, the level of matching between assets and liabilities will be very high and assets will be held till maturity. Hence, liquidity risk reduces. Is this why we are considering credit spread (which is mainly due to liquidity risk and default risk from corporate bond vs govt bond)?
Please help in connecting the dots and understanding better. Thank you in advance!