In chapter 12, the text talks about the various tiers of assets (and the rules) for backing the SCR and MCR, but what about the rules for the assets to back the technical provisions? Even if these are at market value how is an insurer restricted from investing low quality assets?
It would all need to be backed by assets appropriate to the liabilities term, nature, timing etc. - this is where the prudent person principle comes in to ensure that assets are invested properly. You would be penalised via your SCR calculation if you were holding assets that varied significantly to your liabilities under the standard formula or internal model as you’d need more capital to cope with the volatility. Sarah
