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Reinsurance LGD Simplification

Calculate the Loss-Given-Default instantly.

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Loss-Given-Default

€4 420 000

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Loss-Given-Default

Loss-Given-Default=max⁡(0.9×Recoverables+0.5×Risk-Mitigating Effect on Underwriting Risk (RMre)−Collateral Economic-Effect Factor (F)×Risk-Adjusted Collateral Value,0)\textit{Loss-Given-Default} = \max(0.9 \times \textit{Recoverables} + 0.5 \times \textit{Risk-Mitigating Effect on Underwriting Risk (RMre)} - \textit{Collateral Economic-Effect Factor (F)} \times \textit{Risk-Adjusted Collateral Value}, 0)

Understand the Reinsurance LGD Simplification

Overview

This calculator implements the simplified capital requirement for Loss Given Default (LGD) on Reinsurance within the Solvency II standard formula.[1] This simplified approach is intended for undertakings where the standard-formula calculation is disproportionately complex relative to the risk. The requirement is defined as the economic capital necessary to provide a 1-in-200 year level of protection using a proxy based on technical provisions and recoverables.[2]

Input Terms

  • Reinsurance Recoverables (BE_re): The value of technical provisions calculated as recoverables from reinsurance contracts.[1]
  • Risk-Mitigating Effect (RM): The proxy for the total reduction in capital requirement provided by the reinsurance arrangement.

Technical Rationale

The Counterparty Reinsurance LGD Simplification is calibrated to a 99.5% confidence level over a one-year horizon. It captures the sensitivity of the undertaking’s basic own funds to a default by its reinsurers. Unlike a full article-by-article revaluation, which requires a detailed mapping of all collateral and netting agreements, this simplification uses a direct proxy where the LGD is a function of the reinsurance recoverables and the undertaking's overall risk profile.[1]

This method is governed by the principle of proportionality (Article 109), ensuring that smaller undertakings can calculate their solvency capital requirements without the operational burden of a full-scale default calculator. The result represents the simplified LGD contribution to the total Counterparty Default Risk.

Important Notes

  • Regulatory deviation: Material deviation from the standard-formula assumptions or from the conditions supporting this simplification may support a capital add-on or a move toward a fuller or internal-model approach where justified.[3]
  • Reporting: The simplified result is intended to support the corresponding standard-formula component feeding the S.25.01.01 standard-formula reporting view, not to replace the connected article-chain result where the simplification is not justified.[4]

Sources

  1. Delegated Regulation (EU) 2015/35 - Art. 107 (Simplified calculation of the risk mitigating effect for reinsurance arrangements or securitisation) - EIOPA
  2. Directive 2009/138/EC - Art. 101 (99.5% VaR / 1-in-200 calibration) - EIOPA
  3. Directive 2009/138/EC - Art. 37 (Capital add-on) - EIOPA
  4. Commission Implementing Regulation (EU) 2023/894 - QRT S.25.01.01 (SCR standard formula) - EUR-Lex

Default values are illustrative sample inputs for navigation, training, and QA. Replace them with controlled data before using the result in capital analysis, governance, or reporting decisions.