Counterparty Risk-Mitigating Effect Simplification

Overview

This calculator implements the simplified capital requirement for the Risk-Mitigating Effect across multiple counterparties 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 proxy variables for the aggregate reduction in capital requirement.^[2]

Input Terms

• Reinsurance Recoverables (BE_re_i): The value of technical provisions calculated as recoverables from each individual counterparty contract.^[1]
• Undiversified SCR: The raw, undiversified Solvency Capital Requirement for the aggregated underwriting risk being mitigated.

Technical Rationale

The Counterparty Risk Mitigating Effect 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 one or more of its counterparties. Unlike a full article-by-article revaluation, which requires a complete revaluation of the SCR under multiple default scenarios involving all counterparties, this simplification uses a closed-form allocated proxy.^[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 mitigation-valuation calculator. The result represents the simplified mitigation 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]