Spread Risk Captive Simplification

Overview

This calculator implements the simplified capital requirement for Spread Risk for captive insurance undertakings within the Solvency II standard formula.^[1] This simplified approach is intended for captive 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 duration-based proxy factors. ^[2]

Input Terms

• Market Value (MV_i): The current market value of the bond or loan.^[1]
• Modified Duration (dur_i): The modified duration of the bond used as a proxy for price sensitivity.
• Credit Quality Step (CQS): The regulatory rating step used to determine the applicable risk factor.

Technical Rationale

The Spread Risk Captive 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 an adverse change in the level or volatility of credit spreads. Unlike a full article-by-article revaluation, which may require complex credit-spread duration modeling, this simplification uses a closed-form duration-based proxy for captive insurers.^[1]

This method is governed by the principle of proportionality (Article 109), ensuring that captive undertakings can calculate their solvency capital requirements without the operational burden of a full-scale valuation calculator. The result represents the simplified spread risk component before diversification in Market Risk.

Important Notes

• Duration Calibration: The 1-in-200 year severity is embedded in the duration-based proxy factor, which assumes an instantaneous shock to the entire credit-spread term structure.
• Look-Through Approach: Per Article 84 of the Delegated Regulation, insurers must "look through" investment funds to the underlying spread-sensitive assets so the simplified portfolio charge reflects the real asset mix rather than the wrapper alone.^[3]
• Gross vs. Net SCR: This simplification estimates the standalone Spread Risk SCR. Solvency II risk is only finalized as a net impact on Basic Own Funds after diversification in Market Risk, then within BSCR, and after the top-level LAC TP and LAC DT adjustments.
• 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.^[4]
• 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.^[5]