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 engine. 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 standard-formula reporting view, not to replace the connected article-chain result where the simplification is not justified.^[4]