Underwriting Risk Mitigation Simplification

Overview

This calculator implements the simplified capital requirement for Underwriting Risk Mitigation within the Solvency II counterparty risk module.^[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 risk-reduction provided by derivatives and other mitigation techniques. ^[2]

Input Terms

• Mitigation Value (M): The current market value of the risk-mitigation arrangement (e.g., a derivative contract).^[1]
• Specified Delta Proxy: The regulatory factor used to proxy the 1-in-200 year change in mitigation value.

Technical Rationale

The Counterparty Underwriting Risk Mitigation 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 a mitigation counterparty (e.g., a derivative provider). Unlike a full article-by-article revaluation, which requires complex Greeks-based modeling, this simplification uses a direct proxy where the requirement is a function of the mitigation value and the undertaking's overall underwriting risk.^[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 engine. The result represents the simplified underwriting-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 standard-formula reporting view, not to replace the connected article-chain result where the simplification is not justified.^[4]