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Risk Margin Calculation

Calculate the Risk Margin instantly.

Runoff Profile (Art. 58)

€
%
€
%
%
%

SCR_ref(0)

€18 000 000

×

Net Tech. Provisions

€120 000 000

+

Σ Discounted SCRs

€93 948 557

=

Risk Margin

€4 462 556

Year
Rate
Closing NTP
Runoff φ
SCR_ref(t)
Disc. SCR
1
3.50%
€114 000 000
0.9500
€17 100 000
€15 968 941
2
3.48%
€102 000 000
0.8500
€15 300 000
€13 812 116
3
3.47%
€90 000 000
0.7500
€13 500 000
€11 781 879
4
3.46%
€78 000 000
0.6500
€11 700 000
€9 871 457
5
3.46%
€66 000 000
0.5500
€9 900 000
€8 074 945
6
3.45%
€54 000 000
0.4500
€8 100 000
€6 386 905
7
3.45%
€42 000 000
0.3500
€6 300 000
€4 802 191
8
3.45%
€30 000 000
0.2500
€4 500 000
€3 315 877
9
3.45%
€18 000 000
0.1500
€2 700 000
€1 923 232
10
3.45%
€6 000 000
0.0500
€900 000
€619 710
1Step 1

Build the risk-free discount curve (Art. 38(2) — Nelson-Siegel)

rt=r∞+(r0−r∞)⋅αt−1r_t = r_\infty + (r_0 - r_\infty) \cdot \alpha^{t-1}
2Step 2

Linear Runoff Profile (Art. 58) — Proportional decrease over horizon T

ϕt=max⁡(0,  1−t−0.5T)\phi_t = \max\left(0,\; 1 - \frac{t - 0.5}{T}\right)
3Step 3

Exponential Runoff Profile — Fixed annual decay rate (e.g. 15%)

ϕt=(1−ρ)t\phi_t = (1 - \rho)^t
4Step 4

Proportional Runoff Profile — Based on projected Net TP

ϕt=NTPtNTP0\phi_t = \frac{\mathrm{NTP}_t}{\mathrm{NTP}_0}
5Step 5

Project the reference undertaking SCR(t) (Art. 38(1))

SCRref(t)=SCRref,0⋅ϕt\mathrm{SCR}_{\mathrm{ref}}(t) = \mathrm{SCR}_{\mathrm{ref},0} \cdot \phi_t
6Step 6

Compute RM — cost-of-capital method (Art. 37(1))

RM=CoC×∑t=1TSCRref(t)(1+rt)t\mathrm{RM} = \mathrm{CoC} \times \sum_{t=1}^{T} \frac{\mathrm{SCR}_{\mathrm{ref}}(t)}{(1 + r_t)^t}

Understand the Risk Margin Calculation

Overview

This calculator implements the transfer value for the Risk Margin within the Solvency II standard formula.[1] The Risk Margin represents the additional amount that an insurance undertaking would have to pay to another undertaking in order to transfer its insurance obligations following a 1-in-200 year stress event.[1]

The calculation uses the Cost-of-Capital (CoC) method, estimating the future capital requirements necessary to support the transfer of the undertaking's liabilities.

Input Terms

  • Reference Undertaking SCR: The Solvency Capital Requirement of a hypothetical "Reference Undertaking" that would take over the insurance obligations.[2]
  • Cost of Capital Rate: The regulatory 4.75% rate applied to the discounted future SCR amounts.[3]
  • Projection Period: The duration over which the SCR is projected to run off, reflecting the life of the liabilities.
  • Risk-Free Rate: The EIOPA-market discount-rate term structure used to calculate the present value of future capital charges.

Technical Rationale

The Risk Margin is calibrated to ensure that the technical provisions as a whole are sufficient to support the transfer of the liabilities to a secondary insurer.[1] It is calculated by multiplying the projected SCR of a reference undertaking by the 4.75% Cost-of-Capital rate and discounting the results back to the reporting date using the risk-free curve.

This approach recognizes that the transferee insurer would need to hold capital to support the run-off of the obligations and would expect a return on that capital. The reference undertaking is assumed to be debt-free, with no market risk (other than spread) and no new business. The final Risk Margin is added to the Best Estimate Liabilities (BEL) to establish the total value of the technical provisions on the economic balance sheet.

Important Notes

  • Gross vs. Net SCR: This calculator determines the final Risk Margin transfer value. While it is not a "risk charge" in the SCR sense, it is a significant component of the technical provisions that impacts the basic own-funds available to meet the capital floor.
  • Simplification Tiers: Small or low-risk undertakings may use regulatory simplifications (Hierarchy of Methods) for the SCR projection if the full year-by-year modeling is disproportionately complex.[4]
  • Operational Risk Integration: The reference-undertaking SCR must include the operational risk associated with the transferred business but excludes the initial insurance-undertaking's own market risk.[2]
  • Reporting: The Risk Margin results feed into the S.12.01 (Life) and S.17.01 (Non-Life) technical provision reporting views.[5][6]
  • Regulatory deviation: Any material deviation from the 4.75% CoC rate or the reference-undertaking assumptions is not permitted as it is a non-discretionary regulatory parameter.

Sources

  1. Directive 2009/138/EC - Art. 77 (Calculation of technical provisions) - EIOPA
  2. Delegated Regulation (EU) 2015/35 - Art. 38 (Reference undertaking for the risk margin) - EIOPA
  3. Delegated Regulation (EU) 2015/35 - Art. 39 (Cost-of-Capital rate) - EIOPA
  4. Delegated Regulation (EU) 2015/35 - Art. 58 (Risk margin simplification) - EUR-Lex
  5. Commission Implementing Regulation (EU) 2015/2450 - QRT S1201 (Life and Health SLT technical provisions) - EUR-Lex
  6. Commission Implementing Regulation (EU) 2015/2450 - QRT S1701 (Non-life technical provisions) - 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.