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Spread Risk

Market

Calculate the Spread Risk Capital instantly.

#
InstrumentMarket Value (EUR)Modified DurationCQS / RatingTreatment
1
€
2
€
3
€

Chargeable MV

€57 000 000

Rows subject to spread shock

Sovereign Exempt MV

€28 000 000

0% sovereign exception

Largest Instrument Charge

€2 058 000

Euro IG Corporate Bond

Spread Risk SCR

€3 488 000

Simple sum of instrument charges

Instrument Spread Stress and Capital Build

InstrumentMVDur.CQSbiStressCharge
1

Euro IG Corporate Bond

Top Charge
Bond / LoanA
€35M
4.2
CQS 2
1.4%
5.9%
€2.1M
2

Senior Bank Loan

Bond / LoanBBB
€22M
2.6
CQS 3
2.5%
6.5%
€1.4M
3

EEA Sovereign Bond

Exempt
Country / SovereignAAA

Country / Sovereign selection applies the 0% EEA sovereign exception.

€28M
6.5
CQS 0
0%
0%
€0

Simplified Spread Factor Table

CQSRating BucketFactor b_i
CQS 0
AAA
0.9%
CQS 1
AA
1.1%
CQS 2
A
1.4%
CQS 3
BBB
2.5%
CQS 4
BB
4.5%
CQS 5
B
7.5%
CQS 6
Unrated / Lower
7.5%
Exception
EEA Sovereign / Central Bank
0.0%
1Step 1

Floor modified duration at one year

dur~i=max⁡(duri, 1)\widetilde{dur}_i = \max(dur_i,\ 1)
2Step 2

Look up the spread factor by Credit Quality Step

bi=Lookup(CQSi)b_i = \mathrm{Lookup}(CQS_i)
3Step 3

Set the shock to zero for EEA sovereign and central-bank rows

bi=0if sovereign exception appliesb_i = 0 \quad \text{if sovereign exception applies}
4Step 4

Compute the simplified spread shock percentage

stressi=dur~i×bistress_i = \widetilde{dur}_i \times b_i
5Step 5

Translate the shocked percentage into an asset capital charge

SCRspread,i=MVi×stressi100\mathrm{SCR}_{spread,i} = MV_i \times \frac{stress_i}{100}
6Step 6

Add all individual charges without diversification

SCRspread=∑i=1nSCRspread,i\mathrm{SCR}_{spread} = \sum_{i=1}^{n} \mathrm{SCR}_{spread,i}
7Step 7

Assume liabilities stay on the risk-free curve so the asset loss hits BOF 1:1

ΔBOF=−SCRspread\Delta BOF = -\mathrm{SCR}_{spread}

Understand the Spread Risk

Overview

This calculator implements the gross capital requirement for the Spread Risk sub-module within the Solvency II standard formula.[1] The Spread Risk requirement is defined as the economic capital necessary to cover the loss in basic own funds resulting from a 1-in-200 year stress event affecting credit spreads on bonds, loans, structured products, and credit derivatives.[2]

Input Terms

  • Market Value: The current carrying amount of each bond or loan instrument.
  • Modified Duration: The measure of an asset's sensitivity to shifts in interest rates or credit spreads, subject to a regulatory one-year floor in this module.[1]
  • Credit Quality Step (CQS): The regulatory rating classification used to select the applicable spread-risk factor.
  • Sovereign Treatment: The flag used to identify EEA sovereign or central-bank exposures qualifying for the 0% capital charge.[3]

Technical Rationale

The Spread Risk sub-module 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 changes in the level or volatility of credit spreads across a wide range of debt instruments.[1]

In the simplified standard formula implementation, the capital requirement is calculated as the sum of individual instrument losses (`duration × b_i`). Unlike other modules, the spread sub-module does not assume diversification between assets; each instrument's loss is directly additive. The model focuses on asset-side volatility, as liabilities are typically valued against a risk-free benchmark that does not move with credit spreads. The final result is the gross spread component before diversification in Market Risk.

Important Notes

  • Rulebook build: The Standard Formula sheet prices bonds and loans instrument by instrument, floors modified duration at one year, preserves the EEA sovereign 0% treatment where applicable, and adds charges directly without diversification.
  • Duration Floor: A regulatory one-year floor is applied to modified duration before selecting the spread factor. For instruments with shorter durations, the capital charge will appear conservatively higher.
  • Look-Through Approach: Per Article 84 of the Delegated Regulation, insurers must "look through" investment funds to the underlying spread-sensitive assets so credit quality, duration, and asset treatment are captured in the prepared exposure and factor inputs.[4]
  • Gross vs. Net SCR: This calculator determines 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 LACDT adjustments.
  • Regulatory deviation: Material deviation from standard-formula assumptions at this layer may support a capital add-on or a move toward an internal model where justified.[5]
  • Reporting: The displayed result is intended to support the corresponding standard-formula component feeding the S.25.01 standard-formula reporting view.[6]

Sources

  1. Delegated Regulation (EU) 2015/35 - Art. 175 (Spread risk sub-module) - EUR-Lex
  2. Directive 2009/138/EC - Art. 101 (99.5% VaR / 1-in-200 calibration) - EIOPA
  3. Delegated Regulation (EU) 2015/35 - Art. 180 (Spread risk on exposures to central governments) - EUR-Lex
  4. Delegated Regulation (EU) 2015/35 - Art. 84 (Look-through approach) - EIOPA
  5. Directive 2009/138/EC - Art. 37 (Capital add-on) - EIOPA
  6. Commission Implementing Regulation (EU) 2015/2450 - QRT S.25.01 - 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.