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Spread Risk Captive Simplification

Market

Calculate the Spread Risk Capital on Bonds and Loans instantly.

€
€

Spread Risk Capital on Bonds and Loans

€9 700 000

Credit Quality Step 3 b-Factor

1.8%

1Step 1

Credit Quality Step 3 b-Factor

Credit Quality Step 3 b-Factor=1.8\textit{Credit Quality Step 3 b-Factor} = 1.8
2Step 2

Duration Floor

Duration Floor=max⁡(1,Modified Duration of the Portfolio)\textit{Duration Floor} = \max(1, \textit{Modified Duration of the Portfolio})
3Step 3

article_105_cqs3_stress_factor

article_105_cqs3_stress_factor=Duration Floor×Credit Quality Step 3 b-Factor\textit{article\_105\_cqs3\_stress\_factor} = \textit{Duration Floor} \times \textit{Credit Quality Step 3 b-Factor}
4Step 4

Credit Quality Step 3 Stress

Credit Quality Step 3 Stress=article_105_cqs3_stress_factor\textit{Credit Quality Step 3 Stress} = \textit{article\_105\_cqs3\_stress\_factor}
5Step 5

Shocked Asset Decrease

Shocked Asset Decrease=Market Value of Bonds and Loans Portfolio×article_105_cqs3_stress_factor\textit{Shocked Asset Decrease} = \textit{Market Value of Bonds and Loans Portfolio} \times \textit{article\_105\_cqs3\_stress\_factor}
6Step 6

Spread Risk Capital on Bonds and Loans

Spread Risk Capital on Bonds and Loans=Shocked Asset Decrease+Increase in TP Less RM for UL Policies\textit{Spread Risk Capital on Bonds and Loans} = \textit{Shocked Asset Decrease} + \textit{Increase in TP Less RM for UL Policies}

Understand the 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 engine. 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 LACDT 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 standard-formula reporting view, not to replace the connected article-chain result where the simplification is not justified.[5]

Sources

  1. Delegated Regulation (EU) 2015/35 - Art. 104 (Spread risk on bonds simplification) - EUR-Lex
  2. Directive 2009/138/EC - Art. 101 (99.5% VaR / 1-in-200 calibration) - EIOPA
  3. Delegated Regulation (EU) 2015/35 - Art. 84 (Look-through approach) - EIOPA
  4. Directive 2009/138/EC - Art. 37 (Capital add-on) - EIOPA
  5. 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.