Decoding the new Equity Risk transitional measures under Solvency II. The adjustment from 01/01/2016
During the first seven years of implementation of Solvency II, the application of a transitional measure for the calculation of equity risk is provided for Insurance undertakings calculating their Solvency Capital Requirement using the standard formula. In this context, a number of procedures that are necessary for the calculation and application of capital charges on all equity holdings held until 31/12/2015 will be put to motion in 2016. These may substantially impact an Insurance undertaking’s capital charges.
The baseline for the estimation of the stress charge is pretty straightforward: the stress parameter for each equity position shall be calculated as the weighted average of the parameter with and without the transitional measures.
The study of EIPOA’s recent consultation paper raises a number of questions, which we attempt to answer here below:
Q. What are the inputs for the calculation of the weighted average of the stress charge?
A. We need the Equity Position on 31/12/2015 (which is under the effects of the transitional measure) and the difference with the new Position on the Report Date, with the corresponding stress factor on that day.
Q. How does the “difference of the new Positions” affect our factor?
A. If the difference between the new positions and those of 31/12/2015 is zero, then the factor remains equal to the transitional measure of 22%.
If the difference is positive, due to the purchase of new stocks, then the calculation must include the new amount of stocks.
If the difference is negative, due to the selling of a number of stocks, then the factor remains equal to the transitional measure for the rest of the holdings.
Q. An Insurance undertaking sold equities and then bought them back. What should the new stress factor be?
A. Let us suppose that an Insurance undertaking sells and buys the same amount of equities. The net difference is zero and, therefore, the transitional measure should be applied.
However, the final consultation on the equity transitional measures states that “the amount of equities subject to the transitional measure will reduce from that initially recognized”. Therefore, we apply the new stress factor on the equities we bought.
And that leads us to the next question.
Q. Should we use Positions or detailed Transactions on the calculation?
A. In general, positions are adequate due to simplifications, but the undertaking “should be able to identify any changes affecting the amount of equities which are subject to the transitional measure”, according to the consultation.
Q. How do we identify the changes for equity held within Funds positions?
A. The latest amendment of the Regulation 2015/35 provides a simplified methodology to apply the transitional measure using the look-through approach. The undertaking can estimate the proportion of equities in accordance with the target underlying asset allocation on 31/12/2015.
Q. Does the transitional measure apply only to Type I equities?
A. Absolutely No. The latest amendment of the Regulation 2015/35 has extended the application of the transitional measures to all equities.
To conclude, we give an example of the progression of the final stress factor with respect to investment actions:
|
Date |
Initial Position |
TM Factor |
New Position |
Symmetric Adjustment |
New Factor |
Stress Factor |
Actions |
|
31/12/2015 |
100 |
-22% |
|||||
|
15/1/2016 |
100 |
-22% |
120 |
-7,04% |
-31,96% |
-23,66% |
Bought 20 Stocks |
|
31/1/2016 |
100 |
-22% |
140 |
-5,54% |
-33,46% |
-25,27% |
Bought 20 Stocks |
|
15/2/2016 |
100 |
-22% |
200 |
-8,21% |
-30,79% |
-26,40% |
Added Fund position equivalent to 60 Stocks |
|
29/2/2016 |
40 |
-22% |
200 |
-6,45% |
-32,55% |
-30,44% |
Sold 60 Stocks |
The Commission Amendment to 2016/467 can be downloaded here:
http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R0467&from=EN
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