What is matching adjustment in Solvency II?

What is matching adjustment in Solvency II?

Under Solvency II, insurers are required to calculate the value of their liabilities using a risk-free interest rate. The matching adjustment is an upward adjustment to the risk-free rate where insurers hold certain long-term assets with cashflows that match the liabilities.

How do you calculate SCR under Solvency II?

The SCR for each individual risk is then determined as the difference between the net asset value (for practical purposes this can be taken as assets less best estimate liabilities) in the unstressed balance sheet and the net asset value in the stressed balance sheet.

What does unit matching mean?

This is achieved using ‘Solvency II unit matching’ – the process of more closely aligning the insurer’s holding of unit-linked investment funds with the unit-linked part of the Technical Provisions. …

What is the risk margin Solvency II?

It defines the risk margin as the discounted value of the future cost of capital relating to risks (other than hedgeable market risks) required to be held under Solvency II rules by the hypothetical trans- feree company (called the reference undertaking under Solvency II).

What is the fundamental spread Solvency II?

Fundamental spreads (FS), used by insurers to calculate the risk-free curve for liabilities within a matching adjustment portfolio; Risk-free rate curves for liabilities where the insurers are permitted to use a volatility adjustment (VA).

What is a good Solvency II ratio?

Each insurance company is required to maintain its Solvency Ratio at 100% over time. Many insurance companies may use a certain level of solvency to demonstrate financial health to their customers, e.g. 150% could be a strategic goal.

What is Solvency II own funds?

Own funds consist of basic own funds and ancillary own funds. Pursuant to Article 88 of the Solvency II Directive ( EU Directive 2009/138/EC), basic own funds are composed of the excess of assets over liabilities and subordinated liabilities. Undertakings must apply for supervisory approval of ancillary own funds.

What is Solvency II Pillar 2?

In early 2011, the work concentrated on Pillar 2 of Solvency II, which required companies to challenge their own risk culture, define – or redefine as needed – risk governance and strategy and consider the operational implementation of the risk management function.

What is own funds in Solvency II?

What does Solvency II mean for asset-liability management?

One of the aims of Solvency II is to encourage insurers to match their investments (and capital) more closely to their liabilities. They will suffer an additional capital charge if they fail to do so. This means that insurers will need an asset-liability management (ALM) policy.

How does the Matching Adjustment affect Solvency II ratio?

It increases the numerator of the Solvency II ratio (own funds) by reducing the value of their liabilities and at the same time decreases the denominator (the capital requirement). Thus one might ask why many insurers have not opted for the matching adjustment.

What are admissible assets under the Insurers Act?

admissible assets means the assets of an insurer which are acceptable for determining an insurer’s solvency and shall include those identified in the Third Schedule to this Act but shall not include receivables outstanding or unpaid for a period of more than twelve months;

What does solsolvency II mean for the insurance industry?

Solvency II will, for most insurance assets (but not unit linked assets) replace set rules on admissibility and counterparty/asset exposures with a principles based test, known as the ‘prudent person principle’.