Consider the situation of a multi national with 2 main currencies Assume their

Consider the situation of a multi national with 2

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Consider the situation of a multi-national with 2 main currencies. Assume their SCRs are equal, by currency and their capital is all in Currency A and is funded at 150% of the SCR. If Currency B goes up by 10% relative to Currency A but own funds are solely in Currency A, the capital ratio will drop to 142.8% (150/{50 x 1.1 + 50}). The company is less prepared to withstand an event as their capital ratio has gone down yet no currency SCR was held. Take the reverse situation. If 50% of the capital was held in each currency, the Company would have to hold a currency SCR for Currency B. However, if the currencies were to move, the capital ratio would not change. Interest Rate Module Under the interest rate module, a company can realize a zero interest rate SCR if it perfectly cash flow matches the assets backing its liabilities with its liabilities AND holds all of its surplus in cash. However, if it does that, should interest rates drop, its many of its Life SCRs will increase as they are the discounted values of the additional cash flows after the shock event. Again, the capital ratio will decrease, resulting in a reduction in security for the policyholder. Template comments 2/66
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Comments Template on Discussion Paper on the review of specific items in the Solvency II Delegated Regulation Deadline 3 March 2017 23:59 CET A scenario performed demonstrated this impact. If you look solely at the interest rate SCR for the company, you would believe they are exposed to increasing interest rates. This is simply because there are surplus assets. However, if you were to calculate the total balance sheet including SCRs for the company, you will find an increase in interest rates results in an increase in the capital ratio. Conclusion The currency and interest rate SCRs should include the other SCRs (after diversification) in their calculation. This is a bit circular as one would want to use SCRs after diversification and these SCRs will impact diversification. This shouldn’t be too difficult to do as, now that Solvency II is in place, a Company can look at its prior quarter’s SCR calculation to determine the diversification benefits to be applied to the SCR. Other comments which there is no immediately clear natural home for: Market Risk: Equity Type 2 as a “catch-all” asset bucket There are questions over the ability of certain asset types on the balance sheets of insurers to absorb losses in a 1 in 200-year event, e.g. a claims management system specific to a particular company. Currently these types of assets tend to fall into the Equity Type 2 bucket but it may be argued that the Type 2 charge is not onerous enough for such assets, and it may be more appropriate to have another "catch all" module subject to a higher shock. Defined Benefit Staff Pension Scheme Risk There is currently a difference in treatment for Defined Benefit Staff Pension Schemes under the standard formula versus internal models.
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