Symmetric adjustment (equity risk)
A Solvency II countercyclical mechanism that lowers the shock applied to equities after a market fall and raises it after a rise, to prevent insurers from all selling at once.
In the Solvency II standard formula, equities held by an insurer are subject to a shock that determines the capital requirement: around 39 percent for listed developed-market equities, 49 percent for others. Applied mechanically, this shock would have a perverse effect. After a sharp market fall, insurers' own funds shrink while their capital needs stay high; to restore their ratio, they would be pushed to sell equities, deepening the fall. The symmetric adjustment corrects this movement. It compares the current level of a reference equity index with its three-year average and adjusts the shock accordingly, within a band of plus or minus ten points: after a fall, the shock decreases; after a prolonged rise, it increases. The European insurance authority publishes the adjustment's value each month. The mechanism played out fully in March 2020, when the sudden market collapse pushed it to its lower bound, easing capital needs just as own funds were melting. It illustrates a constant concern of prudential regulation: avoiding a rule designed to protect each insurer that weakens the system by pushing all insurers in the same direction at the same time.
Hypothetical case: after a 30 percent market fall in a month, the symmetric adjustment moves from plus 2 to minus 10 points. An insurer's equity shock drops from 41 to 29 percent: its capital requirement falls just as its own funds shrink, and it does not have to sell its equities at the bottom.
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