Submodule of market SCR applying to each credit asset a shock based on rating and duration, whose calibration produces considerable allocation effects.
The spread risk submodule quantifies the loss in value of a credit portfolio under an instantaneous spread widening calibrated at a 99.5% one-year percentile. Its mechanics are deliberately simple: a shock factor, given by a table in the delegated regulation according to credit quality step and modified duration, applied to the market value of each exposure. Three features of that calibration have consequences visible in balance sheets. The shock grows with duration, which makes long bonds expensive and pushes insurers toward maturities shorter than their liabilities, in direct tension with matching. It grows sharply as ratings deteriorate, which makes speculative grade costly and explains the concentration of portfolios on intermediate steps. And European Economic Area sovereign exposures denominated in domestic currency receive a zero shock, an openly political exception that subsidizes sovereign debt holding and that supervisors themselves have debated for years.
Delegated Regulation (EU) 2015/35, in the articles devoted to the spread submodule. On a 3 billion euro portfolio made up half of euro area sovereign bonds and half of A-rated corporate bonds with a duration of 8, the capital charge falls entirely on the second half: the first, though exposed to the same spread widening seen in 2011 and 2012, does not enter the calculation.
SCR spread, spread risk, choc de spread, sous-module de spread