Spread risk submodule
A submodule of the market SCR that applies to each credit asset a shock based on its rating and duration, and whose calibration has considerable effects on asset allocation.
Take 3 billion euros of assets, half euro area sovereigns, half A-rated corporates with a duration of 8: under Delegated Regulation (EU) 2015/35, the whole spread charge falls on the second half. The first, exposed to the same widening seen in 2011 and 2012, does not enter the calculation. The submodule quantifies the loss in value of a credit portfolio under an instantaneous spread widening, calibrated at the 99.5% one-year percentile. The mechanics are deliberately crude: a shock factor read from a table by credit quality step and modified duration, applied to the market value of each line. The calibration shows up in balance sheets. The shock grows with duration, which makes the long end expensive and pushes toward maturities shorter than the liabilities, against matching. It grows sharply as ratings slip, hence the concentration on intermediate steps and the scarcity of high yield. The zero shock on European Economic Area sovereigns in domestic currency is an openly political exception, one that supervisors themselves have debated for years.
Delegated Regulation (EU) 2015/35, Article 176: for credit quality step 2, the A rating, the shock is 7.0% plus 0.7% per year of duration beyond five. At a duration of 8, that is 9.1%. On the 1.5 billion of corporate bonds in the portfolio that opens this entry, the gross spread charge comes to 136.5 million euros; on the 1.5 billion of euro area sovereigns, to zero. Bringing the corporates back to a duration of 5 lowers the shock to 7.0%, or 105 million: that is the pull away from matching.
- Commission Delegated Regulation (EU) 2015/35, Article 176(3) (EIOPA Single Rulebook)
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.