solvency ii capital requirements

Article

Solvency II capital requirements of collective investment funds: An overview

This article is part of a series sharing aggregated analytics on collective investment funds used in different regulatory or business contexts. On this occasion, we will analyze the Solvency II capital requirements (SCR) for market risk in the context of look-through on collective investment funds.

The SCR, as defined in the Solvency II regulation (EU CDR 2015/35), as amended, represents the level of eligible own funds that should allow an insurance or reinsurance undertakings to absorb significant losses. The SCR is calibrated using the Value at Risk (VaR) of the basic own funds of an insurance or reinsurance undertaking, subject to a confidence level of 99.5% over one year. In other words, this would correspond to a one-year loss level expected not to be breached more than once over the next two hundred years.

The SCR is composed of different risk modules and sub-modules as laid out in the Solvency II regulation. For this article, we will only focus on the market SCR excluding concentration risk, which represents the majority of the total SCR for European insurance companies and, in particular, its estimation for collective investment funds.

Our internal analysis considers a sample of 339 sub-funds covering a wide range of asset classes, and the graph below depicts the typical market SCR observed per investment strategy. While the market SCR range for some categories is quite well defined—such as emerging markets equity, fixed income high yield, and money market—for other investment strategies the observed market SCR can vary significantly.

Distribution of the market SCR estimation for investment funds across different investment fund categories

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On another note, we found it interesting to compare the net average annual performance of the sub-funds in scope over the last three years with the average market SCR for each investment fund category.

Recent historical performance versus average market SCR ratio across investment fund categories



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We hope this analysis was of interest to you. Stay tuned for other analytics in the coming weeks.

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