"Solvency II Capital requirements" of collective investment funds: an Overview
This article is the second of a series aiming at sharing aggregated analytics on collective investment funds used in different regulatory or business contexts. In this occasion, we will analyse 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 enable 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 a one-year period. In others words, this would correspond to a 1-year loss level expected not to be breached more than once over the next two hundred years.
Different risk modules and sub-modules compose the SCR as laid out in Solvency II regulation. For the purposes of 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 on its estimation for collective investment funds.
Our internal analysis takes into account a sample of 163 sub-funds covering a wide range of asset classes, and in the graph below are depicted the typical SCR Market observed per investment strategy. While for some categories, such as Emerging Markets Equity, Fixed Income High Yield and Money Market range of the Market SCR is quite well defined, for other investment strategies observed Market SCR can vary significantly.
Distribution of the Market SCR estimation for investment funds across different investment funds categories
On another note, we found interesting to compare the net average annual performance of the sub-funds in scope over the last 3 years and the average Market SCR for each investment funds category.
Recent historical performance vs. average Market SCR Ratio across investment funds categories
We hope the above was of interest, and stay tuned for other analytics in the coming weeks.
Basel III, CRR, Solva, VAG, GroMiKV, Solvency II, SCR
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