Solvency Capital Requirement (SCR)

Question

Do we have to take into account valuation method of the fund's underlying assets when calculating interest rate up/down capital charge via look through for the funds? For example, mezzanine debt instruments are often fixed rate instruments and so , in theory, sensitive to interest rate movement. However valuation method applied in practice to calculate fair market value is market multiple method, in line with IPEV valuation guidelines, and doesn't take into account interest rate movements. Thus, fund's NAV will not move based on the duration of such bonds. Do we have to apply interest rate sub-module via look through, knowing that rates parameter isn't being taken into account in funds valuation model in practice?

European Insurance and Occupational Pensions Authority · Accepted Answer

This answer covers the SCR calculation of the described fund. In accordance with Article 84(1) and (2) of Delegated Regulation (EU) 2015/35 (DR), the look-through approach should be applied to the fund.

Debt instruments with fixed interest rates are typically interest rate sensitive. Guideline 4 of the EIOPA Guidelines on the treatment of market and counterparty default risk exposures in the standard formula provides that all interest rate sensitive assets should be included in the calculation of the interest rate risk sub-module. Moreover, the same Guideline states that all interest sensitive assets should be revalued under the stressed interest rate scenarios. This might in particular involve a mark-to-model valuation.

Consequently, the interest rate risk sub-module needs to be applied to all interest rate sensitive assets of the fund. These assets need to be revalued under the stressed scenarios of Article 166 and Article 167 DR irrespective of the fund's valuation methodology.

Solvency Capital Requirement (SCR)

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