CEIOPS' Advice for Level 2 Implementing ... - EIOPA - Europa

∆rn = the absolute decrease of the risk-free interest rate for
maturity n under the downward stress scenario of the
interest rate risk sub-module.
3.362 The calculations should be carried out per currency (for the individual lines
of business where the unavoidable market risk is assumed to be material.
3.363 The calculation method sketched may also be applied in the context of a
proportional method (cf. para 3.301-3.312) or a duration method (cf. para
3.313-3.333) – given that the necessary adjustments are made in the
relevant formulas.
3.364 It should, however, be noted that in cases where the longest duration of
the risk-free financial instruments is low compared to the modified
duration of the insurance liabilities, the unavoidable market risk may have
a huge impact on the overall risk margin. This is especially the case if the
rather crude approximation sketched in para 3.361 is applied. In these
cases the undertaking may find it worthwhile to use more accurate
simplifications, e.g. by taking into account the fact that the best estimate
(of technical provisions) to be applied in the calculation of unavoidable
market risk in general will decrease over time. Moreover, the calculations
may be carried out in a manner that reflects the risk-reducing effect of
technical provisions (e.g. future bonuses), cf. the reference to this aspect
in para 3.295 above.
3.365 A further explanation of the technical aspects of this simplification is given
in annex D.
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© CEIOPS 2010