EIOPA Launches Study on Diversification in Solvency II Internal Models

The study will be conducted in two phases to balance complexity and completeness. The first phase of the study, which starts in early October 2020, will focus on top-level risk dependencies between market, credit, life, non-life, health, and operational risks. However, the second phase of the study, in the second quarter of 2021, will assess the lower level inter-risk dependencies, to complete the understanding of diversification effects, in combination to the respective risk profiles. For undertakings applying the same correlation settings and aggregation structure as the standard formula, the first phase is limited to a subset of the qualitative questionnaire. Diversification effects depend on a variety of factors, such as the level of correlations, tail dependencies, number of risk factors, shape of underlying distributions, and the dependency structures. The modeling of dependencies and aggregation, in effect typically called diversification, within internal models has a significant impact on the overall solvency capital requirement (SCR) of insurance undertakings. This study is intended to

• gain an overview of the current approaches in the market and, on a best effort basis, analyze and compare the levels of diversification.
• facilitate a better understanding of modeling dependencies, aggregation, and the resulting diversification benefits.
• enhance quality and convergence of supervision on diversification in internal models.

Related Links

• Press Release
• Quantitative Reporting Template (XLSX)
• Qualitative Questionnaire (DOCX)
• Technical Specifications (DOCX)

Keywords: Europe, EU, Insurance, Internal Models, Solvency II, SCR, Solvency Capital Requirement, EIOPA