The CRO Forum welcomes the opportunity to contribute to the calibration of the standard formula through this paper on market risks. This document is a follow-up to our position papers published respectively last May: ‘Calibration Principles for the Solvency II Standard Formula”; and last December: ‘Calibration recommendation for the correlations in the Solvency II standard formula’.

While the CRO Forum had expected an increase in capital requirements for market risks (in comparison to QIS4 capital requirements), the increases proposed in the Consultation Papers were at the extreme end. The Final Advices, recently issued by CEIOPS on market risks, show a marked decrease from the consultation paper proposals – yet these calibrations are still generally higher than those of our Internal Models. This paper proposes an alternative calibration of the 1-in-200 market stresses, compared to those suggested by CEIOPS in its Final Advices (former CP 69/ 70/ 74). The counter-proposal is supported by the members of the CRO Forum.

The CRO Forum argues that calibration parameters should be set in accordance with the envisioned risk tolerance of a 1-in-200 year loss (individual shocks x correlation), not higher and not lower. The calibration approach should not result in accounting for the worst shocks observed ever with the simultaneous worst possible correlations between all pair-wise risks, as observed for very short periods of time during the financial crises. If parameters are calibrated to account for these ‘extreme events’, the aggregate 1-200 year calibrations across all risks will be far too conservative and together, not be supported by history or what is plausible in the future. More generally, the combined overall impact of all CEIOPS suggested calibrations could be devastating for an insurer’s asset mix with potential large scale asset sales and longer term diverting capital from the European industry.

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