A Review of the Solvency II Risk Margin

A Review of the Solvency II Risk Margin

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This paper reviews the current design of the Solvency II risk margin. The current aim of the risk margin is to provide a quantification of the hypothetical cost a third party would expect to charge (in addition to the Solvency II 'best estimate liability') to take on a book of insurance liabilities. We make suggestions that respect this principle but address some perceived weaknesses in the existing design. Issues explored in the paper include: (a) the overall impact and sensitivity of the risk margin to changes in economic conditions, (b) the interaction between the Solvency II risk margin and the margin over current estimate in the IAIS global Insurance Capital Standard or the risk adjustment in IFRS 17, (c) the risks to include in the risk margin calculation, (d) the discount rate and cost of capital rate to use in the risk margin calculation, (e) multi-year dependencies and (f) the treatment of tax.

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