Guidance

SS30/15 – Solvency II: treatment of sovereign debt in internal models

Chapter

Compliance with Solvency II requirements

Printed on: 08/09/2024

Rulebook at: 23/07/2015

2

Compliance with Solvency II requirements

2.1

Solvency Capital Requirement - General Provisions 3.3 requires that the Solvency Capital Requirement must be calibrated so as to ensure that all quantifiable risks to which a firm is exposed are taken into account. The PRA considers that sovereign debt as an asset class can give rise to market risk and credit risk as defined in the Glossary Part of the PRA Rulebook. The PRA also expects firms to consider a particular basis risk that arises under Solvency II when sovereign bonds are used to back liabilities. Specifically, the discounting of liabilities with the ‘relevant risk-free rate term structure’[3] derived from interest rate swaps may give rise to a risk that the spread between sovereign bond yields and the relevant risk-free rate changes (‘gilt-swap spread risk’).

  • 3. Commission Delegated Regulation (EU) 2015/35, Chapter III section 4.
  • 23/07/2015

2.2

Firms should include these risks in their internal model, unless it can be demonstrated that these are not material. Failure to include material risks within the scope of the internal model will mean that the model does not fulfils the requirements set out in Solvency Capital Requirement - Internal Models 10 to 15.

  • 23/07/2015