4
Other considerations when modelling the volatility adjustment within the SCR calculation
4.1
In addition to the above assumption and parameter uncertainties that arise with modelling the VA in stress, the PRA expects firms to consider the following when modelling DVA:
(i) how the change in discount rate methodology implied by the DVA could change the nature and scale of other risks to which the firm is exposed, as well as the dependency between these risks;
(ii) whether the scope of the model is justifiable in the context of Rules 4.2 and 10.3 of the Solvency Capital Requirement – Internal Models Part of the PRA Rulebook. In particular, the PRA expects firms seeking DVA approval to consider whether the model scope should also cover sovereign risk and any other material interest rate risks;
(iii) how the model, and the risk management practices it informs, allows for the risk that the VA cannot be earned in practice. In particular, the PRA expects firms reliant on the yield from assets with an uncertain return, or on the yield from assets they intend to purchase at a future date, to demonstrate that they will continue to earn the VA assumed in stress;
(iv) that the DVA model should not lead to excessive capital relief in relation to the costs of any financial guarantees or options on business valued using the VA; and
(v) the PRA expects validation to be more intensive in the areas of greatest risk and for limitations to be mitigated where appropriate.
- 17/10/2018