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Type 1 Counterparty Risk Simplification

Calculate the Simplified Type 1 Counterparty Risk instantly.

€
€
%

Simplified Type 1 Counterparty Risk

€110

1Step 1

20% LGD Eligibility Threshold

20% LGD Eligibility Threshold=Total Losses-Given-Default on Type 1 Exposures×Sigma Eligibility Threshold Factor\textit{20\% LGD Eligibility Threshold} = \textit{Total Losses-Given-Default on Type 1 Exposures} \times \textit{Sigma Eligibility Threshold Factor}
2Step 2

Article 112b Eligibility Met

Article 112b Eligibility Met=lte⁡(Standard Deviation of the Loss Distribution (sigma),20% LGD Eligibility Threshold)\textit{Article 112b Eligibility Met} = \operatorname{lte}\left(\textit{Standard Deviation of the Loss Distribution (sigma)}, \textit{20\% LGD Eligibility Threshold}\right)
3Step 3

Simplified Type 1 Counterparty Risk

Simplified Type 1 Counterparty Risk=Sigma Capital Multiplier×Standard Deviation of the Loss Distribution (sigma)×Article 112b Eligibility Met\textit{Simplified Type 1 Counterparty Risk} = \textit{Sigma Capital Multiplier} \times \textit{Standard Deviation of the Loss Distribution (sigma)} \times \textit{Article 112b Eligibility Met}

Understand the Type 1 Counterparty Risk Simplification

Overview

This calculator implements the simplified capital requirement for Counterparty Default Type 1 Risk within the Solvency II standard formula.[1] This simplified approach is intended for undertakings where the standard-formula calculation is disproportionately complex relative to the risk. The requirement is defined as the economic capital necessary to provide a 1-in-200 year level of protection using proxy variables for loss-given-default (LGD).[2]

Input Terms

  • Loss Given Default (LGD): The proxy for the economic loss resulting from a counterparty's default, calculated using simplified exposure measures.[1]
  • Variance Proxy (V): The simplified measure of the volatility of the default risk across the portfolio.[1]

Technical Rationale

The Counterparty Type 1 Simplification is calibrated to a 99.5% confidence level over a one-year horizon. It captures the sensitivity of the undertaking’s basic own funds to the default of diversified, highly rated counterparties (e.g., reinsurers, banks). Unlike a full article-by-article revaluation, which requires complex variance-covariance modeling of all exposures, this simplification uses a closed-form expression for firms where the number of counterparties is limited and the exposures are concentrated in a few name-groups.[1]

Article 109 proportionality is the reason this simplification exists: it preserves a conservative Type 1 default-risk proxy while reducing the evidence and modelling burden of a full stochastic default build where that burden would be disproportionate.[3] The output remains a simplified Type 1 component before aggregation in Counterparty Default Risk and should not replace the full calculation where the simplification conditions are not met.

Important Notes

  • Gross vs. Net SCR: This simplification estimates the standalone Counterparty Default Risk (Type 1) SCR. Solvency II risk is only finalized as a net impact on Basic Own Funds after diversification in Counterparty Risk, then within BSCR, and after the top-level LAC TP and LAC DT adjustments.
  • Regulatory deviation: Material deviation from the standard-formula assumptions or from the conditions supporting this simplification may support a capital add-on or a move toward a fuller or internal-model approach where justified.[4]
  • Reporting: The simplified result is intended to support the corresponding standard-formula component for the S.25.01.01 standard-formula reporting view, not to replace the full article-based result where the simplification is not justified.[5]

Sources

  1. Delegated Regulation (EU) 2015/35 - Art. 111 (Simplified calculation of the risk mitigating effect) - EIOPA
  2. Directive 2009/138/EC - Art. 101 (99.5% VaR / 1-in-200 calibration) - EIOPA
  3. Delegated Regulation (EU) 2015/35 - Art. 109 (Simplified calculations for pooling arrangements) - EIOPA
  4. Directive 2009/138/EC - Art. 37 (Capital add-on) - EIOPA
  5. Commission Implementing Regulation (EU) 2023/894 - QRT S.25.01.01 (SCR standard formula) - EUR-Lex

Default values are illustrative sample inputs for navigation, training, and QA. Replace them with controlled data before using the result in capital analysis, governance, or reporting decisions.