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Risk Margin Calculation

Calculate the Risk Margin, Risk Margin Curve Governance Breach Flag (0/1), and Governance-Adjusted Risk Margin instantly.

Runoff Profile (Art. 58)

€
%
%
%
€
%
%
%

Risk Margin

€4 027 613

=

Discounted Future SCRs

€84 791 849

×

Cost of Capital

4.75%

Year
Rate
Closing NTP
Runoff φ
Time τ
SCR_ref(t)
Disc. SCR
1
3.50%
€114 000 000
0.9500
0.9650
€17 100 000
€15 410 028
2
3.48%
€102 000 000
0.8500
0.9312
€15 300 000
€12 862 188
3
3.47%
€90 000 000
0.7500
0.8986
€13 500 000
€10 587 575
4
3.46%
€78 000 000
0.6500
0.8672
€11 700 000
€8 560 330
5
3.46%
€66 000 000
0.5500
0.8368
€9 900 000
€6 757 346
6
3.45%
€54 000 000
0.4500
0.8075
€8 100 000
€5 157 679
7
3.45%
€42 000 000
0.3500
0.7793
€6 300 000
€3 742 231
8
3.45%
€30 000 000
0.2500
0.7520
€4 500 000
€2 493 543
9
3.45%
€18 000 000
0.1500
0.7257
€2 700 000
€1 395 653
10
3.45%
€6 000 000
0.0500
0.7003
€900 000
€433 972
1Step 1

Build the risk-free discount curve (Art. 38(2) - Nelson-Siegel)

rt=r∞+(r0−r∞)⋅αt−1r_t = r_\infty + (r_0 - r_\infty) \cdot \alpha^{t-1}
2Step 2

Linear Runoff Profile (Art. 58) - Proportional decrease over horizon T

ϕt=max⁡(0,  1−t−0.5T)\phi_t = \max\left(0,\; 1 - \frac{t - 0.5}{T}\right)
3Step 3

Exponential Runoff Profile - Fixed annual decay rate (e.g. 15%)

ϕt=(1−ρ)t\phi_t = (1 - \rho)^t
4Step 4

Proportional Runoff Profile - Based on projected Net TP

ϕt=NTPtNTP0\phi_t = \frac{\mathrm{NTP}_t}{\mathrm{NTP}_0}
5Step 5

Project the reference undertaking SCR(t) (Art. 38(1))

SCRref(t)=SCRref,0⋅ϕt\mathrm{SCR}_{\mathrm{ref}}(t) = \mathrm{SCR}_{\mathrm{ref},0} \cdot \phi_t
6Step 6

Apply the 2026 Article 37 time factor to future risks

τt=max⁡(1−c,  (1−a)t)\tau_t = \max(1 - c,\; (1 - a)^t)
7Step 7

Compute RM - cost-of-capital method (Art. 37(1))

RM=CoC×∑t=1Tτt⋅SCRref(t)(1+rt)t\mathrm{RM} = \mathrm{CoC} \times \sum_{t=1}^{T} \frac{\tau_t \cdot \mathrm{SCR}_{\mathrm{ref}}(t)}{(1 + r_t)^t}

Understand the Risk Margin Calculation

Overview

This calculator implements the transfer value for the Risk Margin within the Solvency II standard formula.[1] The Risk Margin represents the additional amount that an insurance undertaking would have to pay to another undertaking in order to transfer its insurance obligations following a 1-in-200 year stress event.[1]

The calculation uses the Cost-of-Capital (CoC) method, estimating the future capital requirements necessary to support the transfer of the undertaking's liabilities.

Input Terms

  • Reference Undertaking SCR: The Solvency Capital Requirement of a hypothetical "Reference Undertaking" that would take over the insurance obligations, sourced from the dedicated `risk-margin-reference-undertaking-scr` calculator.[2]
  • Cost of Capital Rate: The regulatory 4.75% rate applied to the discounted future SCR amounts.[3]
  • Future-Risk Time Factor: The Article 37 time-dependent factor introduced by Commission Delegated Regulation (EU) 2026/269, seeded with a 3.5% annual future-risk reduction and a 50% cumulative reduction cap.
  • Projection Period: The duration over which the SCR is projected to run off, reflecting the life of the liabilities.
  • Risk-Free Rate: The EIOPA-market discount-rate term structure used to calculate the present value of future capital charges.

Technical Rationale

The Risk Margin is calibrated to ensure that the technical provisions as a whole are sufficient to support the transfer of the liabilities to a secondary insurer.[1] It is calculated by multiplying the projected SCR of a reference undertaking by the Article 37 time factor and the 4.75% Cost-of-Capital rate, then discounting the results back to the reporting date using the risk-free curve.

This approach recognizes that the transferee insurer would need to hold capital to support the run-off of the obligations and would expect a return on that capital. The reference undertaking is assumed to be debt-free, with no market risk (other than spread) and no new business. The final Risk Margin is added to the Best Estimate Liabilities (BEL) to establish the total value of the technical provisions on the economic balance sheet.

The projection keeps the Article 37 calculation separate from the Article 38 reference-undertaking build, with the upstream capital amount passed into this standalone cost-of-capital step.

Important Notes

  • Engine mirror: The broader risk-margin workflow remains live in the Engines section as a transitional orchestration surface. The Calculators section keeps the atomistic Article 37 and Article 38 pieces public so the underlying formula steps stay inspectable.
  • Atomistic child calculators: Use `risk-margin-reference-undertaking-scr`, `risk-margin-time-reduction-factor`, `risk-margin-projected-reference-scr`, `risk-margin-discounted-scr-term`, `risk-margin-discounted-scr-sum`, and `risk-margin-cost-of-capital-charge` for clean calculator-level boundaries.
  • Gross vs. Net SCR: This calculator determines the final Risk Margin transfer value. While it is not a "risk charge" in the SCR sense, it is a significant component of the technical provisions that impacts the basic own-funds available to meet the capital floor.
  • Simplification Tiers: Small or low-risk undertakings may use regulatory simplifications (Hierarchy of Methods) for the SCR projection if the full year-by-year modeling is disproportionately complex.[4]
  • Operational Risk Integration: The reference-undertaking SCR must include the operational risk associated with the transferred business but excludes the initial insurance-undertaking's own market risk.[2]
  • Chain separation: Article 38 reference-undertaking reconstruction is maintained in a standalone upstream calculator and then fed into this Article 37 projection step.
  • 2026 risk-margin time factor: The current rulebook basis applies an exponential future-risk reduction to projected SCR terms, defaulting here to 3.5% per year with a 50% cumulative reduction cap.
  • Sensitivity parameters: The Cost-of-Capital rate, annual time-reduction rate, and cumulative reduction cap remain editable to support sensitivity analysis. Results using non-default values should be treated as scenario outputs rather than the regulatory standard-formula basis.
  • Reporting: The Risk Margin results feed into the S.12.01.01/S.12.01.02 (Life) and S.17.01.01/S.17.01.02 (Non-Life) technical-provision reporting views.[5][6]

Sources

  1. Directive 2009/138/EC - Art. 77 (Calculation of technical provisions) - EIOPA
  2. Delegated Regulation (EU) 2015/35 - Art. 38 (Reference undertaking for the risk margin) - EIOPA
  3. Delegated Regulation (EU) 2015/35 - Art. 39 (Cost-of-Capital rate) - EIOPA
  4. Delegated Regulation (EU) 2015/35 - Art. 58 (Simplified calculation of the risk margin) - EIOPA
  5. Commission Implementing Regulation (EU) 2023/894 - QRT S.12.01.01/S.12.01.02 (Life and Health SLT technical provisions) - EUR-Lex
  6. Commission Implementing Regulation (EU) 2023/894 - QRT S.17.01.01/S.17.01.02 (Non-life technical provisions) - 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.