How to Estimate Risk Margins under Solvency II and IFRS

We'll show you, step by step, how to estimate the risk margin under IFRS and Solvency II, which both use a cost of capital method.  Under Solvency II's standard formula approach, several simplifications can be used to determine future required capital that eventually flows into the cost of capital method. We will review the various simplifications and provide examples of the methods most commonly used by insurers during the Solvency II QIS 5 exercise.

We will also tackle the questions: 

• How does the IFRS risk margin differ from the Solvency II risk margin? Which one will be higher?
• What assumptions are needed to practically estimate a Solvency II risk margin, and what are some data issues and complexities to consider when estimating the Solvency II risk margin?
• How would these risk margins compare with real-life transfers of liabilities?