Solvency II Standard Formula SCR:
Counterparty Default Risk Module – Type 1 Risk
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The final Solvency II Delegated
Act, like the earlier CEIOPS Level 2 guidance, subdivides counterparty
exposures into two types. Type 1 aims to cover exposures primarily of the sort
that might well not be diversified and where the counterparty is likely to be
rated (e.g. reinsurance arrangements). It involves a formula along the
following lines:
where:
=
loss-given-default for type 1 exposure of counterparty 
=
3 or 5 depending on how big 
is in relation to
(based on the
earlier CEIOPS Level 2 guidance the 3 seems to assume a lognormal distribution)
=
deemed variance of the loss distribution of the type 1 exposures, calculated as
below
is in effect calculated
as follows (although the formulae specified in the Delegated
Act less clearly brings this out than the formulae in the earlier CEIOPS
Level 2 guidance), subdividing exposures by rating class, where 
and
run through each
rating class and 
, 
and 
are parameters
which depend on rating classes.
where the 
and 
are to be
calculated summing over all independent counterparties in
rating class :
As with the Type 2
exposures, the impact of possible recoveries should be taken into account when
assessing exposures, see e.g. loss-given-default
adjustments.
7 December 2015
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