Dynamic Volatility Adjustment: Balance Sheet Protection Under Stress

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On 11 April 2018 the PRA published the consultation paper (CP) 9/18 on the modelling of the volatility adjustment (VA) for internal model (IM) firms. The PRA proposes a new supervisory statement related to the application of a dynamic VA in the modelling of Solvency II (SII) market risk stresses.

The VA is a stabilising measure intended to avoid excessive short term volatility of own funds under SII. The dynamic application of this measure may extend an IM and generate benefits in terms of Solvency Capital Requirements and available own funds.

The PRA has asked for responses to the CP by 11 July 2018. In this paper we summarise the content of the CP and its potential implications for UK insurance firms.

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