Regulatory Alerts2016-04-25 | NBB_2016_14Added · Updated
Circular NBB_2016_14 on Guidelines on Basis Risk When Applying Risk Mitigation Techniques in SCR Calculation under the Standard Formula
The National Bank of Belgium issues guidelines requiring Belgian insurance and reinsurance undertakings to assess basis risk when applying risk mitigation techniques in the Solvency II standard formula capital calculation. The document specifies that basis risk is not significant if the hedged exposure is sufficiently similar to the enterprise's risk exposure and reflects its fluctuations across all relevant risk scenarios. For financial risk mitigation, undertakings must evaluate the relative importance of basis risk, symmetry, non-linear dependencies, and diversification levels before applying the technique. For insurance risk mitigation, basis risk arising from currency asymmetry is considered significant unless currencies fluctuate within a narrow band or a fixed exchange rate is contractually agreed, in which case the mitigation technique may not be recognized in the SCR calculation.