The SCR Adequacy according to the Volatility Longevity Shocks.

The improvements in longevity observed in many countries over the past century have been significant. The risk that the longevity experience is higher than the one forecasted, i.e. longevity risk, is explicitly consideredin Solvency II standard formula as a sub-module of the life underwriting risk module. The life underwriting risk module includes all the life insurance and reinsurance obligations, except the SLT health insurance obligations (EIOPA 2012), where the longevity risk is one of the seven sub-modules. According to Solvency II, solvency capital requirements (from herein SCRs) can be computed by a standard formula or an internal model. Nevertheless, the scenario in which the insurance companies operate is often more complex than that one assumed by the standard formula. According to the standard formula the SCR is represented as the change in net asset value due to longevity shock which is a permanent 20% reduction of mortality rates for all ages. A constant shock is not reasonable for all ages and maturities. The scenario related to the standard formula may lead to a biased allocation of capital, because of the volatility of longevity phenomenon in respect of different ages. In this paper we examine the adequacy of SCRs on the basis of the standard formula. To correctly calculate the solvency capital requirement we follow a multi-period approach in the sense that we evaluate at the beginning of each year the amount of capital that the insurer need to meet its future obligations year by year till the contract will be in force. We examine the adequacy of the shocks structure suggested by the standard formula studying its impact on the SCR for longevity risk (SCRLong) and liabilities at different ages.