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Insurance and reinsurance undertakings using the standard formula have to hold a certain amount of regulatory capital to compensate for losses in the value of equites in case of an adverse scenario. The capital requirement is calculated as a percentage of the market value of the exposures to equity risk. The percentage has been calibrated ‘through the cycle’, i.e. considering all parts of the economic cycle.
In order to prevent pro-cyclical behaviour ("fire sales") of equities exposures, the capital charge calibrated ‘through the cycle’ is corrected with an adjustment. The adjustment behaves symmetrically. It is expected to be positive (i.e. the capital requirement is higher than the average) when markets have risen recently, and negative (i.e. the capital requirement lower than the average) when equity markets have dropped in the previous months.
The calculation of the symmetric adjustment is based on the behaviour of an equity index built by EIOPA exlusively for that purpose. The legal requirements on the determination of the symmetric adjustment and of the EIOPA equity index are set out in the Directive 2009/138/EC (as amended by Directive 2014/51/EU), the Implementing Measures of that Directive, and also in the draft. Implementing Technical Standard on the EIOPA equity index.