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The CEA has issued a position paper on the cost of capital calculations to be used in the Solvency II project. The different methodologies being advocated by various stakeholders do not necessarily result in mutually exclusive approaches, CEA notes and specifies attributes that it believes market risk margin approaches should have.
CEA notes that the market consistent fulfilment cost approach proposed by the CRO Forum paper displays all the attributes set out in this paper. Market value risk margins are also part of the IFRS phase II project. Whilst this project concerns financial reporting rather than solvency, the CEA believes it is important to have consistency between financial reporting standards and Solvency II so as to avoid burdening companies and their policyholders with the additional costs associated with duplicate calculations.
The CEA’s position does not endorse a particular definition or approach at this stage, but instead specifies attributes that the market risk margin approaches should have.
Position paper: cost of capital methodology