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📋 '''Duration-based equity risk sub-module''' is an alternative method within the [[Definition:Solvency II | Solvency II]] [[Definition:Standard formula | standard formula]] for calculating the [[Definition:Solvency capital requirement (SCR) | capital charge]] on equity exposures held by [[Definition:Insurance carrier | insurers]] whose liabilities are long-duration in nature — primarily [[Definition:Life insurance | life insurers]] and [[Definition:Pension fund | pension funds]] with obligations stretching well beyond a typical market cycle. Instead of applying the standard equity risk stress (which subjects equity holdings to a flat percentage decline irrespective of the insurer's liability profile), this sub-module recognizes that a firm with a very long investment horizon may be better positioned to ride out short-term equity volatility, and therefore calibrates a lower shock.

⚙️ To use this sub-module, an insurer must satisfy specific eligibility conditions set out in the [[Definition:Delegated regulation | delegated regulation]]. The entity's [[Definition:Technical provisions | technical provisions]] backing the relevant business must have an average duration exceeding a prescribed threshold — typically the liabilities must have a duration significantly longer than that of the equity holdings — and the insurer must be able to demonstrate that its equity portfolio is ring-fenced for the purpose of meeting those long-duration obligations. National [[Definition:Insurance regulator | supervisory authorities]] must approve the use of this approach before it can be applied. Once approved, the equity stress applied is generally 22 percent — symmetric-adjustment-adjusted — compared with the standard stresses of 39 percent for Type 1 (developed-market, listed) equities or 49 percent for Type 2 (other) equities under the main equity risk sub-module. The resulting capital saving can be substantial for firms with large equity allocations held against retirement or savings products.

🔎 In practice, relatively few European insurers have elected to use this sub-module, partly because the eligibility requirements are stringent and partly because supervisory authorities in some member states have interpreted the conditions conservatively. Nevertheless, it remains a strategically important option for those that do qualify, as it allows a more economically realistic treatment of equity risk for buy-and-hold portfolios matched against predictable, long-dated liabilities. The sub-module reflects a broader debate in insurance regulation about whether short-term market-consistent valuation overstates the true risk to firms with inherently long time horizons — a question that also surfaces in discussions around the [[Definition:Volatility adjustment | volatility adjustment]], [[Definition:Matching adjustment | matching adjustment]], and the treatment of [[Definition:Infrastructure investment | infrastructure]] and [[Definition:Long-term equity investment | long-term equity investments]] under Solvency II's periodic review process.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Equity risk sub-module]]
* [[Definition:Market risk module]]
* [[Definition:Solvency capital requirement (SCR)]]
* [[Definition:Standard formula]]
* [[Definition:Matching adjustment]]
* [[Definition:Symmetric adjustment]]
{{Div col end}}

Definition:Duration-based equity risk sub-module - Revision history

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