Kennisbank / Setting a Cost-of-Capital for IFRS 17 – methodology

Setting a Cost-of-Capital for IFRS 17 – methodology

Risk Management Magazine De Actuaris Solvency II IFRS Europa EIOPA
Kennisbank •
Willem Stegink, Tjemme van der Meer

For IFRS 17, a ‘Risk Adjustment’ (RA) is part of the valuation of technical liabilities to value non-financial risk. To determine this RA, different approaches are allowed like a Cost-of-Capital (CoC) approach or a (tail) Value-at-Risk approach.

Setting a Cost-of-Capital for IFRS 17 – methodology

We think that for European insurance companies a CoC approach in line with the Solvency II Risk Margin (RM) is a natural choice. In Solvency II, the annual CoC rate of return (the CoC) is set by EIOPA. In this article we propose a methodology for individual insurers to determine the CoC for IFRS 17.


For Solvency II, the CoC is calibrated using an implementation of the Capital Asset Pricing Model (CAPM). We briefly describe this implementation and show its limitations.


A pure CAPM arrives at a very low CoC by allowing for full diversification with external ‘market risk’ (taken on by shareholders). We propose to limit diversification benefits to internal diversification with ‘financial risk’ (taken on by the insurer). We end with a comment on taxes.


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