Prudential Regulation Authority Rulebook

20.1

A firm carrying on long-term insurance business must calculate a resilience capital requirement in accordance with this Chapter.

20.2

A firm must identify relevant assets which, after applying the scenarios in 20.3, have a value that is equal to the firm's long-term insurance liabilities under those scenarios.

20.3

For the purpose of 20.2, the scenarios are:

1. (1) for those relevant assets invested in the UK, the market risk scenario set out in 20.6;
2. (2) subject to (3) and to 20.10, for those relevant assets invested outside of the UK, the market risk scenario set out in 20.8; and
3. (3) where the relevant assets in (2) are:
1. (a) held to cover index-linked liabilities or property-linked liabilities; or
2. (b) not invested in a significant territory outside the UK;

the market risk scenario set out in 20.6.

20.4

The resilience capital requirement is the result of deducting B from A, where:

1. (1) A is the value of the relevant assets which will produce the result described in 20.2; and
2. (2) B is the firm's long-term insurance liabilities.

20.5

In calculating the value of the firm's long-term insurance liabilities under a scenario specified in 20.3, a firm is not required to adjust the provision made under Insurance Company – Overall Resources and Valuation 3.1 in respect of a defined benefits pension scheme.

20.6

In 20.3(1) and (3), the market risk scenario for assets invested in the UK and for assets (including assets invested outside the UK) held to cover index-linked liabilities or property-linked liabilities which a firm must assume is:

1. (1) a fall in the market value of equities of at least 10% or, if greater, the lower of:
1. (a) a percentage fall in the market value of equities which would produce an earnings yield on the FTSE Actuaries All Share Index equal to four-thirds of the long-term gilt yield; and
2. (b) a fall in the market value of equities of 25% less the equity market adjustment ratio;
2. (2) a fall in real estate values of 20% less the real estate market adjustment ratio for an appropriate real estate index; and
3. (3) the more onerous of either a fall or rise in yields on all fixed interest securities by the percentage point amount equal to 20% of the long-term gilt yield.

20.7

For the purposes of 20.6(1) and (2), a firm must:

1. (1) assume that earnings for equities and rack rents for real estate fall by 10%, but dividends for equities remain unaltered (see Insurance Company – Mathematical Reserves 9.5 and 9.6); and
2. (2) model a fall in equity and real estate markets as if the fall occurred instantaneously.

20.8

In 20.3(2), subject to 20.10, the market risk scenario for assets invested outside the UK (other than assets held to cover index-linked liabilities or property-linked liabilities) which a firm must assume is, for each significant territory in which assets are invested outside the UK:

1. (1) an appropriate fall in the market value of equities invested in that territory, which is at least equal to the percentage fall determined in 20.6;
2. (2) a fall in real estate values in that territory of 20% less the real estate market adjustment ratio for an appropriate real estate index for that territory; and
3. (3) the more onerous of either a fall or a rise in yields on all fixed interest securities by the percentage point amount equal to 20% of the nearest equivalent (in respect of the method of calculation) to the long-term gilt yield.

20.9

For the purposes of 20.8(1), an appropriate fall in the market value of equities invested in a significant territory must be determined having regard to:

1. (1) an appropriate equity market index for that territory; and
2. (2) the historical volatility of the equity market index selected in (1).

20.10

Where the assets of a firm invested in a significant territory of a kind referred to in 20.8 represent less than 0.5% of the firm's long-term insurance assets (excluding assets held to cover index-linked liabilities or property-linked liabilities), measured by market value, the firm may assume for those assets the market risk scenario for assets of that kind invested in the UK set out in 20.6 instead of the market risk scenario set out in 20.8.