date: 31 march 2014 · usd 1,000 300 700 = 1,000 - 300 sgd 200 700 500 = abs {200 - 700} myr 500...
TRANSCRIPT
© 2014 Towers Watson. All rights reserved.
OIC RBC 2
Stage 3 – Parameters and overview of market testing
Date: 31 March 2014
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Table of Contents
Preface ................................................................................................................................................. iv
Section 1 : Introduction to market testing ......................................................................................... 1
Objectives and scope ....................................................................................................................... 1
Submission requirements ................................................................................................................ 2
Materiality ......................................................................................................................................... 2
Questions and answers ................................................................................................................... 2
Section 2 : Framework changes to be tested .................................................................................... 3
Overview of framework .................................................................................................................... 3
Summary of changes ....................................................................................................................... 5
Details of changes (Life and Non-life insurance) ............................................................................. 6
Details of changes (Life insurance only) ........................................................................................ 11
Section 3 : Parameters for testing .................................................................................................... 16
Market risk ..................................................................................................................................... 16
Credit risk ....................................................................................................................................... 19
Asset correlation ............................................................................................................................ 24
Life insurance risk .......................................................................................................................... 25
Operational risk .............................................................................................................................. 26
Section 4 : Market testing template .................................................................................................. 27
Overview ........................................................................................................................................ 27
Input process ................................................................................................................................. 29
Details of RBC 2 additional input ................................................................................................... 33
Appendix A : Guidance notes for asset risk charge calculations ................................................. 44
Interest rate risk ............................................................................................................................. 44
Other market risks .......................................................................................................................... 47
Credit risk ....................................................................................................................................... 48
Derivatives ..................................................................................................................................... 48
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Appendix B : Guidance notes for Life insurance calculations ...................................................... 51
Contract recognition and boundaries ............................................................................................. 51
Mass lapse scenario ...................................................................................................................... 53
Negative reserves .......................................................................................................................... 56
Short-term contracts ...................................................................................................................... 57
Liability discount rates .................................................................................................................... 58
Appendix C : Guidance notes for operational risk charge testing ................................................ 63
Simplified Solvency II approach ..................................................................................................... 63
Simplified Australia approach ........................................................................................................ 64
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Preface
The implementation of risk-based capital (RBC) regulations on 1 September 2011 was the first time
the OIC introduced principles-based supervisory regulation. The OIC wants to continuously monitor
and develop its supervisory approach to the industry; since 2012 the OIC has sought feedback and
comments on the current RBC regime from related parties.
In line with its aim to pursue continuous improvement, the OIC has now launched Phase 2 of the RBC
framework development, and has engaged Towers Watson to work together with the OIC in further
developing and refining the RBC framework.
Project stages
There are five stages to this project, namely:
Stage 3 (current stage)
In the current Stage 3, companies will be able to test the impact of the proposed changes to the RBC
framework, to understand what the likely impact to the capital adequacy position will be from each
proposed change.
This document provides an overview of the items and parameters that will be market tested.
Current stage
Stage 4
Stage 1
Stage 2
Stage 3
Review and proposal
development
Stage 5
Market calibration /
Proposal refinement
Market testing
Regulation / guidance
assessment
Finalisation
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Section 1: Introduction to market testing
Objectives and scope
1.1 The objectives of market testing are to enable:
companies to assess the impact of potential changes to the RBC framework, and
provide feedback;
the OIC to make informed decisions based on quantitative testing of possible changes;
and
an assessment of appropriate transition periods for proposals that will be adopted in
the RBC framework.
1.2 The market testing has two main parts:
Testing the impact of proposed changes to the RBC framework; and
Testing the impact of changes to the parameters
1.3 Details of the potential framework changes to be tested are provided in Section 2.
1.4 Details of the potential parameter changes to be tested are provided in Section 3. In
particular, the parameters will be tested at the following target sufficiency levels:
Potential changes to parameters
Market testing
Potential changes to framework
85% 1-year VaR
90% 1-year VaR
95% 1-year VaR
97.5% 1-year VaR
99.5% 1-year VaR
Target sufficiency levels to be tested. These target sufficiency levels will apply to both asset and liability risks.
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Submission requirements
1.5 The market testing will be based on the 31 December 2013 financial position, using the 31
December 2013 RBC submissions as a base starting point.
1.6 The latest date for submission is 30 May 2014 (9 weeks starting from 1 April).
1.7 There is no requirement for the market testing submission to be certified by an auditor.
1.8 The submissions are to be sent directly to the OIC at the following email address:
Materiality
1.9 As the objective of the market testing is to understand the impact of the potential changes to
the RBC framework and parameters, it is not expected that the testing be performed to the
same degree of accuracy as the quarterly submissions. Examples are provided in the
guidance notes.
1.10 Companies are allowed to use judgement to determine if approximations for certain
calculations can be used, and should describe such approximations where used in their
submissions to the OIC.
Questions and answers
1.11 Questions may be submitted via the following email address:
1.12 Answers to frequently asked questions (“FAQs”) will be distributed once a week to the industry,
and will be available at the following website:
http://www.oic.or.th/th/rbcrbs/
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Section 2: Framework changes to be tested
Overview of framework
2.1 Under the current Thai RBC framework, capital adequacy is measured based on the Capital
Adequacy Ratio (“CAR”):
2.2 The definitions of the “Total Capital Available” and “Total Capital Requirement” components
are shown in the diagram below.
CAR Total Capital Available ( TCA )
Total Capital Requirement ( TCR )
Fair value of assets
Best estimate liability
Liability risk margin (Value of
PADs@75%)
Total Capital Requirement
Inadmissible assets
Total Capital Available
Fair value of liabilities
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Components of TCA
2.3 The proposed RBC 2 changes to components of the Tier 1, Tier 2 and Deductions (e.g.
goodwill, intangibles, etc.) are discussed in more detail in the following sub-sections.
Components of TCR
Tier 1 Capital
Tier 2 Capital
Total Capital Available
Deductions
RBC 1 and RBC 2
Insurance risk
Market risk
Credit risk
Concentration risk
Current RBC 1 RBC 2 to be tested
Insurance risk
Market risk
Credit risk
Concentration risk
Operational risk
Surrender risk To be assessed in market testing first
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Summary of changes
2.4 The table below summarises the potential changes to the framework that are to be assessed in
market testing.
Summary of potential changes to framework to be market tested
ID Proposed potential change Affects
Non-life?
Affects
Life?
Comments on input / calculations
required by companies
1 Inclusion of investments in associates
and subsidiaries in TCA Yes Yes
Companies need to determine the
value of investments in associates /
subsidiaries
2 Calculation of exchange rate risk Yes Yes Automated in market test template
3 Reflecting risk mitigation
characteristics of derivatives Yes Yes
Companies will need to apply
judgement
4 Inclusion of an operational risk charge Yes Yes Automated in market test template
5
Inclusion of diversification between
asset, insurance and operational risk
charges
Yes Yes Automated in market test template
6 Contract recognition and boundaries Yes Yes Companies will need to apply
judgement
7 Calculation of short-term reserves and
risk charges Yes Yes Automated in market test template
8 Commodity risk is to follow that of
equity risk Yes Yes Automated in market test template
9 Inclusion of negative reserves No Yes Automated in market test template
10 Testing of a surrender risk charge or a
mass lapse scenario No Yes
Companies need to perform
additional projections on “mass
lapse” scenario
11 Testing of discount rates for long-term
liabilities No Yes
Companies will market test using a
prescribed discount rate
12 Changes to product grouping and
scenario selection No Yes
Companies to apply judgement for
product grouping
13 Changes to calculation of the interest
rate risk charge No Yes
Companies will need to perform
additional projections
2.5 Details of each of the changes are discussed in the following sub-sections below.
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Details of changes (Life and Non-life insurance)
ID 1 – Investments in associates and subsidiaries
2.6 It is proposed that the TCA recognises the value of investments in associates and subsidiaries.
2.7 For investments in associates and subsidiaries that are licensed to conduct insurance
business, these associates / subsidiaries must be subject to regulatory capital requirements by
the OIC, and the value of the investment will be subject to the following deductions:
Intangibles;
Minimum required regulatory capital.
2.8 “Intangibles” are to be defined as per the current RBC 1 regulations, i.e. the value of deductible
intangible assets is to be the same as the value of intangibles that the subsidiary / associate
deducts from its current RBC 1 TCA.
2.9 For market testing purposes, the “minimum required capital” is defined as 140% of an
insurance subsidiary’s current TCR (i.e. under the current RBC framework).
ID 2 – Exchange rate risk calculation
2.10 It is proposed that the calculation of exchange rate risk be changed to the following:
∑
2.11 A numerical example is provided below:
Exposure Calculation
details Currency Long position Short position Net (absolute)
USD 1,000 300 700 = 1,000 - 300
SGD 200 700 500 = abs {200 - 700}
MYR 500 500 0 = 500 - 500
Total 1,200
Risk charge applicable 10%
Risk charge amount 120 = 1,200 x 10%
2.12 The change in calculation method will be reflected in the market testing templates, and
companies will not need to modify the calculations themselves.
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ID 3 – Reflecting risk mitigation effects of derivatives
2.13 Under the current RBC framework the “stresses” to assets are generally applied as “asset
value x risk charge”, and therefore full risk mitigation / hedging strategies are not captured
appropriately in the solvency assessment.
2.14 It is proposed that the risk mitigating effects of derivatives be allowed for by allowing
companies to reflect the change in the value of the “asset plus derivative” under the prescribed
stress. An illustration of this is shown below:
2.15 Detailed guidance notes will be provided for market testing.
RBC 1 Proposed RBC 2
Original asset value
Stressed asset value
Risk charge
Original asset value
Derivative
Stressed asset value reflecting
risk mitigation effects of derivative
Risk charge
Base scenario
Prescribed stress
scenario
Base scenario
Prescribed stress
scenario
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ID 4 – Inclusion of an operational risk charge
2.16 It is proposed that the impact of including an operational risk charge be assessed. The
operational risk charge calculations to be tested are based on simplified versions of the
Solvency II and Australian approaches. The simplifications include:
excluding any overall cap that is linked to RBC results for other risks;
basing allowances for unit-linked business on unit-linked liabilities rather than allocated
expenses; and
excluding elements that are associated with large movements in premiums or claims or
the excess of these over a percentage of liabilities.
2.17 The simplified operational risk formulae (parameterised at the 99.5% target sufficiency level for
illustration purposes) for market testing are summarised below:
{ }
{ }
Market test approach 1: Based on simplified Solvency II approach:
Where:
Risk ther
{ }
Market test approach 2: Based on simplified Australia approach:
Where:
“ ther” business)
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ID 5 – Diversification between asset, insurance and operational risks
2.18 The following correlation matrix between asset, insurance and operational risks is proposed for
market testing for all target sufficiency levels:
Correlation matrix for asset and insurance risks
Asset risk Insurance risk Operational risk
Asset risk 100% 25% 25%
Insurance risk 25% 100% 25%
Operational risk 25% 25% 100%
ID 6 – Contract recognition and boundaries
2.19 Some of the feedback provided by the industry regarding contract recognition and boundaries
is summarised below:
“A suggestion is to consider the definition ‘constructive obligations / constructive
options’”
“The definition should reflect the management practice of the company, for example
consideration of the voiding of the contract due to fraud.”
2.20 Taking industry feedback into consideration, it is proposed that the contract classification be
based on principles, and for consistency with the incoming implementation of IFRS, that these
principles be consistent with the IFRS principles. These will be provided in the guidance notes
for market testing.
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ID 7 – Calculation of short-term reserves and risk charges
2.21 It is proposed that the calculation of short-term reserves and risk charges be changed to the following:
Formula for short-term reserves and risk charges
Component Current RBC 1 Proposed RBC 2
Short-term reserve calculation
Premium Max{UPR, URR x (1 + PAD premium @75%)} Max{UPR, URR + UPR x PAD premium @75%}
Claims Unpaid claims x (1 + PAD claims @75%) (no change)
Short-term risk charge calculation(1)
Premium Max{ 0,
URR x (PAD premium @95% - PAD premium @75%) (2)
– Max{ 0, UPR – Premium reserve} }
Max{ 0,
UPR x (PAD premium @95% - PAD premium @75%)
– Max{ 0, UPR – Premium reserve} }
Claims Unpaid claims x (PAD claims @95% - PAD claims @75%) (2)
(no change)
Notes:
1. This example shows the formulae that apply at the 95% 1-year VaR target sufficiency level. The PADs will change accordingly depending on the target sufficiency level.
2. This is a simplified representation of the formula for Non-life. The exact formulae in the Non-life RBC forms is actually:
Premium risk = URR x (1 + PAD@75%) x PAD@75% x 1.5
Claims risk = Unpaid claims x (1 + PAD@75%) x PAD@75% x 1.5
These formulae can be simplified into the formulae presented in the table above, as is done in the Life RBC forms.
2.22 The market testing will include calculation of the short-term reserves on both of the following approaches:
Current RBC 1 approach (i.e. using URR as the driver for risk charges); and
Proposed RBC 2 approach (i.e. using UPR as the driver for risk charges)
2.23 The changes to the calculation method for short-term reserves and risk charges will be reflected in the market testing template, and companies
will not need to modify the calculations by themselves.
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ID 8 – Commodities and other assets based on equity risk charge
2.24 For commodities and any other assets that not explicitly considered in any of the other stress
tests, the equity risk charge is to apply.
Details of changes (Life insurance only)
ID 9 – Negative reserves
2.25 The IAIS ICPs provide the following guidance regarding classification of capital tiers:
ICP Description
17.11.34
In many jurisdictions, capital elements are categorised into two or three distinct levels of quality when considering criteria for, and limits on, those capital elements for solvency purposes. For example, one broad categorisation may be as follows;
Highest quality capital - permanent capital that is fully available to cover losses of the insurer at all times on a going-concern and a wind-up basis;
Medium quality capital - capital that lacks some of the characteristics of highest quality capital, but which provides a degree of loss absorbency during ongoing operations and is subordinated to the rights (and reasonable expectations) of policyholders; and
Lowest quality capital - capital that provides loss absorbency in insolvency/ winding-up only.
2.26 It is proposed that negative reserves be allowed as available capital, and the amount of
negative reserves is to be quantified at either the product level or the individual policy level,
and classified as Tier 2 capital.
2.27 No flooring of negative reserves will be performed, i.e. negative reserves will be fully
recognised (subject to limits on Tier 2 capital).
2.28 The rationale for proposing the quantification of negative reserves at product level is for
practical reasons, as this may not require changes to current actuarial projection models.
However, some insurers may find it more practical to quantify the negative reserves at the
individual policy level, and may choose to do so instead.
2.29 An example of how negative reserves are to be quantified is shown below:
Example of how negative reserves are to be calculated at product level
Product GPV reserves as calculated Amount of negative reserves
Max{-GPV, 0}
Product A total 500 0
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Product B total (200) 200
Product C total 300 0
Product D total (100) 100
Product E total 1,000 0
Total 1,500 300
2.30 The table below shows a simplified numerical example of how negative reserves are to be
treated in total available capital. Note that for simplicity, the example assumes that there is no
other Tier 2 capital, and no deductions.
Simplified illustration of how negative reserves are to be treated in available capital
Item Amount
RBC balance sheet
[A] Total assets 2,500
[B] Total liabilities (i.e. total reserves from table above) 1,500
[C] = [A] – [B] Total shareholder equity 1,000
Quantification of negative reserves
[D] = [C] Tier 1 capital (before adjustment for negative reserves) 1,000
[E] Amount of negative reserves (i.e. amount from table above) 300
Breakdown of total available capital
[F] = [D] – [E] Tier 1 capital (after adjustment for negative reserves) 700
[G] = [E] Tier 2 capital (negative reserves) 300
[H] = [F] + [G] Total available capital (Tier 1 plus Tier 2 capital) 1,000
2.31 The adjustments to available capital for negative reserves will be reflected in the market testing
template. Companies will be required to specify the level at which negative reserves are
quantified (e.g. product level, individual policy level).
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ID 10 – Cash surrender value floor
2.32 In Stage 1 it was proposed that an explicit surrender value capital charge be included, based
on a comparison of the surrender value to total capital requirement (i.e. the sum of all risk
charges plus reserves). This treatment would be consistent with the cash surrender value
(“CSV”) treatment under the Malaysia and Singapore RBC frameworks.
2.33 Some of the feedback provided by the industry is summarised below:
“This is a liquidity issue and should be considered as part of Pillar 2 instead”
“This may not address the issue of the volatility of the CAR ratio to interest rate
movements”
“Can a “mass lapse” scenario be considered as an alternative instead?”
“The IC has mandated that assets must be greater than the CSV, therefore there is
no need for a separate risk charge”
2.34 Taking the industry feedback into consideration, it is proposed that the market testing capture
the capital adequacy position of life insurance companies under the following scenarios:
Scenario 1: With a CSV charge (as per the Stage 1 proposal)
Scenario 2: Without a CSV charge, but with a mass lapse scenario
2.35 For scenario 1, the calculation of the CSV charge will be reflected in the market testing
template.
2.36 For scenario 2, companies will be required to perform an additional projection under a
prescribed mass lapse scenario, where reserves will be defined as:
Reserves = Max { Reserve lapse up; Reserves lapse down; Reserves Mass lapse }
Where the lapse rate under the “mass lapse” scenario will be 50% in the first
projection year after the valuation date. Lapse rates for subsequent projection years
are to follow best estimate lapse rates plus the prescribed PAD.
2.37 Impact assessments at other “mass lapse” rates will be estimated using the results from the
test at the 50% mass lapse rate.
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ID 11 – Discount rates for long-term liabilities
2.38 In Stage 1 it was proposed that the discount rate for long-term liabilities be based on the risk-
free yield curve at the valuation date, instead of a weighted average of historical risk-free rates.
2.39 Some of the feedback provided by the industry is summarised below:
“A weighted-average yield can be used for durations 15 years (or 20 years) and
onwards, in line with the current Singapore RBC framework.”
“A liquidity risk premium can be introduced for longer duration cashflows”
2.40 Taking the industry feedback into consideration, it would be ideal for the market testing to
capture the capital adequacy position of insurance companies under different discount rates.
However, assessing the volatility of the capital adequacy position would require insurance
companies to perform sensitivity testing on different discount rates for a range of different
valuation dates.
2.41 Recognising the time constraints for market testing, and the demands placed on companies’
actuarial resources to perform this further work, it is proposed that market testing be performed
only on one prescribed set of discount rates, and the assessment of the impact under different
discount rates and valuation dates will be performed by Towers Watson and discussed with
the OIC.
2.42 However, companies may wish to perform their own internal assessments of the impacts of
different discount rates, and may choose to do so with the set of discount rates that will be
provided in the guidance notes.
ID 12 – Product grouping and scenario selection
2.43 Under the current RBC framework, companies calculate the GPV reserves under prescribed
positive and negative PAD scenarios and choose the maximum of these scenarios as the
reserves to adopt in the RBC balance sheet. The current RBC regulations do not specify the
granularity at which the scenario selection should be performed.
2.44 The following principles for product grouping and scenario selection are proposed:
Product grouping and scenario selection should be performed on a basis consistent
with the risk characteristics and management of the product group. For example, if a
base product and rider are sold together, these can be considered as a single product
group, if the company wishes to do so.
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Individual life and Group life products should not be considered together when
performing the scenario selection;
Different Group life product types (for example group mortgage versus group
endowment) should not be considered together for scenario selection;
Participating and non-participating base products should be considered separately, but
non-participating riders on participating base products may be considered together
with the base product;
Universal life and unit-linked products should be considered separately from
conventional Individual life and Group life products.
2.45 An insurer may choose to apply the scenario selection at more granular levels (for example at
the product level or policy level) if the insurer wishes to do so for practical reasons.
2.46 If a company’s current product grouping does not contradict the proposed principles outlined
above, the company does not have to (i.e. it is not compulsory) change their current product
groupings and scenario selection for this round of market testing, but may choose to do so if
desired.
2.47 Companies will need to describe the level of product grouping and scenario selection that is
adopted for market testing.
ID 13 – Changes to calculation of interest rate risk charge
2.48 The following changes to the calculation of the interest rate risk charge are proposed for
market testing:
The liability cashflows included in the assessment of the interest risk charge should be
at the 75% target sufficiency level, instead of at the 50% level that is currently adopted
in RBC 1;
Non-guaranteed liability cashflows should also be included in the assessment of
interest rate risk;
The loss-absorbency effect of non-guaranteed cashflows will be allowed for in the
assessment of interest risk charges, by allowing companies to reflect adjustments to
non-guaranteed payments that would be consistent with actual management
practice in such stressed scenarios;
The risk mitigating effects of derivatives (e.g. interest swaps) are to be reflected in the
assessment of the interest risk charge.
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Section 3: Parameters for testing
3.1 The parameters for market testing are specified at the following target sufficiency levels:
85% 1-year value-at-risk (“VaR”);
90% 1-year VaR;
95% 1-year VaR;
97.5% 1-year VaR; and
99.5% 1-year VaR.
3.2 These parameters are also contained within the market testing template, and the calculations
using these specified parameters have been automated, with the exception of the insurance
risk parameters which will require external actuarial model projections for long-term contracts.
3.3 Please note that these parameters are only for impact testing purposes in Stage 3 (market
testing). A roadmap for revisions to RBC parameters will only be decided by the OIC after
impact assessments have been performed and the results, along with any additional feedback
from the industry, have been considered.
Market risk
Equity risk parameters
Parameters for market testing (Equity risk)
Risk category RBC1
Proposed (at various sufficiency levels)
85% 90% 95% 97.5% 99.5%
(1) Listed on the Thai stock exchanges SET
and MAI 16% 20% 25% 35% 45% 50%
(2) Listed on the main board of other
approved stock exchanges 16% 20% 25% 35% 45% 50%
(3) Equity investments in subsidiaries and associates, except (4) below
(1)
0% 25% 30% 40% 50% 55%
(4) Investment in subsidiaries or associates licensed to conduct insurance business
(2)
20% 25% 30% 40% 50% 55%
(5) Other assets not explicitly considered in
any of the other stress tests 20% 25% 30% 40% 50% 55%
Notes:
1. Under the current RBC, no risk charges apply to equity investments in subsidiaries / associates because these are
excluded from TCA. As it is proposed to include these investments in TCA for RBC 2, a risk charge is applicable.
2. To be applied to the value of investments net of any deductions, as discussed in Section 2.
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Property risk parameters
3.4 Note that the stress for owner occupied property has been proposed to be the same as other
property assets, because owner occupied property is included in available capital at fair value,
and a market level stress should therefore be applied to assess this value for consistency.
Parameters for market testing (Property risk)
Risk category RBC1
Proposed (at various sufficiency levels)
85% 90% 95% 97.5% 99.5%
(1) Owner occupied 4% 14% 16% 19% 22% 25%
(2) Operating assets 16% 14% 16% 19% 22% 25%
(3) Other property not included in (1)-(2) 16% 14% 16% 19% 22% 25%
3.5 Note that for property funds that are listed on a stock exchange (e.g. SET), the equity risk
charge should be applied to these assets instead.
Exchange rate risk parameters
Parameters for market testing (Exchange rate risk)
RBC1
Proposed (at various sufficiency levels)
85% 90% 95% 97.5% 99.5%
Exchange rate risk charge 8% 8% 10% 14% 17% 22%
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Interest rate risk parameters (Life insurance)
3.6 The table below shows the proposed interest rate parameters for market testing at selected durations. The full set of proposed parameters at all
durations is contained in the market testing template.
Proposed interest rate shocks (for Life insurance only)
TTM Current RBC1
Proposed (at various target sufficiency levels)
85% level 90% level 95% level 97.5% level 99.5% level
Up Down Up Down Up Down Up Down Up Down Up Down
1 50% 50% 30% 30% 35% 35% 45% 40% 55% 45% 70% 60%
2 47% 45% 29% 29% 34% 34% 44% 39% 54% 44% 68% 58%
3 46% 43% 28% 28% 33% 33% 43% 38% 53% 43% 66% 56%
4 44% 41% 27% 27% 32% 32% 42% 37% 52% 42% 64% 54%
5 43% 39% 26% 26% 31% 31% 41% 36% 51% 41% 62% 52%
10 37% 31% 21% 21% 26% 26% 36% 31% 46% 36% 52% 42%
15 32% 24% 17% 17% 21% 21% 31% 26% 35% 26% 37% 27%
20 27% 19% 14% 14% 16% 16% 26% 21% 28% 21% 32% 22%
25 23% 15% 10% 10% 11% 11% 21% 15% 23% 16% 27% 17%
30+ 21% 12% 7% 7% 8% 8% 16% 10% 21% 11% 22% 12%
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Credit risk
Debt securities and “other” assets
3.7 It is proposed that debt securities issued by the following issuers be exempt from credit risk
charges:
Thai government or central bank;
Bank of Thailand;
State enterprise / government organisations that are backed by Ministry of Finance
(“MoF”) guarantees;
Recognised multilateral development banks (“MDBs”):
– Asian Development Bank;
– African Development Bank;
– The Bank for International Settlements;
– European Bank for Reconstruction and Development;
– European Investment Bank;
– European Investment Fund;
– Inter-American Development Bank;
– International Bank for Reconstruction and Development;
– International Finance Corporation; and
– International Monetary Fund.
3.8 In addition, a change is proposed for the credit risk charge on investment assets (i.e. debt
securities, deposits). Spread risk is proposed to be included:
3.9 The spread risk component of the risk charge aims to capture the risks associated with
changes in a bond’s credit spread, i.e. the potential decrease in market value of an asset due
to increases in credit spreads.
RBC 1 Proposed RBC 2
Default risk
Spread risk
+ Default risk
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3.10 As a result, the proposed credit risk charges need to vary by asset duration, and the proposed
duration buckets have been based on the current duration buckets required in the “Chor” /
“Wor” asset reports that insurance companies submit regularly to the OIC, namely:
Term to maturity is less than or equal to 1 year;
Term to maturity greater than 1 year, but less than or equal to 5 years;
Term to maturity greater than 5 years, but less than or equal to 10 years; and
Term to maturity is greater than 10 years
3.11 The table below summarises the proposed credit risk charges at the various target sufficiency
levels. These apply to all debt securities that are not exempt from credit risk charges.
Proposed credit risk charges (debt securities)
Bond term to maturity (T)
Risk level
1 2 3 4 5 6 Unrated
At 85% target sufficiency level
T ≤ 1 year 0.2% 0.2% 0.7% 1.6% 3.4% 23.0% 31.0%
1 year < T ≤ 5 years 1.2% 1.5% 2.5% 3.8% 6.1% 29.0% 38.0%
5 years < T ≤ 10 years 2.4% 3.0% 4.6% 6.5% 9.3% 36.0% 40.0%
T > 10 years 4.0% 5.0% 7.4% 10.0% 14.0% 40.0% 40.0%
At 90% target sufficiency level
T ≤ 1 year 0.2% 0.3% 1.0% 1.9% 3.8% 24.0% 32.0%
1 year < T ≤ 5 years 1.5% 1.8% 3.2% 4.8% 7.5% 31.0% 41.0%
5 years < T ≤ 10 years 3.0% 3.6% 5.9% 8.4% 12.0% 40.0% 45.0%
T > 10 years 5.0% 6.0% 9.5% 13.0% 18.0% 45.0% 45.0%
At 95% target sufficiency level
T ≤ 1 year 0.3% 0.4% 1.3% 2.4% 4.4% 25.0% 32.0%
1 year < T ≤ 5 years 1.8% 2.4% 4.3% 6.6% 9.2% 34.0% 44.0%
5 years < T ≤ 10 years 3.6% 4.8% 7.8% 12.0% 15.0% 46.0% 50.0%
T > 10 years 6.0% 8.0% 13.0% 18.0% 23.0% 50.0% 50.0%
At 97.5% target sufficiency level
T ≤ 1 year 0.4% 0.6% 1.6% 2.7% 4.9% 26.0% 33.0%
1 year < T ≤ 5 years 2.4% 2.8% 5.3% 7.6% 11.0% 37.0% 47.0%
5 years < T ≤ 10 years 4.8% 5.5% 9.8% 14.0% 18.0% 51.0% 55.0%
T > 10 years 8.0% 9.1% 16.0% 21.0% 28.0% 55.0% 55.0%
At 99.5% target sufficiency level
T ≤ 1 year 0.7% 1.2% 2.2% 4.4% 7.6% 27.0% 34.0%
1 year < T ≤ 5 years 3.5% 4.5% 7.4% 11.0% 16.0% 42.0% 54.0%
5 years < T ≤ 10 years 6.8% 8.4% 14.0% 20.0% 26.0% 60.0% 65.0%
T > 10 years 11.0% 14.0% 22.0% 31.0% 39.0% 65.0% 65.0%
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3.12 The credit ratings corresponding to the risk levels above are shown in the table below.
Rating Thai rating Offshore rating
TRIS Fitch (Thailand) S & P Moody’s Fitch A.M. Best
1 AAA AAA (THA) AAA Aaa AAA A++
2
AA+
AA
AA-
AA+ (THA)
AA (THA)
AA- (THA)
AA+
AA
AA-
Aa1
Aa2
Aa3
AA+
AA
AA-
A+
3
A+
A
A-
A+ (THA)
A (THA)
A- (THA)
A+
A
A-
A1
A2
A3
A+
A
A-
A
A-
4
BBB+
BBB
BBB-
BBB+
BBB
BBB-
BBB+
BBB
BBB-
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
B++
B+
5 - -
BB+
BB
BB-
Ba1
Ba2
Ba3
BB+
BB
BB-
B
B-
6 BB+ or
below
B+ (THA) or
below B+ or below B1 or below
B+ or below C++ or
below
3.13 For unrated bonds issued by Thai or foreign state enterprises that are not backed by the MoF,
the following classification is proposed:
Rating classification for unrated bonds issued by state enterprises
Bond issuer Rating category
Thai state enterprise / government organisations that are established under the
special law (i.e. as per the investment regulations) 4
Others Unrated
Mortgage loans
3.14 No change is proposed, i.e. the same risk charges as RBC 1 will apply.
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Reinsurance credit risk
3.15 The table below shows the proposed reinsurance credit risk charges for reinsurers with credit
ratings.
Proposed reinsurance credit risk charges (for reinsurers with credit ratings)
Risk level Current Proposed (at various target sufficiency levels)
85% 90% 95% 97.5% 99.5%
1 1.6% 0.2% 0.2% 0.4% 0.5% 1%
2 2.8% 0.2% 0.3% 0.5% 0.7% 1.5%
3 4% 0.7% 1% 1.4% 1.8% 3%
4 8% 1.7% 2% 2.5% 3% 6%
5 12% 3.6% 4% 5% 6% 15%
6 12% 15.0% 17.5% 20% 22.5% 25%
3.16 The credit ratings corresponding to the risk levels above are shown in the table below.
Counterparty grade
Rating S & P Moody’s Fitch A.M. Best
1 AAA Aaa AAA A++
2
AA+
AA
AA-
Aa1
Aa2
Aa3
AA+
AA
AA-
A+
3
A+
A
A-
A1
A2
A3
A+
A
A-
A
A-
4
BBB+
BBB
BBB-
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
B++
B+
5
BB+
BB
BB-
Ba1
Ba2
Ba3
BB+
BB
BB-
B
B-
6 B+ or below B1 or below B+ or below C++ or below
3.17 For Thai unrated reinsurers, the following risk charges are proposed for market testing. Note
that these risk charges reflect the CAR levels of the reinsurer under the current RBC
framework, and not the CAR levels of the reinsurer under the proposed framework.
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Proposed reinsurance credit risk charges (for reinsurers that have no credit ratings)
CAR ratio (X) Current
RBC1
Proposed (at various target sufficiency levels)
85% 90% 95% 97.5% 99.5%
X > 375% 1.6% 0.2% 0.2% 0.4% 0.5% 1%
350% < X ≤ 375% 1.6% 0.2% 0.3% 0.5% 0.7% 1.5%
300% < X ≤ 350% 1.6% 0.7% 1% 1.4% 1.8% 3%
250% < X ≤ 300% 2.8% 1.7% 2% 2.5% 3% 6%
150% < X ≤ 250% 4% 3.6% 4% 5% 6% 15%
X ≤ 150% 8% 15.0% 17.5% 20% 22.5% 25%
Other loans
3.18 It is proposed that the credit risk charges for other loans be consistent with the credit risk
charges adopted for the reinsurance assets. The following rating classification for loans that
are unrated is proposed:
Rating classification for unrated loans
Counterparty Rating category
Lease / hire purchase 4
Employee loans 3
Other individuals (except policy loans) 4
Policy loans No charge applicable (1)
Other loans 4
Notes:
1. As policy loans in Thailand are fully backed by the value of the policy, it is proposed that no credit risk charge be
applicable to policy loans.
3.19 The table below summarises the implied credit risk charges for other loans based on the rating
classification above.
Proposed credit risk charges (other loans that are unrated)
Current Proposed (at various target sufficiency levels)
85% 90% 95% 97.5% 99.5%
Lease / hire purchase 8% 1.7% 2% 2.5% 3% 6%
Employee loans 4% 0.7% 1% 1.4% 1.8% 3%
Other individuals (except policy loans) 8% 1.7% 2% 2.5% 3% 6%
Policy loans 0% 0% 0% 0% 0% 0%
Other loans 8% 1.7% 2% 2.5% 3% 6%
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Asset correlation
3.20 Changes to the market correlation matrix are proposed, to include all asset risks in the
correlation:
3.21 The proposed correlation matrix for asset risks is summarised below:
Proposed correlation matrix for market testing
Interest rate Equity Property Credit Concentration Currency
Interest rate 100% 0%/50% (1)
0%/50% (1)
0%/50% (1)
0% 25%
Equity 0%/50% (1)
100% 75% 75% 0% 25%
Property 0%/50% (1)
75% 100% 50% 0% 25%
Credit 0%/50% (1)
75% 50% 100% 0% 25%
Concentration 0% 0% 0% 0% 100% 0%
Currency 25% 25% 25% 25% 0% 100%
Notes:
1. For correlations to interest rate risk, the correlation factor should be 0% if the “interest up” scenario is biting; or 50% if
the “interest down” scenario is biting.
3.22 The selection of the “interest up” or “interest down” scenario is based on the RBC Form 6
calculation, and is automated in the market testing template.
RBC 1 Proposed RBC 2
Interest
Equity
Property
Currency
Credit
+
Concentration
+
Correlation applies to market risks only
Interest
Equity
Property
Currency
Credit
Concentration
Correlation applies to all asset risks
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Life insurance risk
3.23 The life insurance PADs for market testing are summarised below:
Parameters for market testing (Life insurance risk)
Parameter Current RBC 1 Proposed (at various target sufficiency levels)
75% 95% 75% 85% 90% 95% 97.5% 99.5%
Long-term contracts
Mortality 12% 28% 8% 11% 14% 18% 22% 28%
Morbidity 12% 28% 8% 12% 15% 21% 25% 32%
Lapses 17% 40% 15% 19% 22% 25% 30% 37%
Expenses 5% 10% 2% 3% 4% 5% 6% 8%
3.24 For contracts that are classified as short-term business, the following parameters are
proposed:
Short-term PA and riders:
Risk charges are to be the same as the Non-life industry for consistency.
Risk Current RBC 1 Proposed (at various target sufficiency levels)
75% 95% 75% 85% 90% 95% 97.5% 99.5%
Premium (UPR basis) n/a n/a 9% 15% 20% 27% 33% 45%
Premium (URR basis) 15% 41% 13% 21% 27% 38% 46% 63%
Claims 15% 41% 12% 20% 26% 36% 44% 60%
Short-term group business:
For short-term group business, it is proposed that the risk charges be the same as the
individual business, and vary by risk type (for example mortality, morbidity or PA and
health).
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Operational risk
3.25 The following parameters are proposed for market testing operational risk:
Parameters for market testing operational risk
Proposed (at various target sufficiency levels)
85% 90% 95% 97.5% 99.5%
Simplified Solvency II approach
Risk charge related to premiums 0.6% 0.8% 1.4% 2.4% 4.0%
Risk charge related to reserves 0.07% 0.09% 0.16% 0.27% 0.45%
Risk charge related to unit-linked business 0.04% 0.05% 0.09% 0.15% 0.25%
Simplified Australia approach
“Risk” business 0.45% 0.6% 1.05% 1.8% 3.0%
“ ther” business 0.0375% 0.05% 0.0875% 0.15% 0.25%
3.26 Note that these parameters are for market testing purposes only.
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Section 4: Market testing template
Overview
4.1 The market testing template has been based on the existing RBC 1 annual submission form,
with minor modifications to reflect the proposed changes to be tested.
4.2 The market testing template contains the following key items:
Parameters for market testing;
RBC 2 market testing forms;
High-level descriptions of inputs required by companies
A macro to assist companies in copying data from the existing RBC1 forms;
Tabs containing RBC 1 results for comparison; and
A summary page containing key aspects of the market testing results.
4.3 Note that detailed instructions and guidance notes are not provided within the market testing
template, but are contained within this document.
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Tabs contained within the market testing template
4.4 The table below provides an overview of the tabs contained within the market testing template:
Overview of tabs contained within the market testing template
No. Tab name Description of tab
Instructions related
1 Readme Provides an overview of the market testing template
2 Market testing details Details of the market testing for RBC Phase 2
3 Input instructions Contains instructions on how to fill in this market testing template. Also contains a macro to help copy data from the RBC 1 forms
RBC 2 market testing forms
4 Approximations Provide descriptions of any approximations adopted for market testing
5 Form1 Summary of the capital adequacy position under all scenarios
6 Form2 Calculation of the total capital available (TCA)
7 Form3 - 3.1 RBC balance sheet (assets only)
8 Form3 - 3.2, 3.3 RBC balance sheet (liabilities and shareholders' equity only)
9 Form4 - 4.1, 4.2 Calculation of the insurance risk charge
10 Form4 - 4.3 Summary of the long-term insurance liabilities
11 Form4 - 4.4, 4.5 Summary of the short-term insurance liabilities
12 Form5 - 5.1 Summary of the market risk charges
13 Form5 - 5.2-5.5 Calculation of market risk charges (excluding unit trust assets)
14 Form5 - 5.6 Calculation of market risk charges for unit trust assets
15 Form6 Calculation of interest rate risk charges
16 Form7 - 7.1 Summary of the credit risk charges
17 Form7 - 7.2-7.7 Calculation of credit risk charges (excluding reinsurance credit)
18 Form8 Calculation of reinsurance credit risk charges
19 Form9 Calculation of concentration risk charges
20 Form10 Operational risk
21 Form11 Diversification effects
22 Data from RBC1 forms
23 Form1 (RBC1) Data copied from RBC1 Form1
24 Form2 (RBC1) Data copied from RBC1 Form2
25 Form3 - 3.1 (RBC1) Data copied from RBC1 Form3 - 3.1
26 Form3 - 3.2, 3.3 (RBC1) Data copied from RBC1 Form3 - 3.2, 3.3
27 Form4 - 4.1, 4.2 (RBC1) Data copied from RBC1 Form4 - 4.1, 4.2
28 Form4 - 4.3 (RBC1) Data copied from RBC1 Form4 - 4.3
29 Form4 - 4.4, 4.5 (RBC1) Data copied from RBC1 Form4 - 4.4, 4.5
30 Form5 - 5.1, 5.7 (RBC1) Data copied from RBC1 Form5 - 5.1, 5.7
31 Form5 - 5.2-5.5 (RBC1) Data copied from RBC1 Form5 - 5.2-5.5
32 Form5 - 5.6 (RBC1) Data copied from RBC1 Form5 - 5.6
33 Form6 (RBC1) Data copied from RBC1 Form6
34 Form7 - 7.1 (RBC1) Data copied from RBC1 Form7 - 7.1
35 Form7 - 7.2-7.7 (RBC1) Data copied from RBC1 Form7 - 7.2-7.7
36 Form8 (RBC1) Data copied from RBC1 Form8
37 Form9 (RBC1) Data copied from RBC1 Form9
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Input process
4.5 A high-level overview of the input process is shown in the diagram below:
4.6 Details of each of the steps are in the sub-sections below:
Step 1: Input RBC 1 data
Step 1:
Input data from current RBC 1 forms
Step 2:
Make necessary modifications to RBC 1 data, and input
additional RBC 2 data
Input data from existing RBC 1 forms
Data is copied to tabs at end of the template (e.g. "Form
3.2 (RBC1)")
Companies input data directly to RBC 2 market
testing forms
Use macro (optional)
Input data manually
OR
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Macro for copying RBC 1 data
The macro for copying data from existing RBC 1 forms can be found in the [Input instructions] tab.
Note that for optimal use, the format of the RBC 1 forms should be as similar as possible to the standard format of the RBC 1 forms provided by the OIC.
Companies need to input the file path and file name of the RBC 1 forms to copy, and the tabs to copy from:
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Step 2: Input additional RBC 2 data
4.7 The table below provides details of the RBC forms which will / may require additional input from companies.
Overview of additional input required for RBC 2 market testing
Form no. Needs additional / manual
input? Comments on additional / manual input
Approximations Yes Provide descriptions of any approximations adopted for market testing
1 No n/a
2 Yes Input the value of intangible assets and minimum capital requirement of subsidiaries and
associates that are recognised in Tier 1 capital
3.1 No additional RBC 2 input, but
may require manual RBC 1 input
Data in this form is linked to existing RBC 1 forms, but as the format of the form may differ
between companies, companies may need to manually re-link / or enter data from RBC1 forms
3.2 and 3.3 No additional RBC 2 input, but
may require manual RBC 1 input
Data in this form is linked to existing RBC 1 forms, but as the format of the form may differ
between companies, companies may need to manually re-link / or enter data from RBC1 forms
4.1 No n/a
4.2 Yes Input values for the net of reinsurance GPV reserves calculated using the market testing
parameters, and for the mass lapse scenario
4.3 Yes
Input values for the GPV reserves calculated using the market testing parameters. Note that
companies may need to re-link some RBC1 data, as the format of the form can differ between
companies
4.4 and 4.5 Yes The data for short-term group business needs to be split by risk type
5.1 No n/a
5.2 Yes
The value of investments in subsidiaries and associates needs to be included (net of intangibles
and minimum capital requirement). The risk mitigating effects of derivatives also needs to be
input.
5.3 to 5.5 No n/a
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Overview of additional input required for RBC 2 market testing
Form no. Needs additional / manual
input? Comments on additional / manual input
5.6 Yes Due to changes in the credit risk charge, companies will need to input the average term / average
risk level of debt securities and deposits. (Columns O and P)
6 Yes
The definition of cashflows to be included in the interest rate risk calculation has changed.
Companies will need to input the following:
(1) Guaranteed liability cash flows that include the PAD@75% (under the market testing PADs)
(2) Non-guaranteed liability cash flows that include the PAD@75% (under the market testing
PADs)
(3) Changes to non-guaranteed liability cash flows under each of the prescribed stress scenarios
(i.e. the changes in dividend payments and other non-guaranteed payments that companies would
make under such scenarios)
(4) The risk mitigating effects on assets from any derivatives that the company may have.
7.1 No n/a
7.2 Yes Due to changes in the credit risk charge, companies will need to split debt securities into
durational buckets.
7.3 to 7.6 No n/a
7.7 Yes Companies will need to input the counterparty risk level of derivative holdings.
8 Yes Companies will need to input the counterparty risk level of reinsurers, and the RBC 1 CAR ratio of
unrated reinsurers
9 No n/a
10 Yes (Where applicable) Companies will need to input the value of unit-linked liabilities (unit portion
only)
11 No n/a
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Details of RBC 2 additional input
4.8 In the market testing template, cells have been colour coded to aid companies identify which
cells require input or modification. The following colour code applies throughout the market
testing template:
Cell colour Description
Additional data / input required
Data in these cells are linked from the RBC 1 forms. Companies may need to
update these in some instances.
Approximations
4.9 Companies are required to provide descriptions of any approximations adopted in the market
testing calculations:
Other inputs
4.10 Companies are also required to describe how negative reserves have been quantified for
market testing, and how the product grouping and scenario selection has been performed.
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Form 2 (TCA)
4.11 To reflect the value of investments in subsidiaries and associates in the TCA, the following
input to the “deductions from TCA” should be included:
4.12 For simplicity, the intangible assets and minimum capital requirement of the subsidiary /
associate should be obtained from the subsidiary’s / associate’s RBC 1 submission as at 31
December 2013.
New input required
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Forms 3.1-3.3 (RBC balance sheet)
4.13 The forms 3.1-3.3 contain details of the RBC balance sheet, and values in these tables are
linked to values in the RBC 1 forms (i.e. linked to tabs “'Form3 - 3.1 (RBC1)”, “'Form3 - 3.2, 3.3
(RBC1)”). However, as the format of the RBC 1 forms may differ between companies, the
links provided in the market testing template may need to be updated.
4.14 Companies should check the links in forms 3.1-3.3.
As companies can add rows, the format of the form may differ
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Form 4.2 (insurance risk charge)
4.15 Companies will need to input the value of the GPV reserves (net of reinsurance) at the various
target sufficiency levels (i.e. 75%, 85%, 90%, 95%, 97.5% and 99.5%), for both the “standard
RBC 1” scenarios and the prescribed “mass lapse” scenario.
4.16 Please see the guidance notes for more details regarding the mass lapse scenario.
New inputs required
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Form 4.3 (summary of long-term insurance liabilities)
4.17 There are two areas of input that companies will need to pay attention to in Form 4.3:
Like forms 3.1-3.3, the format of the RBC 1 forms may differ between companies, the
links provided in the market testing template may need to be updated.
GPV results under the RBC 2 market testing PADs (in paragraph 3.23) need to be
input in Form 4.3.
4.18 As the format of Form 4.3 may differ between companies, input for any rows below row 107
may need to be done manually:
4.19 As the PADs for market testing are different from the current RBC 1 PADs, companies will
need to input the recalculated values of PADs and GPV results in Form 4.3. (Columns U
onwards)
As companies can add rows, the format of the form may differ
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Form 4.4-4.5 (Short-term contracts)
4.20 For market testing, it has been proposed that the parameters for short-term Group business be
based on the risk characteristics of the particular product, for e.g. mortality, morbidity or health.
4.21 Companies will therefore need to split Group business into these risk characteristics:
Form 5.2 (Equity risk charge)
4.22 Companies will need to fill in two items:
The value of investments in subsidiaries and associates (net of intangibles and
minimum required capital). This value should be consistent with the value that is
recognised in the TCA; and
The impact of any risk mitigation from derivatives (e.g. put options) under the
prescribed equity stresses at the 85%, 90%, 95%, 97.5% and 99.5% levels.
4.23 Detailed guidance for assessing the impact of derivatives is discussed in the guidance notes
for derivatives.
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Form 5.6 (Market risk charge for unit trusts)
4.24 Due to changes in the credit risk charge, companies will need to input the average term /
average risk level of debt securities and deposits. (Columns O and P)
4.25 Note that the unit trust assets that are invested in property funds listed on a stock exchange
should be classified as equity assets. Companies may need to change the asset allocation of
“equity” and “property” accordingly where applicable:
Form 6 (Interest rate risk charge)
4.26 For Form 6, companies will need to input the following:
Cashflows for interest-sensitive assets (see guidance notes);
Cashflows for interest-sensitive guaranteed liabilities, at the 75% level;
May require modifications
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© 2014 Towers Watson. All rights reserved.
Cashflows for interest-sensitive non-guaranteed liabilities, at the 75% level;
Discount rates for non-guaranteed liabilities;
Risk mitigating effects of derivatives (e.g. interest swaps) on asset cashflows, under
each of the prescribed interest stresses at the 85%, 90%, 95%, 97.5% and 99.5%
levels;
Adjustments (if any) to non-guaranteed liability cashflows to reflect management
actions that companies would take under the prescribed stress scenarios.
4.27 Please see the guidance notes for details of how each of the above should be treated for
market testing.
4.28 For the input and calculation of non-guaranteed liabilities in particular, we note that some
companies may use different sets of discount rates for different products, and it may not be
possible to calculate the present value of non-guaranteed liabilities using a single set of
discount rates. In such instances, companies should input the present value of liabilities
directly in cells W13, AH13, AI13, etc., and also provide the non-guaranteed liability cashflows
(for each target sufficiency level) for reference purposes.
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Form 7.2 (Credit risk for debt securities)
4.29 Due to changes in the credit risk charge structure, companies will need to split debt securities
into maturity buckets.
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Form 7.7 (Credit risk for derivatives)
4.30 Companies will need to input the counterparty risk level of derivative holdings.
Form 8 (Reinsurance credit risk charge)
4.31 Companies will need to input the counterparty risk level of reinsurers, and the RBC 1 CAR
ratio of unrated reinsurers. The risk charge factors and amounts will then be automatically
calculated based on these inputs.
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Form 10 (Operational risk)
4.32 The calculation of operational risk charge in the market testing template is set up to be based
on the inputs in Form 4.3, however companies may modify the calculations if necessary.
4.33 Input for the unit reserves of unit-linked business is required.
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© 2014 Towers Watson. All rights reserved.
Appendix A: Guidance notes for asset risk charge calculations
The guidance notes for asset risk charge calculations contain the following sections:
Interest rate risk
Other market risks
Credit risk
Derivatives
Interest rate risk
Consistency between “interest-sensitive assets” and “interest-sensitive liabilities”
The IAIS ICPs recommend that an RBC framework be based on a ‘total balance sheet” approach, i.e.
considering the impact upon both assets and liabilities in a stressed situation.
For the determination of interest rate risk in particular, the definitions adopted for the “interest-
sensitive” assets and “interest-sensitive” liabilities need to be consistent, and should also be consistent
with how assets and liabilities are valued on the RBC balance sheet, as the interest rate risk charge is
aimed at capturing the impact on the TCA in a stressed situation where interest rates rise / fall
significantly.
Base scenario Interest stress scenario
Assets
Liabilities
TCA
Asset value in stress
event
Liability value in
stress event
TCA
Interest risk charge
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© 2014 Towers Watson. All rights reserved.
To improve the consistency of the definitions of “interest-sensitive” assets and “interest-sensitive”
liabilities, the following guidelines for defining these can be applied for market testing purposes:
“Interest-sensitive” assets
“Interest-sensitive” assets should include those assets whose value, as measured on the RBC
balance sheet, changes when interest rates change. This would include assets such as listed
debt securities.
For example:
– Assets that are measured at cost / amortised value on the balance sheet should be excluded, for example (the list below is shown for examples only, and there may be other assets too):
Some bills of exchange may be measured at cost price due to a lack of an observable
market value;
Policy loans that are measured as the outstanding loan balance.
The values of these assets are not affected by changes in interest rates, and should therefore be
excluded from the assessment of interest rate risk.
“Interest-sensitive” liabilities
“Interest-sensitive” liabilities should include liabilities whose value, as measured on the RBC
balance sheet, changes when interest rates change. For the purposes of market testing, this
should be the GPV liabilities at the 75% target sufficiency level.
Non-guaranteed liabilities
As mentioned in the paragraph above, the “interest-sensitive” liabilities included in the interest rate risk
charge calculation should be reflective of all liabilities on the RBC balance sheet whose value changes
with interest rates. This should therefore include the non-guaranteed liabilities at the 75% target
sufficiency level.
For the prescribed interest stresses, companies should make appropriate adjustments to the non-
guaranteed liabilities to reflect what the company would do in actual practice if such a situation
occurs.
For example, if a company has a dividend policy to pay out 70% of its investment profits to
policyholders as dividends, then in a scenario where interest rates fall by (say) 10%, the adjustment to
non-guaranteed liabilities should be based on the reduction in investment income multiplied by 70%
(the company’s profit sharing ratio). Likewise, in a scenario where interest rates rise by 10%, the
adjustment to non-guaranteed liabilities should be based on the increase in investment income
multiplied by 70%.
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As another example, if a company typically does not change its dividend payments regardless of
changes to interest rates, then no adjustments to non-guaranteed liabilities should be made.
The discount rates for non-guaranteed liabilities under the interest stress scenarios should be based
on the current RBC 1 method of “risk free plus margin”, where the “stressed” risk-free rate is based on
the stresses provided. Other discount rate assumptions such as corporate bond spreads, equity
returns, etc. should be assumed unchanged from the base scenario.
Consistency with GPV@75% reserves
In determining the interest risk charge, the total present value of the liability cashflows used in Form 6
should produce a figure that is consistent with the total GPV@75% reserve that is reported in Form
4.1.
As there may be potential differences in the discounting of cashflows, and approximations to reflect
the PADs@75%, for market testing the present value of liability cashflows in Form 6 should be within
3% of the GPV@75% reserves in Form 4.1.
Effects of derivatives
Where the interest rate exposures have embedded options, such as call or put provisions in the case
of debt securities, companies should take into account the likelihood of these options being exercised,
and the effect of the exercise of these rights on the values of such debt securities/loans, under the
scenarios of changes in the interest rate level.
For example, say a company has purchased interest rate swaps to minimise interest rate movements
to within 10% of the current interest rates. When calculating the change in asset values under a fall in
interest rates of 30%, the adjustments to asset values from derivatives should effectively reverse out
the fall in interest rates, such that the net decrease in interest rates is 10%.
More details are discussed in the section on derivatives.
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Other market risks
Equity risk
A direct position in equity which is matched by opposite positions in equity derivatives may be fully
offset and only the absolute net position subject to the equity risk charge. For example, a future in a
given equity may be offset against a direct position in the same equity.
More details are discussed in the section on derivatives.
Commodities and other assets
The equity risk charge should apply to any other assets not explicitly considered in any of the other
stress tests, for example commodities.
Property risk
For market testing, property funds and infrastructure funds that are listed on a stock exchange (e.g.
SET) should be treated as equity assets, and the equity risk charge should be applied to these assets.
Unit trust assets
For market testing, the “look through” approach adopted in RBC 1 should be used.
For clarity, the unit trust assets that are invested in property funds listed on a stock exchange should
be classified as equity assets. Companies may need to change the asset allocation of “equity” and
“property” accordingly where applicable.
The average term and average credit rating for debt security assets (or deposits) can be based on
annual reports from fund managers and strategic / target asset allocations of the funds.
Note that for unit trust assets denominated in foreign currency, the exchange rate risk charge should
also apply to these assets.
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Credit risk
Credit ratings
There have been some changes proposed to the risk categories for the credit risk charge. The
application of credit ratings should follow the same principles as those described in RBC 1.
Bonds issued by Thai state enterprises, that are not backed by the MoF
For clarity, for bonds issued by Thai state enterprises which are not backed by the MoF the following
risk classification should apply:
Bond rating Rating category
Rated Based on table in paragraph 3.12, i.e. depends on actual rating of bond / issuer
Unrated 4
Derivatives
Some guidance notes and examples regarding the treatment of derivatives for the asset stress
scenarios are discussed here. However, noting that these may not cover the wide range of derivatives
available, companies are also advised to:
Apply judgement in estimating the risk-mitigating effects of derivatives;
Take into account likely materiality of including the effects of derivatives (i.e. if the impact is likely
to be immaterial (<1% impact on TCR), this can be excluded for market testing)
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Equity risks
A direct position in equity which is matched by opposite positions in equity derivatives may be fully
offset and only the absolute net position subject to the equity risk charge. For example, a future in a
given equity may be offset against a direct position in the same equity.
Some examples are discussed below:
Example 1: Futures contracts
Shares owned: THB 10m in Stock A and THB 5m in Stock B
Futures contract: Short equity futures with market value of THB 5m in Stock A
The net equity exposure of the insurer would then be:
Stock A: THB 5m (THB 10m of shares minus THB 5m from equity futures on Stock A)
Stock B: THB 5m
Equity risk charge @ 90% level = THB 2.5m ([THB 5m + THB 5m] x 25%)
Example 2: Options
Shares owned: THB 15m in Stock C and THB 20m in Stock D
Option contract: Long put on Stock C with strike price market value of THB 14m
Under a prescribed equity stress of 25% at the 90% target sufficiency level, the net decrease in
equity values would be:
Stock C: THB 1m (= THB 15m – Max{THB 15m x (1 – 25%), THB 14m})
Stock D: THB 4m (= THB 20m x 25%)
Equity risk charge @ 90% level = THB 5m
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Interest rate risks
Interest rate risk exposures can be reduced by interest rate derivative positions, such as futures,
forwards and options. Interest rate derivatives should be converted into exposures in the relevant
underlying assets and subjected to appropriate interest rate risk charge calculations. To determine the
capital charge, the amount reported should be the market value of the principal amount of the
underlying or of the notional underlying. In the case of options, the delta equivalent value of the option
positions is used.
Futures and forward contracts, including Forward Rate Agreements (FRAs):
– These instruments are treated as a combination of long and short positions in a notional zero-coupon government security. The maturity period of futures or FRAs will be the period until delivery or exercise of the contract, plus, where applicable, the life of the underlying instrument. For example, a long position in a June three month interest rate future (taken in April) is to be regarded as a long position in a government security with a maturity of five months and a short position in a government security with a maturity of two months.
– In the case of a future or forward on a corporate bond or corporate bond index, positions will be included at the market value of the notional underlying portfolio.
Swaps
– Swaps will be treated as two underlying positions in zero coupon government securities with relevant maturities. For example, a plain vanilla interest rate swap under which an insurer pays floating and receives fixed will be treated as a long position in a fixed rate instrument of maturity equivalent to the residual life of the swap and a short position in a floating-rate instrument of maturity equivalent to the period until the next interest fixing.
– Where one of the swap legs involves payment relating to some other reference price, for example a stock index, the leg should be captured in the equity component of the market risk charge calculation. Swaps are treated as two notional positions. For example, an equity swap in which the insurer receives an amount based on the change in value of one particular equity or stock index and pays a different index will be treated as a long position in the former and a short position in the latter.
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Appendix B: Guidance notes for Life insurance calculations
The guidance notes for life insurance calculations contain the following sections:
Contract recognition and boundaries
Mass lapse scenario
Negative reserves
Short-term contracts
Liability discount rates
Contract recognition and boundaries
Definition from IFRS exposure draft
Cash flows are within the boundary of an insurance contract when the entity can compel the
policyholder to pay the premiums or has a substantive obligation to provide the policyholder with
coverage or other services.
A substantive obligation to provide coverage or other services ends when:
the entity has the right or the practical ability to reassess the risks of the particular policyholder
and, as a result, can set a price or level of benefits that fully reflects those risks; or
both of the following criteria are satisfied:
– the entity has the right or the practical ability to reassess the risk of the portfolio of insurance contracts that contains the contract and, as a result, can set a price or level of benefits that fully reflects the risk of that portfolio; and
– the pricing of the premiums for coverage up to the date when the risks are reassessed does not take into account the risks that relate to future periods.
An entity shall determine the boundary of an insurance contract by considering all of the substantive
rights that are held by the policyholder, whether they arise from a contract, law or regulation. However,
an entity shall ignore restrictions that have no commercial substance (i.e. no discernible effect on the
economics of the contract).
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Guidance from IFRS exposure draft
The paragraph above refers to an entity’s right or practical ability to set a price at a future date (a
renewal date) that fully reflects the risks in the contract or portfolio from that date. An entity has that
right or practical ability when there are no constraints to prevent it from setting the same price as it
would for a new contract that is issued on that date, or if it can amend the benefits to be consistent
with those that it would provide for the price that it will charge.
Similarly, an entity has that right or practical ability when it can re-price an existing contract so that the
price reflects overall changes in the risks in the portfolio, even if the price set for each individual
policyholder does not reflect the change in risk for that specific policyholder. When assessing whether
the entity has the right or practical ability to set a price that fully reflects the risks in the contract or
portfolio, it should consider all the risks that it would consider when underwriting equivalent contracts
on the renewal date for the remaining coverage.
Examples for companies
Example 1:
A company sells accident riders that are yearly renewable, but are not guaranteed renewable.
These accident riders are sold together with a base plan that has a premium term that is greater
than one year, and the company manages these riders as ‘long-term” contracts on the basis that
these riders are likely to renew as long as the base policy is still in the premium payment period.
In this case, although the contractual policy term is less than one year, and the contract does not
state that it is guaranteed renewable, because the company manages these contracts as long-
term business and actual historical experience shows that these contracts behave like long-term
contracts, these policies may be classified as “long-term” contracts instead of “short-term”
contracts.
Example 2:
A company sells hospitalisation policies that are yearly renewable, where premium rates are not
contractually guaranteed, i.e. the company has the contractual right to increase premium rates
for policies if experience is poorer than expected.
However, due to competitive pressures, the insurer will not increase premium rates in practice.
In this case, the contract would also be treated as a “long-term” contract for valuation purposes.
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Mass lapse scenario
Overview
The intention of a “mass lapse” scenario is to capture the scenario where a large proportion of
policyholders decide to surrender / lapse their insurance policies at the same time, for example due to
a sudden negative change in the reputation of the insurance company.
Calculation
The “mass lapse” scenario is therefore to be applied to all policies that are valued using the GPV
method, i.e. both “lapse-supported” and “non-lapse supported” policies.
The “mass lapse” risk charge is to be defined as:
Where the “zero floor” on the “mass lapse” risk charge is to be applied at the company level, and
Reserve RBC 1 method is the maximum of the reserves under the four scenarios as described in RBC 1:
Mortality up (BE+PAD@75%), lapse up (BE+PAD@75%) and expense (BE+PAD@75%)
Mortality up (BE+PAD@75%), lapse down (BE-PAD@75%) and expense (BE+PAD@75%)
Mortality down (BE-PAD@75%), lapse up (BE+PAD@75%) and expense (BE+PAD@75%)
Mortality down (BE-PAD@75%), lapse down (BE-PAD@75%) and expense (BE+PAD@75%)
For clarity:
– the scenario selection under the RBC 1 method should be done at the product group level as per RBC 1; and
– the “mass lapse” risk charge should be calculated on a “net of reinsurance” basis, i.e. Reserve Mass lapse should be calculated on a net of reinsurance basis.
The total insurance risk charge is then defined as:
The following assumptions and PADs are to be adopted in the mass lapse scenario:
Lapse assumption PADs to apply at 85%, 90%, 95%, 97.5%, 99.5%
Lapse Mortality Expense
Projection year 1: 50% lapse rate
Projection year 2+: Best estimate lapse rates
No PADs for all years
PADs as per RBC2 market
testing
PADs as per RBC2 market
testing
“Mass lapse” risk charge = Max {Reserve Mass lapse – Reserve RBC 1 method, 0}
Total insurance risk charge = “Mass lapse” risk charge + Insurance risk charge RBC 1 method
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Note that this means that companies will have to perform additional projections for the mass lapse
calculations to complete the results for all target sufficiency levels:
Additional projections required for reserve calculations under mass lapse scenario
No.
Target
sufficiency
level
Assumptions / PADs
(on net of reinsurance basis)
1 85%
Mass lapse, Mortality up (BE+PAD@85%), expense (BE+PAD@85%)
2 Mass lapse, Mortality down (BE-PAD@85%), expense (BE+PAD@85%)
3 90%
Mass lapse, Mortality up (BE+PAD@90%), expense (BE+PAD@90%)
4 Mass lapse, Mortality down (BE-PAD@90%), expense (BE+PAD@90%)
5 95%
Mass lapse, Mortality up (BE+PAD@95%), expense (BE+PAD@95%)
6 Mass lapse, Mortality down (BE-PAD@95%), expense (BE+PAD@95%)
7 97.5%
Mass lapse, Mortality up ([email protected]%), expense ([email protected]%)
8 Mass lapse, Mortality down ([email protected]%), expense ([email protected]%)
9 99.5%
Mass lapse, Mortality up ([email protected]%), expense ([email protected]%)
10 Mass lapse, Mortality down ([email protected]%), expense ([email protected]%)
Examples
For example, at the 95% target sufficiency level:
“Mass lapse” charge = Max{GPV@95% mass lapse – GPV@95% RBC 1 method, 0}
Total insurance risk charge = “Mass lapse” charge + Insurance risk charge RBC 1 method
= Max{GPV@95% mass lapse – GPV@95% RBC 1 method, 0}
+ (GPV@95% RBC 1 method - GPV@75% RBC 1 method)
Where:
GPV@95% mass lapse = Maximum of:
– Mass lapse, Mortality up (BE+PAD@95%), expense (BE+PAD@95%)
– Mass lapse, Mortality down (BE-PAD@95%), expense (BE+PAD@95%)
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GPV@95% RBC 1 method = Maximum of:
– Mortality up (BE+PAD@95%), lapse up (BE+PAD@95%) and expense (BE+PAD@95%)
– Mortality up (BE+PAD@95%), lapse down (BE-PAD@95%) and expense (BE+PAD@95%)
– Mortality down (BE-PAD@95%), lapse up (BE+PAD@95%) and expense (BE+PAD@95%)
– Mortality down (BE-PAD@95%), lapse down (BE-PAD@95%) and expense (BE+PAD@95%)
GPV@75% RBC 1 method = Maximum of:
– Mortality up (BE+PAD@75%), lapse up (BE+PAD@75%) and expense (BE+PAD@75%)
– Mortality up (BE+PAD@75%), lapse down (BE-PAD@75%) and expense (BE+PAD@75%)
– Mortality down (BE-PAD@75%), lapse up (BE+PAD@75%) and expense (BE+PAD@75%)
– Mortality down (BE-PAD@75%), lapse down (BE-PAD@75%) and expense (BE+PAD@75%)
Simplifications
To simplify, companies may simply adopt the mortality PAD direction (i.e. “Up” or “Down”) that
generally bites, and do not necessarily have to run on both “up” and “down” PADs.
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Negative reserves
Negative policy reserves arise when the present value of expected future policy cash inflows (e.g.
premiums) is greater than the present value of expected future policy cash outflows (e.g. benefits and
expenses) on existing in-force business.
For clarity, the definition of “negative reserves” for Universal life and Unit-linked policies refers to
negative non-unit reserves, not negative total policy reserves (i.e. the sum of unit and non-unit
reserves).
For market testing, negative reserves are to be quantified at either the individual policy level, or at a
plancode level, if quantification at a policy level requires too much effort.
For companies which use actuarial projection software (for e.g. Prophet), a suggestion for quantifying
negative reserves at the individual policy level is to add new variables to quantify the negative
reserves, then running the models to extract the value of negative reserves separately.
For example:
Examples for creating new variables in actuarial projection models
Existing variables New variables for negative reserves
GPV_75_MortUp_LapseUp NegativeReserve_75_ MortUp_LapseUp =
Min{ GPV_75_MortUp_LapseUp, 0}
GPV_75_MortUp_LapseDown NegativeReserve_75_ MortUp_LapseDown =
Min{ GPV_75_MortUp_LapseDown, 0}
GPV_75_MortDown_LapseUp NegativeReserve_75_ MortDown_LapseUp =
Min{ GPV_75_MortDown_LapseUp, 0}
GPV_75_MortDown_LapseDown NegativeReserve_75_ MortDown_LapseDown =
Min{ GPV_75_MortDown_LapseDown, 0}
Present value of cash inflows (e.g.
premiums)
Negative reserves
Present value of cash outflows (e.g.
benefits, expenses)
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Short-term contracts
For market testing, it has been proposed that the parameters for short-term Group business be based
on the risk characteristics of the particular product, for e.g. mortality, morbidity or health. Companies
will therefore need to split Group business into these risk characteristics.
For simplicity, companies may classify the Group business based on the major risk exposure of the
business, or simply classify the full amount as “other” business, for prudence.
Example 1
A Group business product has the following risk exposures:
Mortality risk: THB 10 million sum assured
Morbidity risk: THB 2 million sum assured
For simplicity, the company may classify the full THB 12 million as mortality risk
Example 2
A Group business product has the following risk exposures:
Mortality risk: THB 1 million sum assured
Morbidity risk: THB 2 million sum assured
PA risk: THB 4 million sum assured
For simplicity, the company may classify the full THB 4 million as “other “ business, for prudence,
as the “other” business has the highest risk charge.
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Liability discount rates
The liability discount rates to be adopted for market testing are shown in the table below:
T Spot rate for market testing as at 31 December 2013
1 2.37%
2 2.64%
3 2.97%
4 3.21%
5 3.50%
6 3.67%
7 3.85%
8 3.90%
9 3.97%
10 4.11%
11 4.19%
12 4.23%
13 4.26%
14 4.30%
15 4.40%
16 4.49%
17 4.52%
18 4.52%
19 4.52%
20 4.54%
21 4.58%
22 4.62%
23 4.66%
24 4.71%
25 4.75%
26 4.78%
27 4.77%
28 4.76%
29 4.79%
30 4.83%
31 4.88%
32 4.92%
33 4.95%
34 4.97%
35 4.99%
36 5.00%
37 5.01%
38 5.02%
39 5.02%
40 5.01%
41 5.01%
42 5.00%
43 4.98%
44 4.97%
45 4.95%
46 4.94%
47 4.92%
48 4.92%
49 4.92%
50+ 4.92%
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Optional additional testing
In addition to the prescribed liability discount rates for market testing, it is strongly recommended that companies perform additional testing to assess the volatility of the CAR position under different liability discount rate methods:
Discount rate method 1: Using the risk-free rate at the valuation date;
Discount rate method 2: Using the risk-free rate at the valuation date up to a “last liquid point”
at T = 20, and using the spot rate at T = 20 for T ≥ 21;
Discount rate method 3: Using the risk-free rate at the valuation date up to a “last liquid point”
at T = 20, and using weighted-average rates for T ≥ 21
Suggested test parameters
The following test parameters are recommended:
Multiple valuation dates: The testing should be performed at multiple valuation dates, so as to
capture the behaviour of the CAR ratio under different interest rate environments.
Note that the assets and liabilities should be consistent for a particular valuation date. For
example, if testing at the 30 June 2013 valuation date is performed, the risk charges and CAR
ratio should be determined based on the asset risk charges as at 30 June 2013, and the
insurance liabilities and insurance risk charges should be re-calculated under the discount rate
that is to be tested.
Interest risk charge under RBC 2 method: it is recommended that when testing the effect of
different discount rates, that the proposed RBC 2 market testing method for the calculation of
interest risk charges be adopted, i.e. the liability cash flows should be determined at the 75%
level, and non-guaranteed liabilities should be included.
This is to ensure that the volatility of the CAR position is assessed while taking the proposed
changes to the framework into account.
Target sufficiency level: For simplicity, it is recommended that the additional testing only be
performed at a single target sufficiency level (for example the 95% target sufficiency level).
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Discount rates for additional testing
The discount rates for testing under the methods outlined above are shown below:
Discount rate method 1: Risk-free rates at valuation date
T 30 Sept
2011
31 Dec
2011
31 Mar
2012
30 Jun
2012
30 Sept
2012
31 Dec
2012
31 Mar
2013
30 Jun
2013
30 Sept
2013
31 Dec
2013
1 3.60% 3.12% 3.15% 3.17% 3.04% 2.78% 2.75% 2.58% 2.62% 2.37% 2 3.64% 3.12% 3.37% 3.23% 3.20% 2.90% 2.85% 2.91% 2.99% 2.64% 3 3.57% 3.12% 3.49% 3.27% 3.20% 2.94% 2.90% 3.03% 3.21% 2.97% 4 3.63% 3.12% 3.61% 3.30% 3.31% 3.09% 3.07% 3.29% 3.43% 3.21% 5 3.63% 3.19% 3.69% 3.37% 3.32% 3.18% 3.24% 3.52% 3.63% 3.50% 6 3.72% 3.27% 3.80% 3.51% 3.56% 3.30% 3.34% 3.52% 3.71% 3.67% 7 3.81% 3.27% 3.81% 3.54% 3.63% 3.42% 3.51% 3.78% 3.87% 3.85% 8 3.83% 3.34% 3.85% 3.60% 3.63% 3.53% 3.51% 3.72% 3.96% 3.90% 9 3.87% 3.36% 3.86% 3.59% 3.59% 3.51% 3.50% 3.72% 3.98% 3.97%
10 3.78% 3.40% 3.89% 3.62% 3.66% 3.55% 3.57% 3.83% 4.04% 4.11% 11 3.84% 3.49% 3.95% 3.79% 3.77% 3.70% 3.74% 4.04% 4.15% 4.19% 12 3.95% 3.54% 4.02% 3.85% 3.81% 3.80% 3.81% 4.09% 4.22% 4.23% 13 3.96% 3.62% 4.03% 3.90% 3.88% 3.88% 3.89% 4.12% 4.26% 4.26% 14 3.99% 3.67% 4.07% 3.91% 3.91% 3.93% 3.91% 4.17% 4.30% 4.30% 15 4.04% 3.72% 4.11% 3.92% 3.92% 4.00% 3.99% 4.31% 4.42% 4.40% 16 4.09% 3.78% 4.16% 4.02% 4.01% 4.15% 4.18% 4.51% 4.55% 4.49% 17 4.14% 3.85% 4.20% 4.18% 4.13% 4.27% 4.29% 4.63% 4.62% 4.52% 18 4.18% 3.91% 4.23% 4.25% 4.18% 4.32% 4.30% 4.67% 4.64% 4.52% 19 4.22% 3.95% 4.27% 4.26% 4.18% 4.33% 4.26% 4.68% 4.63% 4.52% 20 4.25% 3.99% 4.29% 4.23% 4.18% 4.32% 4.24% 4.68% 4.63% 4.54% 21 4.27% 4.02% 4.31% 4.23% 4.18% 4.33% 4.25% 4.68% 4.63% 4.58% 22 4.29% 4.04% 4.32% 4.25% 4.19% 4.35% 4.29% 4.70% 4.65% 4.62% 23 4.31% 4.07% 4.33% 4.28% 4.22% 4.38% 4.35% 4.73% 4.70% 4.66% 24 4.33% 4.09% 4.34% 4.32% 4.25% 4.42% 4.42% 4.79% 4.77% 4.71% 25 4.34% 4.12% 4.36% 4.38% 4.28% 4.47% 4.51% 4.89% 4.89% 4.75% 26 4.37% 4.15% 4.40% 4.43% 4.31% 4.54% 4.60% 5.00% 4.99% 4.78% 27 4.39% 4.20% 4.46% 4.49% 4.35% 4.59% 4.64% 5.04% 5.01% 4.77% 28 4.46% 4.31% 4.52% 4.53% 4.41% 4.60% 4.62% 4.97% 4.94% 4.76% 29 4.56% 4.45% 4.57% 4.55% 4.47% 4.57% 4.58% 4.89% 4.87% 4.79% 30 4.67% 4.57% 4.61% 4.57% 4.53% 4.55% 4.54% 4.83% 4.82% 4.83% 31 4.77% 4.68% 4.65% 4.59% 4.58% 4.54% 4.51% 4.78% 4.77% 4.88% 32 4.86% 4.78% 4.68% 4.61% 4.63% 4.53% 4.49% 4.75% 4.75% 4.92% 33 4.96% 4.86% 4.71% 4.63% 4.66% 4.52% 4.48% 4.73% 4.73% 4.95% 34 5.04% 4.93% 4.74% 4.65% 4.69% 4.52% 4.47% 4.72% 4.72% 4.97% 35 5.12% 4.99% 4.77% 4.66% 4.71% 4.52% 4.47% 4.72% 4.73% 4.99% 36 5.20% 5.03% 4.79% 4.68% 4.73% 4.53% 4.48% 4.73% 4.74% 5.00% 37 5.27% 5.07% 4.81% 4.70% 4.73% 4.53% 4.49% 4.75% 4.76% 5.01% 38 5.34% 5.10% 4.83% 4.71% 4.74% 4.54% 4.51% 4.78% 4.79% 5.02% 39 5.40% 5.11% 4.85% 4.73% 4.74% 4.56% 4.53% 4.82% 4.83% 5.02% 40 5.47% 5.12% 4.86% 4.74% 4.73% 4.57% 4.56% 4.87% 4.87% 5.01% 41 5.53% 5.12% 4.88% 4.76% 4.72% 4.59% 4.58% 4.92% 4.92% 5.01% 42 5.58% 5.12% 4.89% 4.77% 4.71% 4.61% 4.62% 4.98% 4.98% 5.00% 43 5.64% 5.10% 4.90% 4.78% 4.70% 4.64% 4.65% 5.04% 5.04% 4.98% 44 5.69% 5.09% 4.91% 4.80% 4.68% 4.66% 4.69% 5.11% 5.10% 4.97% 45 5.74% 5.07% 4.92% 4.81% 4.66% 4.68% 4.73% 5.18% 5.16% 4.95% 46 5.79% 5.04% 4.93% 4.82% 4.63% 4.71% 4.77% 5.25% 5.23% 4.94% 47 5.84% 5.01% 4.94% 4.84% 4.61% 4.74% 4.81% 5.32% 5.30% 4.92% 48 5.89% 4.98% 4.95% 4.85% 4.59% 4.76% 4.86% 5.40% 5.30% 4.92% 49 5.93% 4.95% 4.95% 4.86% 4.59% 4.76% 4.86% 5.40% 5.30% 4.92%
50+ 5.93% 4.95% 4.95% 4.86% 4.59% 4.76% 4.86% 5.40% 5.30% 4.92%
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Discount rate method 2: Using the risk-free rate at the valuation date up to a “last liquid point” at T = 20, and using the spot rate at T = 20 for T ≥ 21
Discount rate method 2: Risk-free rates at valuation date, with last liquid point at T = 20
T 30 Sept
2011 31 Dec 2011
31 Mar 2012
30 Jun 2012
30 Sept 2012
31 Dec 2012
31 Mar 2013
30 Jun 2013
30 Sept 2013
31 Dec 2013
1 3.60% 3.12% 3.15% 3.17% 3.04% 2.78% 2.75% 2.58% 2.62% 2.37%
2 3.64% 3.12% 3.37% 3.23% 3.20% 2.90% 2.85% 2.91% 2.99% 2.64%
3 3.57% 3.12% 3.49% 3.27% 3.20% 2.94% 2.90% 3.03% 3.21% 2.97%
4 3.63% 3.12% 3.61% 3.30% 3.31% 3.09% 3.07% 3.29% 3.43% 3.21%
5 3.63% 3.19% 3.69% 3.37% 3.32% 3.18% 3.24% 3.52% 3.63% 3.50%
6 3.72% 3.27% 3.80% 3.51% 3.56% 3.30% 3.34% 3.52% 3.71% 3.67%
7 3.81% 3.27% 3.81% 3.54% 3.63% 3.42% 3.51% 3.78% 3.87% 3.85%
8 3.83% 3.34% 3.85% 3.60% 3.63% 3.53% 3.51% 3.72% 3.96% 3.90%
9 3.87% 3.36% 3.86% 3.59% 3.59% 3.51% 3.50% 3.72% 3.98% 3.97%
10 3.78% 3.40% 3.89% 3.62% 3.66% 3.55% 3.57% 3.83% 4.04% 4.11%
11 3.84% 3.49% 3.95% 3.79% 3.77% 3.70% 3.74% 4.04% 4.15% 4.19%
12 3.95% 3.54% 4.02% 3.85% 3.81% 3.80% 3.81% 4.09% 4.22% 4.23%
13 3.96% 3.62% 4.03% 3.90% 3.88% 3.88% 3.89% 4.12% 4.26% 4.26%
14 3.99% 3.67% 4.07% 3.91% 3.91% 3.93% 3.91% 4.17% 4.30% 4.30%
15 4.04% 3.72% 4.11% 3.92% 3.92% 4.00% 3.99% 4.31% 4.42% 4.40%
16 4.09% 3.78% 4.16% 4.02% 4.01% 4.15% 4.18% 4.51% 4.55% 4.49%
17 4.14% 3.85% 4.20% 4.18% 4.13% 4.27% 4.29% 4.63% 4.62% 4.52%
18 4.18% 3.91% 4.23% 4.25% 4.18% 4.32% 4.30% 4.67% 4.64% 4.52%
19 4.22% 3.95% 4.27% 4.26% 4.18% 4.33% 4.26% 4.68% 4.63% 4.52%
20+ 4.25% 3.99% 4.29% 4.23% 4.18% 4.32% 4.24% 4.68% 4.63% 4.54%
62
© 2014 Towers Watson. All rights reserved.
Discount rate method 3: Using the risk-free rate at the valuation date up to a “last liquid point” at T = 20, and using weighted-average rates for T ≥ 21
Discount rate method 3: Rates at valuation date, with weighted average rates for T > 20
T 30 Sept
2011
31 Dec
2011
31 Mar
2012
30 Jun
2012
30 Sept
2012
31 Dec
2012
31 Mar
2013
30 Jun
2013
30 Sept
2013
31 Dec
2013
1 3.60% 3.12% 3.15% 3.17% 3.04% 2.78% 2.75% 2.58% 2.62% 2.37%
2 3.64% 3.12% 3.37% 3.23% 3.20% 2.90% 2.85% 2.91% 2.99% 2.64%
3 3.57% 3.12% 3.49% 3.27% 3.20% 2.94% 2.90% 3.03% 3.21% 2.97%
4 3.63% 3.12% 3.61% 3.30% 3.31% 3.09% 3.07% 3.29% 3.43% 3.21%
5 3.63% 3.19% 3.69% 3.37% 3.32% 3.18% 3.24% 3.52% 3.63% 3.50%
6 3.72% 3.27% 3.80% 3.51% 3.56% 3.30% 3.34% 3.52% 3.71% 3.67%
7 3.81% 3.27% 3.81% 3.54% 3.63% 3.42% 3.51% 3.78% 3.87% 3.85%
8 3.83% 3.34% 3.85% 3.60% 3.63% 3.53% 3.51% 3.72% 3.96% 3.90%
9 3.87% 3.36% 3.86% 3.59% 3.59% 3.51% 3.50% 3.72% 3.98% 3.97%
10 3.78% 3.40% 3.89% 3.62% 3.66% 3.55% 3.57% 3.83% 4.04% 4.11%
11 3.84% 3.49% 3.95% 3.79% 3.77% 3.70% 3.74% 4.04% 4.15% 4.19%
12 3.95% 3.54% 4.02% 3.85% 3.81% 3.80% 3.81% 4.09% 4.22% 4.23%
13 3.96% 3.62% 4.03% 3.90% 3.88% 3.88% 3.89% 4.12% 4.26% 4.26%
14 3.99% 3.67% 4.07% 3.91% 3.91% 3.93% 3.91% 4.17% 4.30% 4.30%
15 4.04% 3.72% 4.11% 3.92% 3.92% 4.00% 3.99% 4.31% 4.42% 4.40%
16 4.09% 3.78% 4.16% 4.02% 4.01% 4.15% 4.18% 4.51% 4.55% 4.49%
17 4.14% 3.85% 4.20% 4.18% 4.13% 4.27% 4.29% 4.63% 4.62% 4.52%
18 4.18% 3.91% 4.23% 4.25% 4.18% 4.32% 4.30% 4.67% 4.64% 4.52%
19 4.22% 3.95% 4.27% 4.26% 4.18% 4.33% 4.26% 4.68% 4.63% 4.52%
20 4.25% 3.99% 4.29% 4.23% 4.18% 4.32% 4.24% 4.68% 4.63% 4.54%
21 4.32% 4.23% 4.20% 4.21% 4.18% 4.26% 4.25% 4.36% 4.47% 4.53%
22 4.33% 4.24% 4.22% 4.22% 4.20% 4.28% 4.27% 4.38% 4.50% 4.56%
23 4.34% 4.26% 4.23% 4.25% 4.22% 4.30% 4.31% 4.42% 4.54% 4.61%
24 4.35% 4.27% 4.24% 4.27% 4.25% 4.33% 4.35% 4.47% 4.60% 4.67%
25 4.35% 4.28% 4.26% 4.30% 4.28% 4.37% 4.41% 4.54% 4.69% 4.76%
26 4.36% 4.30% 4.29% 4.34% 4.32% 4.42% 4.47% 4.61% 4.78% 4.84%
27 4.38% 4.33% 4.33% 4.39% 4.37% 4.47% 4.52% 4.66% 4.82% 4.87%
28 4.42% 4.39% 4.40% 4.45% 4.44% 4.51% 4.54% 4.65% 4.78% 4.82%
29 4.51% 4.50% 4.50% 4.53% 4.51% 4.54% 4.54% 4.63% 4.73% 4.78%
30 4.60% 4.62% 4.60% 4.61% 4.57% 4.57% 4.55% 4.61% 4.69% 4.76%
31 4.68% 4.74% 4.68% 4.67% 4.63% 4.59% 4.56% 4.60% 4.65% 4.74%
32 4.76% 4.84% 4.77% 4.73% 4.67% 4.61% 4.56% 4.60% 4.63% 4.73%
33 4.84% 4.94% 4.84% 4.79% 4.72% 4.63% 4.57% 4.60% 4.61% 4.72%
34 4.91% 5.03% 4.91% 4.84% 4.75% 4.65% 4.58% 4.60% 4.61% 4.72%
35 4.98% 5.11% 4.98% 4.89% 4.78% 4.67% 4.59% 4.61% 4.61% 4.73%
36 5.05% 5.19% 5.03% 4.93% 4.81% 4.68% 4.60% 4.62% 4.62% 4.74%
37 5.11% 5.26% 5.09% 4.96% 4.83% 4.69% 4.61% 4.63% 4.63% 4.75%
38 5.17% 5.33% 5.14% 4.99% 4.84% 4.71% 4.63% 4.64% 4.66% 4.77%
39 5.23% 5.39% 5.19% 5.02% 4.86% 4.72% 4.64% 4.66% 4.68% 4.80%
40 5.29% 5.45% 5.23% 5.05% 4.86% 4.73% 4.65% 4.68% 4.72% 4.83%
41 5.34% 5.50% 5.27% 5.07% 4.87% 4.74% 4.66% 4.71% 4.75% 4.86%
42 5.39% 5.55% 5.30% 5.09% 4.87% 4.75% 4.68% 4.73% 4.80% 4.89%
43 5.44% 5.60% 5.34% 5.11% 4.87% 4.75% 4.69% 4.76% 4.84% 4.93%
44 5.49% 5.64% 5.37% 5.12% 4.87% 4.76% 4.71% 4.78% 4.89% 4.97%
45 5.54% 5.68% 5.40% 5.14% 4.86% 4.77% 4.72% 4.81% 4.94% 5.01%
46 5.58% 5.72% 5.43% 5.15% 4.86% 4.77% 4.73% 4.84% 4.99% 5.05%
47 5.63% 5.76% 5.45% 5.16% 4.85% 4.78% 4.75% 4.87% 5.04% 5.09%
48 5.67% 5.80% 5.48% 5.17% 4.84% 4.79% 4.76% 4.90% 5.08% 5.12%
49 5.72% 5.84% 5.51% 5.18% 4.84% 4.79% 4.77% 4.90% 5.08% 5.12%
50+ 5.75% 5.87% 5.52% 5.18% 4.84% 4.79% 4.77% 4.90% 5.08% 5.12%
63
© 2014 Towers Watson. All rights reserved.
Appendix C: Guidance notes for operational risk charge testing
It has been proposed that the following definitions of the operational risk charge be tested in market
testing. The formulae below are shown at the 99.5% level.
Simplified Solvency II approach
Definition of “earned premium”
For market testing, the definition of “earned premium” refers to the gross premium earned over the
previous 12 months prior to the valuation date, without any deductions for reinsurance premiums
ceded.
Definition of reserves
For market testing, the reserves to be applied in the calculation of the operational risk charge should
be on the best estimate basis excluding PADs (i.e. GPV@50%).
The Reserve unit-linked should be the unit reserves attributable to the unit-linked business, i.e. the total
policyholder account value for unit-linked business.
{ }
{ }
Market test approach 1: Based on simplified Solvency II approach:
Where:
Risk ther
{ }
Market test approach 2: Based on simplified Australia approach:
Where:
“ ther” business)
64
© 2014 Towers Watson. All rights reserved.
Simplified Australia approach
Definition of “risk” business
For market testing, the definition of “risk business” relates to the following types of business:
Term products;
Mortgage and credit life products;
Riders;
PA and health products;
Critical illness, health, hospitalisation, and other protection-style products.
Definition of “other” business
For market testing, the definition of “other business” relates to all other forms of life insurance business
that are not included within the “risk business” classification.