Public

Level 2 Document:
ICS Version 2.0 for the monitoring
periodPublicLevel 2 Document:
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March 2020

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About the IAISThe International Association of Insurance Supervisors (IAIS) is a voluntary membershiporganisation of insurance supervisors and regulators from more than 200 jurisdictions. The
mission of the IAIS is to promote effective and globally consistent supervision of the insurance
industry in order to develop and maintain fair, safe and stable insurance markets for the benefit
and protection of policyholders and to contribute to global financial stability.
Established in 1994, the IAIS is the international standard setting body responsible fordeveloping principles, standards and other supporting material for the supervision of theinsurance sector and assisting in their implementation. The IAIS also provides a forum forMembers to share their experiences and understanding of insurance supervision andinsurance markets.
The IAIS coordinates its work with other international financial policymakers and associationsof supervisors or regulators, and assists in shaping financial systems globally. In particular,
the IAIS is a member of the Financial Stability Board (FSB), member of the Standards Advisory
Council of the International Accounting Standards Board (IASB), and partner in the Access to
Insurance Initiative (A2ii). In recognition of its collective expertise, the IAIS also is routinely
called upon by the G20 leaders and other international standard setting bodies for input on
insurance issues as well as on issues related to the regulation and supervision of the global
financial sector.
International Association of Insurance Supervisors
c/o Bank for International Settlements
CH-4002 Basel
Switzerland
Tel: +41 61 280 8090 Fax: +41 61 280 9151
www.iaisweb.org
This document is available on the IAIS website (www.iaisweb.org).
© International Association of Insurance Supervisors (IAIS), 2020.
All rights reserved. Brief excerpts may be reproduced or translated provided the source isstated.

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Contents
Figures and tables ................................................................................................................ 6
1

Introduction .................................................................................................................... 7

2

Components of ICS Version 2.0 for the monitoring period .............................................. 7

3

General Guiding Principles ............................................................................................ 7

4

5

3.1

Substance over Form.............................................................................................. 7

3.2

Proportionality ......................................................................................................... 7

3.3

Look-Through ......................................................................................................... 7

3.4

ICS Rating Categories ............................................................................................ 7

Reference ICS: Perimeter of the ICS Calculation ........................................................... 8
4.1

Scope for Starting ICS Balance Sheet .................................................................... 8

4.2

Development of Starting MAV Balance Sheet ....................................................... 10

Reference ICS: Market-adjusted valuation ................................................................... 10
5.1

Valuation Principles .............................................................................................. 10

5.2

Calculation of the Current Estimate ....................................................................... 11

5.2.1

Basis for calculation and cash-flow projection ................................................ 11

5.2.2

Contract recognition, contract boundaries and time horizon ........................... 12

5.2.3

Data quality and setting of assumptions ......................................................... 13

5.2.4

Management actions...................................................................................... 13

5.2.5

Discounting .................................................................................................... 14

5.3

5.3.1

Definition and underlying principles................................................................ 23

5.3.2

Calculation of the MOCE ............................................................................... 23

5.3.3

Interaction of MOCE with other components .................................................. 23

5.4
6

Margin over Current Estimate (MOCE) ................................................................. 23

Obligations replicable by a portfolio of assets ....................................................... 23

Reference ICS: Qualifying Capital Resources .............................................................. 23
6.1

General considerations ......................................................................................... 23

6.2

Classification of financial instruments.................................................................... 24

6.2.1

Tier 1 unlimited financial instruments ............................................................. 24

6.2.2

Tier 1 limited financial instruments ................................................................. 24

6.2.3

Tier 2 financial instruments (other than structurally subordinated).................. 26

6.2.4

Structurally subordinated Tier 2 financial instruments .................................... 27

6.2.5

Tier 2 Non-paid-up capital .............................................................................. 28

6.3

Capital elements other than financial instruments ................................................. 29

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6.3.1

Tier 1 capital elements ................................................................................... 29

6.3.2

Tier 2 capital elements ................................................................................... 29

6.4

6.4.1

Deductions from Tier 1 capital resources ....................................................... 29

6.4.2

Deductions from Tier 2 capital resources ....................................................... 29

6.4.3

Treatment of encumbered assets................................................................... 29

6.5
7

Capital composition limits...................................................................................... 30

Reference ICS: Capital Requirement – The Standard Method ..................................... 30
7.1

ICS Risks and Calculation Methods ...................................................................... 30

7.1.1

Risk mitigation techniques ............................................................................. 30

7.1.2

Geographical segmentation ........................................................................... 32

7.1.3

Management actions...................................................................................... 33

7.2

Insurance risks...................................................................................................... 33

7.2.1

Grouping of policies for life insurance risks .................................................... 33

7.2.2

Calculation of life insurance risk charge ......................................................... 34

7.2.3

Calculation of Non-Life Risk Charge .............................................................. 39

7.2.4

Calculation of Catastrophe Risk Charge ........................................................ 50

7.3

Market Risks ......................................................................................................... 55

7.3.1

Calculation of the market risk charge ............................................................. 55

7.3.2

Interest rate risk ............................................................................................. 55

7.3.3

Non-Default Spread risk ................................................................................. 58

7.3.4

Equity risk ...................................................................................................... 58

7.3.5

Real estate risk .............................................................................................. 61

7.3.6

Currency risk.................................................................................................. 61

7.3.7

Asset concentration risk ................................................................................. 66

7.4

8

Capital adjustments and deductions ..................................................................... 29

Credit Risk ............................................................................................................ 68

7.4.1

Calculation of Credit risk charge .................................................................... 68

7.4.2

Recognition of collateral, guarantees and credit derivatives ........................... 78

7.4.3

Use of external credit ratings ......................................................................... 85

7.4.4

Supervisor-owned and controlled credit assessment (SOCCA) processes .... 88

7.5

Operational risk ..................................................................................................... 89

7.6

Aggregation/Diversification of ICS Risk Charges .................................................. 90

7.7

Non-Insurance Risk Charges ................................................................................ 90

Reference ICS: Tax ..................................................................................................... 91

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8.1

General principles ................................................................................................. 91

8.2

Deferred tax from the ICS Adjustments ................................................................. 91

8.2.1
8.3

9

Utilisation assessment of DTAs recognised from the ICS Adjustments .......... 91

Tax effect on the ICS insurance capital requirement ............................................. 92

8.3.1

Component a: tax loss carry backs ................................................................ 92

8.3.2

Component b: post-stress future taxable income projections ......................... 93

8.3.3

Components c and d: Deferred taxes ............................................................. 93

Additional Reporting ..................................................................................................... 93
9.1

GAAP Plus ............................................................................................................ 93

9.1.1

Overview........................................................................................................ 93

9.1.2

Japanese GAAP (J-GAAP) Plus Approach .................................................... 94

9.2

Other methods of calculation of the ICS capital requirement (“other methods”) ..... 99

9.2.1

Internal Models .............................................................................................. 99

9.2.2

Dynamic Hedging ........................................................................................ 106

Glossary............................................................................................................................ 107
Treatment of Non-Voting Interest Entities (Asset and Insurance Securitisations)109
Definition of ICS Non-Life Segments ............................................................... 111

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Figures and tables
Figure 1: Categorisation of non-life risk exposure, showing how Singapore Motor-like ICS
Category is aggregated ....................................................................................................... 41
Table 1: Mapping to ICS RC (for instruments not in default).................................................. 7
Table 2: List of currencies and associated instruments and LOT ........................................ 14
Table 3: Eligibility of types of investment ............................................................................. 18
Table 4: Geographical segmentation................................................................................... 33
Table 5: Life risks correlation matrix .................................................................................... 34
Table 6: Mortality risk stress factors .................................................................................... 34
Table 7: Longevity risk stress factors .................................................................................. 35
Table 8: Morbidity/Disability risk stress factors – Location of risk Japan .............................. 37
Table 9: Morbidity/Disability risk stress factors – All other locations of risk .......................... 37
Table 10: Level & Trend Lapse risk stress factors ............................................................... 38
Table 11: Expense risk stress factors .................................................................................. 39
Table 12: Within Category Correlation Factors .................................................................... 40
Table 13: ICS Non-Life Segmentation ................................................................................. 41
Table 14: Credit stress factors for trade credit ..................................................................... 53
Table 15: Market risks correlation matrix ............................................................................. 55
Table 16: Stress factors for Non-Default Spread risk .......................................................... 58
Table 17: Stress factors for hybrid debt/preference shares ................................................. 59
Table 18: Absolute stress factors for implied volatilities ....................................................... 60
Table 19: Equity correlation matrix ...................................................................................... 60
Table 20: Currency risk stress factors ................................................................................. 63
Table 21: Calculation of potential future credit exposure ..................................................... 70
Table 22: Credit risk stress factors for public sector entities ................................................ 74
Table 23: Credit risk stress factors for corporates and reinsurance ..................................... 74
Table 24: Credit risk stress factors for securitisations.......................................................... 74
Table 25: Credit risk stress factors for re-securitisations ..................................................... 75
Table 26: Mapping of ICS CM categories, Method 1 ........................................................... 76
Table 27: Stress factors for agricultural and commercial mortgages, Method 1 ................... 76
Table 28: Stress factors for agricultural and commercial mortgages, Method 2 ................... 77
Table 29: Factors for residential mortgages for which repayment depends on income
generated by the underlying property .................................................................................. 78
Table 30: Factors for residential mortgages for which repayment does not depend on income
generated by the underlying property .................................................................................. 78
Table 31: Mapping of ratings by other rating agencies ........................................................ 86
Table 32: Operational risk exposures and stress factors ..................................................... 89
Table 33: Aggregation matrix between risks ........................................................................ 90

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1

Introduction

No additional information compared to the Level 1 document.

2

Components of ICS Version 2.0 for the monitoring period

No additional information compared to the Level 1 document.

3

General Guiding Principles

3.1

Substance over Form

No additional information compared to the Level 1 document.
3.2

Proportionality

No additional information compared to the Level 1 document.
3.3

Look-Through1.
The look-through approach applies to insurance arrangements and indirect
investments (including unleveraged mutual funds, other collective investment vehicles, etc.)
in order to identify all underlying exposures embedded in such arrangements and investments,
including all indirect holdings that may artificially inflate the qualifying capital resources of anInternationally Active Insurance Group (IAIG).
2.
When a full look-through is not possible, a partial look-through may be applied, along
the lines provided by the Basel III framework1.
3.
When no look-through is possible, the full investment is considered as unlisted equity
for the purpose of calculating the insurance capital standard (ICS) risk charges.
3.4

ICS Rating Categories

4.
Whenever the use of an ICS Rating Category (ICS RC) is needed, IAIGs use theagency ratings listed in the table below. Ratings from AM Best can be used only for purposesof calculating the risk charge on reinsurance exposures. Modifiers such as + or – do not affectthe ICS RC. Where two ratings are listed in a cell, the first rating represents a long-term rating,and the second rating represents the short-term rating mapped to the same ICS RC. The
short-term rating is used only for instruments with a remaining maturity of one year or less.
Table 1: Mapping to ICS RC (for instruments not in default)
ICS RC

S&P

Moody’s

Fitch

JCR

R&I

DBRS

1

AAA

Aaa

AAA

AAA

AAA

AAA

2

AA / A-1

Aa / P-1

AA / F1

AA / J1

AA / a-1

AA / R-1

A+

3

A / A-2

A / P-2

A / F2A / J-2

A / a-2

A / R-2

A

AM Best1 http://www.bis.org/publ/bcbs266.htm.

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4

BBB /
A-3

Baa / P-3

BBB /
F3

BBB /
J-3

BBB / a3

BBB / R3

B+

5

BB

Ba

BB

BB

BB

BB

B

6

B/B

B / NP

B/B

B / NJ

B/b

B / R-4

C+

7

CCC / Candlower

Caa andlower

CCC / C
and
lower

CCC
and
lower

CCC / c
and
lower

CCC /
R-5 and
lower

C and
lower

5.
Additionally, IAIGs can use ratings issued by a rating agency that the banking regulator
in its jurisdiction (or for a subsidiary, in the subsidiary’s jurisdiction) has recognised as anExternal Credit Assessment Institution (ECAI) under the Basel II framework. The ICS RC
corresponding to a rating produced by such an agency is the Basel II rating category to which
the supervisor has mapped the rating (the combined rating class AAA/AA corresponds to ICS
RC 2).
6.

ICS RCs 1 to 4 in the table above are considered as investment grade.

7.

The use of ICS RCs is further developed in section 7.4.3.

4

Reference ICS: Perimeter of the ICS Calculation

4.1

Scope for Starting ICS Balance Sheet

8.
The parameter of the ICS calculation is defined as including all consolidated legal
entities within the IAIG.
9.
The starting point to derive the balance sheet of the insurance group, prior toapplication of any Market-Adjusted Valuation (MAV) adjustments, is the consolidated
Generally Accepted Accounting Principles (GAAP) balance sheet of the Head of the IAIG, as
defined in the Common Framework for the Supervision of IAIGs (ComFrame). For entities that
do not have consolidated GAAP financials, see paragraph 15.
10.
For purposes of the ICS calculation, balance sheets are segregated into insurance
related and non-insurance components. The insurance portion of the balance sheet iscomprised of entities that meet the following definitions:a.

Insurer: Insurance legal entity or insurance group.

b.

Insurance legal entity: A legal entity, including its branches, that is licensed to conduct
insurance, regulated and subject to supervision.

c.

Insurance related entities: Legal entities that mainly exist to support the operations of
the insurer.

11.
Legal entities that comprise the consolidated GAAP balance sheet are further
categorised according to the following definitions in order to apply certain accounting treatmentthat differs from GAAP as well as to derive a capital requirement for non-insurancecomponents:a.

Insurer and Insurance related entities;

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b.

Regulated non-insurance financial entity;c.

Non-regulated non-insurance financial entity; andd.

Non-financial entity.

12.
The ICS follows GAAP accounting rules for consolidation accounting treatment except
for the following:a.

For insurer and insurance related entities that are determined under GAAP to becontrolled as joint ventures2, a proportional consolidation method is used unless it isdetermined through consultation with the group-wide supervisor (GWS) that suchtreatment is not considered feasible; in which case the entity remains unadjusted andreported as per GAAP as an equity method investment.

b.

For insurer and insurance related entities that are determined under GAAP to becontrolled as joint operations3 and reported by recognising its own assets, liabilities
and transactions, including its share of those incurred jointly, the entity may remain
unadjusted (ie proportional consolidation on shared assets).

c.

For non-insurance financial and non-financial entities that are determined under GAAP
to be joint operations and reported by recognizing its own assets, liabilities andtransactions, including its share of those incurred jointly, the entity should instead bereported as an equity method investment.

d.

For non-insurance financial and non-financial entities that are determined under GAAP
to be joint ventures, the entity should be reported as an equity method investment.

13.

Adjustments related to non-voting interest entities4:a.

A non-voting interest entity that has been determined under GAAP to beunconsolidated is consolidated if either the IAIG or its GWS assesses that it poses amaterial risk5 to the group, either individually or in the aggregate.

b.

A securitisation originated within the group may not be consolidated provided that itmeets all of the conditions outlined in Annex 1:.

c.

Notwithstanding the materiality assessment or application of additional criteria, a nonvoting interest entity is consolidated when the GWS determines that the nature, scaleand complexity of the risks cannot be considered insignificant.

2 A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement

have rights to the net assets of the arrangement.
3 A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement
have rights to the assets, and obligations for the liabilities, relating to the arrangement.
4 A non-voting interest entity is an entity where voting or similar rights are not the dominant factor inassessing control. Entities are often thinly capitalised or contain no capital and are designed for a
specific purpose (eg, special purpose entities, structured entities, GP/LP structures, trusts andinvestment partnerships).
5
Material risk in this case relates to the risks posed to the group. In considering what might significantly
contribute to group risks, a firm may assess whether the related entity’s gross assets or gross revenue
are more than 1% of the group’s gross assets or revenue. In addition, an assessment of all immaterial
entities exceeding 5% of the group’s asset’s or revenue, in the aggregate, may indicate that otherentities should be consolidated in order to avoid missing material risks.
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14.
Other non-GAAP adjustments: Structured settlement agreements with third parties arerecorded on a net basis (ie removed from reserves and reinsurance recoverables) when theunderlying claim is settled and the risk to the non-life company is contingent upon the life
insurer (and the guarantee fund, if applicable) having the ability to pay.
15.
Aggregated group balance sheet: IAIGs that do not prepare consolidated or group level
financial statements generate a balance sheet on an aggregated basis to reflect group level
starting balances.
4.2

Development of Starting MAV Balance Sheet

No additional information compared to the Level 1 document.

5

Reference ICS: Market-adjusted valuation

5.1

Valuation Principles

16.
When deriving the adjustments to be made to insurance liabilities, reinsurance
balances, financial investments and instruments, and tax, IAIGs apply the following principles:a.

Property for own use is adjusted to fair value using the fair value guidance under the
IAIG’s GAAP or when the IAIG does not produce a GAAP consolidated balance sheet,the GAAP fair value principles in the IAIG’s jurisdiction.

b.

Mortgages and loans are adjusted to fair value using the fair value guidance underthe IAIG’s GAAP or when the IAIG does not produce a GAAP consolidated balance
sheet, the GAAP fair value principles in the IAIG’s jurisdiction.

c.

Reinsurance recoverables are restated on a basis consistent with the determinationof insurance liabilities. Recoverables on paid and unpaid balances are reported net ofallowances for estimated uncollectable amounts.

d.

Deferred tax assets (DTA) and liabilities (DTL) are treated according to section 7.7.

e.

Deferred acquisition costs and other deferred expenses that are on the balance
sheet at the reporting date are adjusted to zero. Future acquisition costs related tofuture premiums (within contract boundaries – see section 5.2.2) are reflected in thevalue of insurance liabilities.

f.

Premium receivables falling due after the reporting date and related to contracts thatare included in the current estimate calculation are reflected in the valuation of
insurance liabilities as negative cash flows. Premium receivables for which the due
date is prior to the reporting date are not part of the current estimate calculation andremain as assets on the balance sheet.

g.

Loans to policyholders are reported separately and are not netted against insurance
liabilities.

h.

Financial liabilities: upon initial recognition, the valuation of these items is based on
the IAIG’s reported GAAP, and there is no subsequent adjustment to take account ofchanges to the IAIG’s own credit standing.

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5.2

Calculation of the Current Estimate

5.2.1

Basis for calculation and cash-flow projection

5.2.1.1 General considerations
17.
The current estimate calculation is based on the probability weighted average of the
future cash flows, taking into account the uncertainty relating to:a.

The timing, frequency and severity of claim events;b.

Claim amounts and claim inflation, including where relevant any uncertainty on thevalue of indices used to determine claim amounts;c.

The time needed to settle claims;d.

The amount of expenses; ande.

Policyholder behaviour.

18.
Cash flow projections reflect expected future demographic, legal, medical,
technological, social or economic developments, and are based on appropriate inflation
assumptions, recognising the different types of inflation to which the entity can be exposed.
Premium adjustment clauses are also considered, where relevant.
19.
The current estimate is calculated gross of reinsurance and special purpose vehicles(SPV). Recoverables from reinsurance or SPVs are calculated separately and recognised as
an asset.
20.
The projected cash flows include at a minimum the following items within the contract
boundaries:a.

Benefit and claim payments;b.

Direct and indirect expenses incurred;c.

Premiums received;d.

Subrogation payments and recoveries other than from reinsurance and special
purpose vehicles; ande.

Other payments made in order to settle the claims.

21.
All expenses related to existing contracts and contracts that are recognised at thereporting date, but not yet in force, are included in the current estimate calculation. The
expenses estimation assumes that the IAIG will write business in the future. Future expenses
relating exclusively to future business are not considered for the current estimate calculation.
22.
Where a yield curve is needed as input to assess future returns on assets, IAIGs makeuse of the relevant IAIS yield curves with specified adjustments.
5.2.1.2 Options and guarantees
23.
The expected cash flows relating to options and guarantees embedded in theinsurance contract are taken into account for the calculation of the current estimate. All
payments connected to the risks insured, and profit participation payments in particular, aretaken into consideration for the calculation of the value of options and guarantees.
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24.
All options and guarantees are valued using arbitrage-free techniques6 based on theadjusted yield curve as a proxy for the risk-free curve.
5.2.1.3 Policyholder behaviour
25.
Where relevant, expected cash flows reflect the contractual right of policyholders tochange the amount, timing or nature of their benefits.
26.
The likelihood that policyholders will exercise contractual options, including lapses andsurrenders, is taken into account with a prospective view, considering in particular:a.

Past and expected behaviour of policyholders, considering also their reaction to
management actions;b.

How beneficial the exercise of options would be to policyholders under specificcircumstances; andc.

Economic conditions.

27.
To the extent that it is deemed representative of future expected behaviour,
assumptions on policyholder behaviour are based on appropriate statistical and empiricalevidence.
28.
The assumptions concerning policyholder behaviour are consistent with the assumed
investment returns and the yield curves specified by the IAIS.
5.2.1.4 Future discretionary benefits
29.
Future discretionary benefits (FDB) are comprised of all non-guaranteed amounts,
including those bonuses linked to a legal or contractual obligation to distribute a portion of the
IAIG’s financial/underwriting profits to policyholders.
30.
The current estimate recognises FDB expected to be paid consistently with expected
future developments, the economic scenarios on which the liability valuation is based andpolicyholders’ reasonable expectations.
31.
The projection of FDB is also consistent with the yield curve applicable to the contract,
as well as with the modelling of policyholder behaviour as described in section 5.2.1.3.
5.2.2

Contract recognition, contract boundaries and time horizon

32.
A contract is recognised and valued as soon as the IAIG becomes party to that
contract, without any possibility to amend or cancel it, even when the insurance coverage has
not yet started.
33.
A contract is derecognised when all possible claims linked to this contract have been
completely settled, and all future cash-flows are nil.
34.
Only those contracts recognised at the reporting date are taken into account in thecurrent estimate calculation; in particular, no future business is included in the calculation.
35.
All obligations, including future premiums, relating to a recognised contract are taken
into account in the current estimate cash flow projection. However, future premiums (and6 This implies in particular that where relevant, path dependency is taken into account in the valuationof options and guarantees.
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associated claims and expenses) beyond either of the following dates are not considered,unless the IAIG can demonstrate that they are able and willing to compel the policyholder to
pay the premiums:a.

The future date where the IAIG has a unilateral right to terminate the contract or reject
the premiums payable under the contract;b.

The future date where the IAIG has a unilateral right to amend the premiums or the
benefits payable under the contract in such a way that the premiums fully reflect therisks.

36.
For group policies, similar rules apply. If premiums can be amended unilaterally for theentire portfolio in a way that fully reflects the risks of the portfolio, the second condition above
is considered to be met.
5.2.3

Data quality and setting of assumptions

37.

When selecting data for the calculation of the current estimate, IAIGs consider:a.

The quality of data based on the criteria of accuracy, completeness andappropriateness;b.

The use and setting of assumptions made in the collection and processing of data; andc.

The frequency of regular updates and the circumstances that trigger additional
updates.

38.
When only limited or unreliable data are available from the IAIG’s own experience, theIAIG shall supplement its own data with data from other sources. When the characteristics ofthe portfolio differ from those of the population represented in the external data used, theexternal data are adjusted in order to ensure consistency with the risk characteristics of the
IAIG’s portfolio.
39.
The assumptions used to calculate the current estimate reflect current expectations
based on all information available. This requires an assessment of expected future conditions,in particular as soon as:a.

There is evidence that historical trends will not continue, that new trends will emerge
or that economic, demographic and other changes may affect the cash flows that arise
from the existing insurance contracts.

b.

There have been changes in underwriting procedures and claims management
procedures that may affect the relevance of historical data to the portfolio of insurance
contracts.

c.

Historical data do not capture types of events that may have an impact on the current
estimate.

5.2.4

Management actions

40.
The management actions recognised for the calculation of the current estimate areconfined to decisions by the IAIG that have an impact on future bonuses or other discretionary
benefits for participating/profit sharing and adjustable products.

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41.
Assumed future management actions are consistent with the IAIG’s current businesspractice and business strategy unless the GWS is satisfied that there is sufficient evidence
that the IAIG will change its practices or strategy.
42.
When calculating the current estimate, future management actions are taken into
account only if they can reasonably be expected to be carried out under the specificcircumstances to which they apply.
43.
The assumptions about future management actions take into account the time needed
to implement them, as well as any resulting incremental expenses.
5.2.5

Discounting

5.2.5.1 Determination of yield curves for current estimate discounting
No additional information compared to the Level 1 document.
5.2.5.2 Determination of the risk-free yield curve
44.
For all currencies, the start of the third segment as referred to in paragraph 47 of the
ICS Level 1 document is the later of the following:

30 years after the Last Observed Term (LOT); and60 years.

45.
The list of currencies for which a risk-free yield curve is calculated and the associatedobserved instruments and LOT are provided in Table 2.
Table 2: List of currencies and associated instruments and LOT

Currency

Observed
Instrument

LOT (years)

Long-term
ForwardRate

AUD

Australian Dollar

Government Bonds

30

3.8%

BRL

Brazilian Real

Government Bonds

10

7.0%

CAD

Canadian Dollar

Government Bonds

30

3.8%

CHF

Swiss Franc

Government Bonds

20

2.8%

CLP

Chilean Peso

Swaps

10

5.0%

CNY

Yuan Renminbi

Government Bonds

10

6.0%

COP

Colombian Peso

Swaps

10

6.0%

CZK

Czech Koruna

Swaps

15

3.8%

DKK

Danish Krone

Swaps

20

3.8%

EUR

Euro

Swaps

20

3.8%

GBP

Pound Sterling

Swaps

50

3.8%

HKD

Hong Kong Dollar

Swaps

15

4.4%

HUF

ForintGovernment Bonds

15

6.0%

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IDR

Rupiah

Swaps

10

8.0%

ILS

New Israeli Shekel

Swaps

20

4.4%

INR

Indian Rupee

Swaps

10

7.0%

JPY

Yen

Government Bonds

30

3.8%

KRW

Won

Government Bonds

20

4.4%

MXN

Mexican Peso

Government Bonds

20

5.0%

MYR

Malaysian Ringgit

Government Bonds

15

5.0%

NOK

Norwegian Krone

Swaps

10

3.8%

NZD

New Zealand Dollar

Swaps

20

4.8%

PEN

Sol

Swaps

10

6.0%

PHP

Philippine Peso

Swaps

10

7.0%

PLN

Zloty

Government Bonds

10

5.0%

RON

Romanian Leu

Government Bonds

10

5.0%

RUB

Russian Ruble

Swaps

10

7.0%

SAR

Saudi Riyal

Swaps

15

6.0%

SEK

Swedish Krona

Swaps

10

3.8%

SGD

Singapore Dollar

Government Bonds

20

3.8%

THB

Baht

Government Bonds

10

5.0%

TRY

Turkish Lira

Government Bonds

10

7.0%

TWD

New Taiwan Dollar

Government Bonds

10

4.4%

USD

US Dollar

Government Bonds

30

3.8%

ZAR

Rand

Government Bonds

30

7.0%

46.

The Long Term Forward Rate (LTFR) is the sum of the following two components:a.

The expected real interest rate, computed as the simple arithmetic mean of annual realinterest rates. Annual real rates 𝑟 are calculated as:𝑟 =𝑠ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑎𝑡𝑒 − 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
1 + 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒

The expected real interest rate is rounded to the nearest five basis points.
b.

The expected inflation target, computed as follows:

For currencies for which the central bank has announced an inflation target, theexpected inflation is based on that inflation target. In this case the expected inflation
rate is:o1%, where the inflation target is lower than or equal to 1%;

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o
o
o


2%, where the inflation target is higher than 1% and lower than 3%;
3%, where the inflation target is higher or equal to 3% and lower than 4%; and4%, otherwise.

For currencies for which the central bank has not announced an inflation target, theexpected inflation rate is set to 2%. However, where past inflation experience andprojection of inflation both clearly indicate that the inflation in a currency area ismaterially higher or lower than 2%, the expected inflation rate is chosen in accordancewith those indicators.

47.
In order to determine the expected real interest rate, countries are grouped in thefollowing three geographical areas:a.

Geographical area 1, comprised of the following currency areas: AUD, CAD, CHF,CZK, DKK, EUR, GBP, JPY, NOK, NZD, SEK, SGD, USD;b.

Geographical area 2, comprised of the following currency areas: HKD, ILS, KRW,
TWD;

c.

Geographical area 3, comprised of all other currency areas.

48.

The value of the expected real interest rate component is:

1.8% for geographical area 1;2.4% for geographical area 2; and

3.0% for geographical area 3.

49.
The maximum annual change to the LTFR is limited to 15 bps. The LTFR is changed
according to the following formula:
𝐿𝑇𝐹𝑅𝑡

𝐿𝑇𝐹𝑅𝑡−1 + 15𝑏𝑝𝑠, 𝑖𝑓 𝐿𝑇𝐹𝑅𝑡∗ ≥ 𝐿𝑇𝐹𝑅𝑡−1 + 15𝑏𝑝𝑠= {𝐿𝑇𝐹𝑅𝑡−1 − 15𝑏𝑝𝑠, 𝑖𝑓 𝐿𝑇𝐹𝑅𝑡∗ ≤ 𝐿𝑇𝐹𝑅𝑡−1 − 15𝑏𝑝𝑠
𝐿𝑇𝐹𝑅𝑡∗ , 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒

where:


𝐿𝑇𝐹𝑅𝑡 denotes the LTFR of year 𝑡, after limitation of the annual change;



𝐿𝑇𝐹𝑅𝑡−1 denotes the LTFR of year 𝑡 − 1, after limitation of the annual change; and

𝐿𝑇𝐹𝑅𝑡∗ denotes the LTFR of year 𝑡, before limitation of the annual change.

50.
The following spread over the LTFR is added to all LTFR calculated according toparagraphs 46 to 49 above:

20 basis points for geographical area 1;

25 basis points for geographical area 2; and

35 basis points for geographical area 3.

5.2.5.3 Determination of the adjustment to the risk-free yield curve
5.2.5.3.1 Classification criteria

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51.
Insurance liabilities are eligible for the Top Bucket if they meet all of the following
criteria:a.

They belong to the category of life insurance and disability annuities in payment withno cash benefits on withdrawal, taking into account e) below.

b.

The portfolio of assets to cover the insurance liabilities is identified and, together withthe corresponding liabilities, it is managed separately, without being used to makepayments relating to other business of the IAIG.7c.

The expected cash flows of the identified portfolio of assets replicate the expectedcash flows of the portfolio of insurance liabilities in the same currency, up to the LOTof the risk-free yield curve for the relevant currency. Any mismatch, addressed throughthe carry forward of cash generated from excess of asset cash flows at previous
maturities, does not give rise to material risks. Carry forward of cash is limited to 10%of the total undiscounted liability cash flows up to the LOT. Where insurance liabilities
are backed with assets denominated in a different currency, those asset cash flows
are taken into account in the cash flow testing, provided that the currency mismatch is
fully hedged and the cost of hedging is deducted from the asset cash flows.

d.

The contracts underlying the insurance liabilities do not include future premiums.

e.

The portfolio of insurance liabilities includes either no surrender option for thepolicyholder or only a surrender option where the surrender value does not exceed thevalue of the assets identified for this portfolio at the reporting date and at all future
points in time.

52.

No unbundling is allowed when assessing eligibility for the Top Bucket.

53.
Insurance liabilities are eligible for the Middle Bucket if they meet all of the following
criteria:a.

The portfolio of assets to cover the insurance liabilities is identified and, together withthe corresponding liabilities, is managed separately, without being used to coverlosses arising from other business of the IAIG.7

b.

The portfolio of insurance liabilities include either no surrender option for thepolicyholder or only a surrender option where the surrender value does not exceed thevalue of the assets identified for this portfolio at the reporting date.

c.

The ICS Lapse risk charge does not represent more than 5% of the current estimateof the liabilities discounted using the risk-free yield curve.

d.

The total market value of assets identified for this portfolio is, at the reporting date,greater than the current estimate of the liabilities calculated using the risk-free yield

7 For both the Top and Middle Buckets, the separate management of assets does not refer to a legal

ring fencing but to a portfolio segmentation of clearly identified assets that would support an identified
group of insurance liabilities over their lifetime. Should a portfolio be restructured within the entity, thisbeing exceptional, the assets contained therein can only be transferred to another portfolio when donein conjunction with their corresponding liabilities. This does not preclude changes in investments withina portfolio in the normal course of business.
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curve. For the calculation of the total market value of assets, all assets identified forthis portfolio are taken into account, irrespective of their classification in Table 3.
e.

The contracts underlying the liabilities do not include future premiums or include only
future premiums that are contractually fixed.

54.

No unbundling is allowed when assessing eligibility for the Middle Bucket.

55.

All liabilities that are not in the Top or Middle Bucket belong to the General Bucket.

5.2.5.3.2 Adjustments to the yield curve
5.2.5.3.2.1

Eligible investments

56.
For the purpose of calculating the Top Bucket and Middle Bucket adjustments, theeligibility of types of investments is specified in the following table:
Table 3: Eligibility of types of investment
Type of investment
Cash and other liquid assets not for investment purposes

Eligible(Excluded from portfolio)

Investment income receivable/accrued

N

Fixed Interest Government Bonds

Y

Fixed interest Corporate Bonds

Y

Fixed Interest Municipal Bonds

Y

Variable Interest Government Bonds

Y

Variable interest Corporate Bonds

Y

Variable Interest Municipal Bonds

Y

Convertible notesN

Residential Mortgage LoansY

Non-residential Mortgage LoansY

Other (non-mortgage) Loans

Y

Loans to policyholders

Y

Residential Mortgage Backed Securities

Y

Commercial Mortgage Backed Securities

Y

Other structured securities

Y

Insurance Linked Securities

N

Equities

N

Hedge Funds

N

Private equity

N

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Real estate (for investment purposes)

N

Infrastructure debt

Y

Infrastructure equity

N

Other investment assets

N

57.
Assets backing unit-linked or separate account insurance liabilities are not taken into
account when those insurance liabilities are valued using the asset replication approachpresented in section 5.4 of the ICS Level 1 Document.
58.
Government bonds include only debt instruments issued or guaranteed by central
governments (excluding exposures to municipal and other public sector entities).
59.
Assets featuring call options (used at the discretion of the issuer) are ineligible to backliabilities, unless it can be demonstrated that the exercise of the option does not imply a loss
to the IAIG and that the matching of the liability cash flows can be maintained.
5.2.5.3.2.2

Top Bucket

60.
The adjustment for the Top Bucket is based on the average spread above the risk-freeyield curve of the eligible assets, as listed in Table 3, identified by the IAIG to back the portfolioof liabilities meeting the Top Bucket criteria.
61.
The IAIG may identify different portfolios, which will lead to the calculation of
portfolio-specific adjustments.
62.
A cap at the level of the ICS RC 4 spread applies for assets with a lower credit quality.
The ICS RC 4 cap is based on the spreads earned by the IAIG for ICS RC 4 rated assets
denominated in the same currency. Where no such assets exist, the spread defined by the
IAIS for the Middle Bucket adjustment calculation is used.
63.
The spread is adjusted for credit risk and any other risk, using the same risk correction
parameters as specified in paragraph 68.
64.
For the Top Bucket, 100% of the spread adjustment is added to the risk-free rate todiscount insurance liabilities.
65.
IAIGs use the relevant adjusted yield curves according to the currency of the insurance
liability cash outflows.
66.
Where insurance liabilities are backed with assets denominated in a different currency,
the spread adjustment for the currency of the liability includes spreads which may be earned
by the IAIG in those assets, provided that the currency mismatch is hedged. The cost ofhedging is deducted from the Top Bucket adjustment.
67.
The spread adjustment determined according to this methodology is applied as aparallel shift up to the run-off of the liabilities, which may be beyond the relevant LOT.

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5.2.5.3.2.3

Middle Bucket

68.
For the Middle Bucket, the IAIS provides spreads and risk corrections by credit quality,
duration and currency, which serve as a basis for the calculation of the Middle Bucket
adjustment.
69.
The Middle Bucket spread adjustment is a group-wide adjustment calculated using the
Weighted Average of Multiple Portfolios (WAMP) approach based on the eligible assetsbacking the Middle Bucket liabilities. The Middle Bucket spread adjustment is currency specificbut not portfolio-specific; it is applied to all Middle Bucket portfolios in the same currency.
70.
Where insurance liabilities are backed with assets denominated in a different currency,
the weighted average calculation of the spread adjustment for the currency includes spreads
earned by the IAIG in those assets, provided that the currency mismatch is hedged. The costof hedging is deducted from the adjustment to the spread recognised in the calculation of the
Middle Bucket adjustment. In case a rolling hedge strategy is in place, the cost of hedging isdeducted from the spread adjustment and an additional haircut of 20% is applied to the spread.
71.
The spread adjustment is calculated according to the WAMP methodology, as
specified in the following paragraphs.
The 𝑊𝑎𝑚𝑝𝑠𝑝𝑟𝑒𝑎𝑑 for a given currency is calculated as follows:

72.

𝑊𝑎𝑚𝑝𝑠𝑝𝑟𝑒𝑎𝑑 =𝑤𝑔𝑜𝑣 × 𝑠𝑝𝑟𝑒𝑎𝑑𝑔𝑜𝑣 𝑎𝑓𝑡𝑒𝑟 𝑅𝐶+𝑤𝐼𝐶𝑆 𝑅𝐶1 × (∑𝐼𝐶𝑆 𝑅𝐶1 𝑎𝑓𝑡𝑒𝑟 𝑅𝐶

𝐼𝐶𝑆 𝑅𝐶1
𝑤𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
𝑏𝑎𝑛𝑑 × 𝑠𝑝𝑟𝑒𝑎𝑑𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑏𝑎𝑛𝑑 )𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛𝑠+𝑤𝐼𝐶𝑆 𝑅𝐶2 × (∑𝐼𝐶𝑆 𝑅𝐶2 𝑎𝑓𝑡𝑒𝑟 𝑅𝐶

𝐼𝐶𝑆 𝑅𝐶2
𝑤𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
𝑏𝑎𝑛𝑑 × 𝑠𝑝𝑟𝑒𝑎𝑑𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑏𝑎𝑛𝑑 )𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛𝑠+⋯+𝑤𝑁𝑜𝑛 𝑒𝑙𝑖𝑔𝑖𝑏𝑙𝑒 × 0
where:--

𝑤𝑔𝑜𝑣 is the weight of government bonds;
𝑤𝐼𝐶𝑆 𝑅𝐶𝑖 is the weight of debt instruments belonging to ICS risk category i;
𝐼𝐶𝑆 𝑅𝐶𝑖
𝑤𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
𝑏𝑎𝑛𝑑 is the weight of debt instruments that belong to ICS risk category i
within the considered duration band;𝑤𝑛𝑜𝑛−𝑒𝑙𝑖𝑔𝑖𝑏𝑙𝑒 is the weight of non-eligible assets in the total portfolio of assets forthat currency;
𝑠𝑝𝑟𝑒𝑎𝑑𝑔𝑜𝑣 𝑎𝑓𝑡𝑒𝑟 𝑅𝐶 is the spread after risk correction corresponding to government
bonds. When a government bond rate is used for the risk-free yield curve, theapplied spread is nil; and𝐼𝐶𝑆 𝑅𝐶𝑖 𝑎𝑓𝑡𝑒𝑟 𝑅𝐶

𝑠𝑝𝑟𝑒𝑎𝑑𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑏𝑎𝑛𝑑 is the spread after risk correction corresponding to debt
instruments that belong to ICS risk category i within the considered duration band.

73.
Debt instruments in ICS RC 4 and lower, as well as unrated debt instruments, areallocated to the ICS RC 4.
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74.
In the case of currency unions, the sovereign exposure (and the corresponding weightin the WAMP calculation) is split by jurisdiction within the currency union.
75.

The Total Observed Matching (𝑇𝑂𝑀) ratio is computed as follows:
𝑀−1
𝑇𝑂𝑀 = min (, 100%)
min(𝐿𝑂𝑇, 𝑙𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑜𝑓 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦)

where:
𝑙𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑜𝑓 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 is the maturity after which the insurance liabilities are not expected togenerate any cash flow, and M is the first maturity for which, under the cash flow test describedin paragraph 51.c, either the cash carry forward limit of 10% is breached or the remaining cash
becomes negative. For the purpose of determining M, asset cash flows in a different currency
than liability cash flows can be taken into consideration provided that either:

the asset cash flows are fully hedged; ora rolling hedge is in place and the replacement frequency of the hedge is not less than
one month. In this case, a 20% haircut is applied on the asset cash flows.

The cost of hedging is deducted from the expected cash flows.
76.
The final spread applied to the yield curve is computed in a way to ensure that the
spread adjustment for the Middle Bucket is greater or equal to the spread adjustment for the
General Bucket.
𝑆𝑝𝑟𝑒𝑎𝑑 𝐴𝑑𝑗𝑀𝐵 = max[90% . (𝑇𝑂𝑀. 𝑊𝑎𝑚𝑝𝑠𝑝𝑟𝑒𝑎𝑑+ (1 − 𝑇𝑂𝑀) 𝑆𝑝𝑟𝑒𝑎𝑑 𝐴𝑑𝑗𝐺𝐵 ), 80% . 𝑆𝑝𝑟𝑒𝑎𝑑 𝐴𝑑𝑗𝐺𝐵 ]77.
The spread adjustment determined according to this methodology is applied as aparallel shift up to year 𝑀. After that maturity, the spread adjustment is phased out in such a
way that the resulting spot curve remains above the spot curve for the corresponding General
Bucket.
5.2.5.3.2.4

General Bucket

78.
The spread adjustment for the General Bucket (𝑆𝑝𝑟𝑒𝑎𝑑 𝐴𝑑𝑗𝐺𝐵 ) is provided by the IAIS,
based on a representative portfolio that reflects the assets typically held by IAIGs in aparticular currency.
79.

The spread adjustment includes a correction for credit risk and any other risk.

80.
For corporate bonds, the aforementioned correction is derived from the annualised
cumulative default experience for a hypothetical 10-year bond, computed on the basis oftransition matrices.
81.
For government bonds, the risk correction is determined depending on the data
underpinning the risk-free rate. Where risk-free rates are determined based on swap rates,
risks other than liquidity risk are assumed to represent 30% of the 10-year average spread.

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For currencies where risk-free rates are based on government bond rates, no risk correction
is applied.
82.
80% of the spread adjustment determined according to this methodology is applied asa parallel shift up to the LOT. For Segments 2 and 3 of the adjusted yield curve, the same
extrapolation methodology as used for determining the risk-free yield curve is applied to theadjusted yield curve.
83.
IAIGs use the relevant adjusted yield curves according to the currency of the insurance
liability cash outflows.
5.2.5.3.3 Alternative adjustments for the General Bucket
84.
IAIGs may use two alternative spread adjustments for the calculation of the General
Bucket adjustment:One specific adjustment for cases where the same currency is shared among different
jurisdictions; andOne specific adjustment for cases where the IAIG is materially invested in assets
denominated in a currency that is different from the liabilities they are backing.

85.
Under those two mechanisms, IAIGs may replace the spreads used in thedetermination of the spread adjustment for a given currency; the weights of the different asset
categories remain unchanged.
5.2.5.3.3.1

Shared currency mechanism

86.
Where the same currency is shared among different jurisdictions, IAIGs may replace
the spreads provided by the IAIS for each Risk Category in that currency (𝑆𝑟𝑐𝑐𝑟𝑛𝑐𝑦 ) by the
spreads (𝑆𝑟𝑐 ) defined as follows:
If:
𝑆𝑟𝑐𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 − 𝑆𝑟𝑐𝑐𝑟𝑛𝑐𝑦 ≥ 50𝑏𝑝𝑠
then:
𝑆𝑟𝑐 = 𝑆𝑟𝑐𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 − 50𝑏𝑝𝑠
where:
𝑆𝑟𝑐𝑐𝑟𝑛𝑐𝑦 = spread for currency 𝑐𝑟𝑛𝑐𝑦 and Risk Category 𝑟𝑐, as provided by the IAIS
𝑆𝑟𝑐𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 = modified spread for Risk Category 𝑟𝑐, using a weighted average of the
spreads of the specific jurisdictions (within the common currency) to which the IAIG isactually exposed

5.2.5.3.3.2

Foreign asset mechanism

87.
IAIGs may replace the spreads provided by the IAIS for each Risk Category in thatcurrency (𝑆𝑟𝑐𝑐𝑟𝑛𝑐𝑦 ) by the spreads (𝑆𝑟𝑐 ) defined as follows:
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If:Hedged eligible foreign currency denominated assets≥ 5%
Total investments (excl.cash) converted into the currency of the liability

then
𝑆𝑟𝑐 = 𝑆𝑟𝑐𝑐𝑟𝑛𝑐𝑦 + 50% ∗ (𝑆𝑟𝑐𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 − 𝑆𝑟𝑐𝑐𝑟𝑛𝑐𝑦 )where:
𝑆𝑟𝑐𝑐𝑟𝑛𝑐𝑦 = spread for currency 𝑐𝑟𝑛𝑐𝑦 and Risk Category 𝑟𝑐, as provided by the IAIS
𝑆𝑟𝑐𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 = modified spread including the extra spread that can be earned from thehedged assets denominated in foreign currency that exceed the 5% threshold. Where
the 5% threshold is exceeded by a combination of exposures in multiple asset
categories, the threshold is proportionally allocated to the different asset categories.
5.3

Margin over Current Estimate (MOCE)

5.3.1

Definition and underlying principles

No additional information compared to the Level 1 document.
5.3.2

Calculation of the MOCE88.
The 85th percentile is used to compute the life component of the MOCE and the 65th
percentile is used for the non-life component.
5.3.3

Interaction of MOCE with other components

No additional information compared to the Level 1 document.
5.4

Obligations replicable by a portfolio of assets

89.
Insurance liabilities are considered to be replicated reliably when their cash flows arein every circumstance precisely matched by cash flows of corresponding assets.
90.
The cash flows associated with insurance liabilities are not considered to be reliably
replicated when:a.

Policyholders can exercise contractual options, including lapses and surrenders.

b.

Obligations depend on mortality, disability, sickness and morbidity rates.

c.

Expenses associated with insurance obligations cannot be reliably replicated.

91.
Financial instruments used to replicate insurance liabilities must be traded in deep,
liquid and transparent markets.

6

Reference ICS: Qualifying Capital Resources

6.1

General considerations

No additional information compared to the Level 1 document.
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6.2

Classification of financial instruments

6.2.1

Tier 1 unlimited financial instruments

92.
Financial instruments that meet all of the following criteria qualify as ICS Tier 1
unlimited capital resources:a.

The instrument is fully paid-up.

b.

The instrument is in the form of issued capital such that it is the first instrument toabsorb losses as they occur.

c.

The instrument represents the most subordinated claim in a winding-up of the IAIG
where the holder has a claim on the residual assets proportional to its share of theissued share capital after all other claims have been repaid, and which is not subject
to a fixed or capped amount.

d.

The instrument is perpetual (ie it does not have a maturity date).

e.

The principal amount of the instrument is not repaid outside winding-up, other than bymeans of discretionary repurchase permitted under national law.

f.

There is not an expectation created by the IAIG at issuance, through the terms of the
instrument or otherwise, that the IAIG will repurchase or cancel the instrument.

g.

There are no circumstances under which a distribution is obligatory (non-payment of a
distribution is, therefore, not an event of default).

h.

Distributions are paid out of distributable items, including retained earnings.

i.

The instrument is neither undermined nor rendered ineffective by encumbrances. In
particular, the priority of claims is not compromised by guarantees or security
arrangements given by either the IAIG or a related entity over which the IAIG exercises
control or significant influence, for the benefit of investors.

j.

Neither the IAIG nor a related entity over which the IAIG exercises control or significant
influence has purchased the instrument, nor has the IAIG directly or indirectly funded
the purchase of the instrument.

k.

The paid-in amount is recognised as equity capital (ie is not recognised as a liability)
where a determination that liabilities exceed assets constitutes a test of insolvency.

6.2.2

Tier 1 limited financial instruments

93.
Financial instruments that do not qualify as Tier 1 unlimited capital resources, but meetall of the following criteria, qualify as ICS Tier 1 limited capital resources:a.

The instrument is fully paid-up.

b.

The instrument is subordinated to policyholders and other non-subordinated creditors
and holders of Tier 2 financial instruments but may rank senior to holders of Tier 1
unlimited financial instruments.

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c.

The instrument is perpetual (ie it does not have a maturity date). For mutual IAIGs8,
the requirement for an instrument to be perpetual is considered to be met if redemption
at maturity (for a dated instrument) can be deferred subject to supervisory approval ora lock-in9 feature, and where an instrument has an initial maturity of at least ten years.

d.

The instrument does not contain any incentive to redeem, such as a step-up.

e.

The instrument is only callable at the option of the issuer after a minimum of five years
from the date of issue and prior supervisory approval is required for any redemption.
However, extraordinary calls (defined as tax and regulatory event calls) are permitted
at any time after issuance of an instrument, subject to prior supervisory approval, andprovided the IAIG was not in a position to anticipate such a call at the time of issuance.
Also, an IAIG may not exercise the extraordinary call within the first five years of
issuance unless, prior to or concurrent with the exercise of the call, it replaces thecalled instrument with capital of the same or better quality, and the replacement of thecalled instrument is made on terms that are sustainable for the income capacity of the
IAIG.

f.

The instrument may be repurchased by the issuer at any time with prior supervisory
approval.

g.

There is not an expectation created by the IAIG, through the terms of the instrument
or otherwise, that the IAIG will repurchase the instrument or exercise any right to callthe instrument, or that the repurchase or redemption will receive supervisory approval.

h.

The IAIG has full discretion at all times to forego or cancel distributions (ie dividends
and coupon payments are non-cumulative). The IAIG’s obligation to pay missed
distributions is forever extinguished and non-payment is not an event of default.

i.

Distributions are paid out of distributable items, including retained earnings.

j.

The instrument does not have distributions that are linked to the credit standing or
financial condition of the IAIG or a related entity, such that those distributions may
accelerate winding-up.

k.

The instrument is neither undermined nor rendered ineffective by encumbrances. In
particular, the priority of claims is not compromised by guarantees or security
arrangements given by either the IAIG or a related entity over which the IAIG exercises
control or significant influence, for the benefit of investors.

l.

Neither the IAIG nor a related entity over which the IAIG exercises control or significant
influence has purchased the instrument, nor has the IAIG directly or indirectly funded
the purchase of the instrument.

m.

The paid-in amount is recognised as equity capital (ie is not recognised as a liability)
where a determination that liabilities exceed assets constitutes a test of insolvency.

8 Characteristics of a mutual group typically include the inability to issue substantial amounts of common

equity and an ultimate parent within the group that cannot issue common equity.
9 A lock-in feature is a requirement for the IAIG to suspend repayment or redemption if it is in breach of
its applicable regulatory capital requirement or would breach it if the instrument is repaid or redeemed.
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n.

The instrument does not possess features that hinder recapitalisation, such asprovisions that require the issuer to compensate investors if a new instrument is issued
at a lower price during a specified time frame.

o.

If the instrument is not issued out of an operating entity or the holding company of the
IAIG (eg it is issued out of an SPV), proceeds are made immediately available, without
limitation, to an operating entity or the holding company of the IAIG, through theissuance of an instrument that meets or exceeds all of the other criteria for inclusion in
Tier 1 limited capital resources (ie the SPV may only hold assets that are intercompany
instruments issued by the IAIG or a related entity with terms and conditions that meetor exceed the criteria for Tier 1 limited capital resources).

6.2.3

Tier 2 financial instruments (other than structurally subordinated)

94.
Financial instruments that do not qualify as Tier 1 (unlimited or limited) capital
resources, but meet all of the following criteria qualify as Tier 2 capital resources:a.

The instrument is fully paid-up.

b.

The instrument is subordinated to policyholders and other non-subordinated creditorsof the IAIG.

c.

The instrument has an initial maturity of at least five years with its effective maturity
date defined to be the earlier of:i.

The first call date, together with a step-up or other incentive to redeem the
instrument; andii. The contractual maturity date fixed in the instrument’s terms and conditions.
d.

The instrument’s availability to absorb losses as it nears its effective maturity is
captured by either:i.

Decreasing the qualifying amount of the instrument from 100% to 0% on astraight-line basis in the final five years prior to maturity; orii. The existence of a lock-in clause.
e.

If the instrument is callable within the first five years from the date of issue:

Any such call is at the option of the issuer only;

Any such call is subject to supervisory approval; andThe called instrument must be replaced in full before or at redemption by a newissuance of the same or higher quality instrument.

Other than in cases of replacement outlined above, the instrument is only callable atthe option of the issuer after a minimum of five years from the date of issue and priorsupervisory approval is required for any redemption prior to contractual maturity.10
10 In the absence of a requirement for prior supervisory approval, this criterion is considered to be met if thefollowing conditions are met:•
The terms of the financial instrument include a lock-in feature that prevents redemption when a firm does notcomply with its regulatory capital requirement (or where redemption would lead to non-compliance);•
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f.

The instrument may be repurchased by the issuer at any time with prior supervisory
approval.

g.

There is not an expectation created by the IAIG, through the terms of the instrument
or otherwise, that the IAIG will repurchase the instrument or exercise its right to callthe instrument, or that the repurchase or redemption will receive supervisory approval.

h.

The instrument does not have distributions that are linked to the credit standing or
financial condition of the IAIG or a related entity, such that those distributions may
accelerate winding-up.

i.

The instrument does not give holders rights to accelerate the repayment of scheduled
principal or coupon payments, except in winding-up.

j.

The instrument is neither undermined nor rendered ineffective by encumbrances. In
particular, the priority of claims is not compromised by guarantees or security
arrangements given by either the IAIG or a related entity over which the IAIG exercises
control or significant influence, for the benefit of investors.

k.

Neither the IAIG nor a related entity over which the IAIG exercises control or significant
influence has purchased the instrument, nor has the IAIG directly or indirectly funded
the purchase of the instrument.

l.

If the instrument is not issued out of an operating entity or the holding company of the
IAIG (eg it is issued out of an SPV), proceeds are made immediately available, without
limitation, to an operating entity or the holding company of the IAIG, through theissuance of an instrument that meets or exceeds all of the other criteria for inclusion in
paid-up Tier 2 capital resources (ie the SPV may only hold assets that areintercompany instruments issued by the IAIG or a related entity with terms andconditions that meet or exceed the criteria for Tier 2 Paid-Up capital resources).

6.2.4

Structurally subordinated Tier 2 financial instruments

95.
Structural subordination of debt refers to a situation where a holding company issues
a financial instrument directly to third party investors and then down-streams the proceeds into
insurance subsidiaries.
96.
Structurally subordinated financial instruments that meet the criteria for Tier 2 financial
instruments, subject to the clarifications of criteria b), e), and f), and new criteria n), o), and p)
below, qualify as Tier 2 capital resources:•b.

Subordination to other non-subordinated creditors of the IAIG is not relevant tostructurally subordinated instruments that are issued by an IAIG’s holding company tosenior creditors.

e.

The requirement for supervisory approval of such a call within the first five years fromthe date of issue can be fulfilled through the exercise of supervisory controls andsupervisory review, including the ability (direct/indirect) for supervisors to limit, defer
and/or disallow the issuance or redemption of financial instruments.
the supervisor receives prior notification upon redemption, or
call dates are fixed and known and the supervisor monitors potential redemption; andThe supervisor has the power to prevent redemption of the instrument.

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The requirement for supervisory approval of redemptions after a minimum of five years
can be fulfilled through supervisory approval11 of dividends prior to their payment froman insurance subsidiary to the holding company.
f.

The requirement for supervisory approval of repurchases can be fulfilled throughsupervisory approval11 of dividends prior to their payment from an insurance subsidiary
to the holding company.

n.

The debt instrument has been issued by a clean holding company, which is defined asa holding company that does not have policyholder liabilities on its stand-alone balance
sheet.

o.

The IAIG and its GWS have determined that the proceeds of the instruments, whichhave been down-streamed into insurance subsidiaries, are being tracked and reported
appropriately.

p.

Amounts from the instrument issuance have been down-streamed into an insurance
subsidiary of the holding company and the insurance subsidiary is located in ajurisdiction whose regulatory regime proactively enforces structural subordination
through appropriate regulatory/supervisory controls over distributions from insurance
subsidiaries12.

6.2.4.1 National discretion on acceleration clauses
97.
Criterion i) in paragraph 94 is subject to a national discretion. When a GWS elects toapply that national discretion, criterion i) is waived for all IAIGs headquartered in thejurisdiction of that GWS.
98.
IAIGs to which the national discretion applies provide a reconciliation of the impact
between the reference ICS with and without applying the national discretion.
6.2.5

Tier 2 Non-paid-up capital99.
Non-paid-up capital consists of commitments, received by entities of the IAIG fromthird parties non-related to the IAIG, to provide capital upon request.
100. Financial items, contracts and arrangements established by mutual IAIGs qualify as
Tier 2 Non-paid-up capital resources when they meet all of the following criteria:a.

The item has been approved by the supervisor as satisfying criteria b) to g) below as
to its characteristics and amount.

11 For structurally subordinated financial instruments, supervisory approval of ordinary dividends canbe met if the supervisor has in place supervisory controls over distributions, including the ability for thesupervisor to limit, defer and/or disallow the payment of any distributions should it find that the insurer
is presently, or may potentially become, financially distressed.
12 Supervisory controls over distributions from insurance subsidiaries refer to the supervisory review
and/or prior supervisory approval of all distributions, including the ability for the supervisor to limit, defer
and/or disallow the payment of any distributions should it find that the insurer is presently, or may
potentially become, financially distressed. As part of its review and/or prior approval of distributions, therelevant supervisor considers surplus adequacy, financial flexibility, the quality of earnings, and otherfactors deemed to be pertinent as they relate to the financial strength of the insurer and policyholder
protection.
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b.

The item can be called up on demand by the mutual IAIG and is not subject to any
contingencies or conditions that prevent or act as a disincentive to the call being madeor satisfied.

c.

When called up, the item becomes either a financial instrument that meets in full thecriteria for inclusion in Tier 1 or Tier 2 paid-up capital resources or a capital element
listed in section 6.3.

d.

The item is legally enforceable in each relevant jurisdiction.

e.

The counterparty to the contract to provide capital is able and willing to pay the agreed
amounts when called upon by the mutual IAIG.

f.

The item is neither undermined nor rendered ineffective by encumbrances.

g.

The mutual IAIG is required to notify the supervisor of any changes of fact or
circumstance that could affect the supervisor’s approval of the item.

6.3

Capital elements other than financial instruments

6.3.1

Tier 1 capital elements

No additional information compared to the Level 1 document.
6.3.2

Tier 2 capital elements

101. The Tier 2 basket comprises the following three items, subject to a limit of 15% of the
ICS capital requirement:a.

50% of the value of each net defined benefit pension fund that is an asset on the IAIG’sbalance sheet, net of any eligible DTL;b.

100% of the DTA deducted from Tier 1 capital resources; andc.

10% of the value of computer software intangibles (net of amortisation) deducted fromTier 1 capital resources, net of any eligible DTL.

6.4

Capital adjustments and deductions

6.4.1

Deductions from Tier 1 capital resources

No additional information compared to the Level 1 document.
6.4.2

Deductions from Tier 2 capital resources

No additional information compared to the Level 1 document.
6.4.3

Treatment of encumbered assets

102. The deduction from ICS Tier 1 capital resources is calculated as the total value of
encumbered assets in excess of the sum of the value of the IAIG’s on-balance sheet liabilities
secured by the encumbered assets, plus the value of the IAIG’s incremental ICS capitalrequirement for encumbered assets and secured liabilities.
103. No ICS Tier 1 deduction is required for encumbered assets relating to off-balance
sheet securities financing transactions (ie securities lending and borrowing, repos and reverse
repos) that do not result in a liability on the balance sheet.
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6.5

Capital composition limits

104.

For non-mutual IAIGs, the following limits are applicable:a.

Tier 1 Limited capital resources are limited to 10% of the ICS capital requirement; thislimit is increased to 15%, provided that the instruments in excess of the 10% limit
possess a Principle Loss Absorbency Mechanism (PLAM);b.

Tier 2 capital resources are limited to 50% of the ICS capital requirement; andc.

There is no allowance for Tier 2 Non-Paid Up capital.

105. For the purpose of paragraph 104, a PLAM is defined as a mechanism providing for
either a write-down of the liability (principal and dividend/coupon) or a conversion of the
instrument (into a Tier 1 unlimited financial instrument as defined in section 6.2.1) incontractually predefined going-concern conditions.
106.

For mutual IAIGs, the following limits are applicable:a.

Tier 1 Limited capital resources are limited to 30% of the ICS capital requirement;b.

Tier 1 Limited + Tier 2 capital resources are limited to 60% of the ICS capitalrequirement; andc.

Tier 2 Non-Paid Up capital are limited to 10% of the ICS capital requirement.

7

Reference ICS: Capital Requirement – The Standard Method

7.1

ICS Risks and Calculation Methods

7.1.1

Risk mitigation techniques

107. Risk mitigation techniques may be recognised in the ICS risk charges provided theymeet all of the following requirements:a.

The risk mitigation technique is effective and legally enforceable in all relevant
jurisdictions and results in an effective transfer of risk to a third party.

b.

The contractual arrangement ensures that the risk transfer is clearly defined.

c.

The calculation of the ICS risk charges allows for the effects of risk mitigation
techniques through a reduction of the risk charge commensurate with the extent of risk
mitigation. It makes reasonable allowance for any basis risk effects due to changes inrisk mitigation assumptions and relationships during a stress scenario and there isappropriate treatment for any corresponding risk embedded in the use of risk mitigation
techniques (eg Credit risk). These two effects are treated separately.

d.

The calculation is made on the basis of assets and liabilities existing at the reporting
date of the ICS calculation.

e.

There is no double counting of mitigation effects.

f.

The documentation for the arrangement sets out a direct claim on the IAIG’s
counterparty in the event of its default, insolvency, bankruptcy or other credit event.

g.

Providers of risk mitigation are of an adequate credit quality (demonstrable througheither adequate rating, capitalisation or collateralisation levels) to ensure with

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appropriate certainty that the IAIG will receive the protection in the cases specified by
the contracting parties. Credit quality is assessed consistently with the definition of
credit categories provided in section 7.4.
108. In addition to these requirements, market risk mitigation techniques are based on an
explicit reference to specific exposures or a pool of exposures.
109. Where risk mitigation techniques are in force for a period shorter than 12 months andmeet the qualitative criteria above, a proportional factor is applied to the risk mitigation effecttaken into account in the ICS risk charges. That factor is defined as either:a.

The proportion of the full term of the risk exposure covered by the risk mitigation
technique up to a maximum of 100%, where the risk exposure’s term is less than 12
months; orb.

The proportion of 12 months covered by the risk mitigation technique up to a maximumof 100%, where the risk exposure term is 12 months or more.

110. However, where the IAIG plans to replace a risk mitigation arrangement relating to aMarket risk exposure at the time of its expiry with a similar arrangement, this renewal may betaken into account if the IAIG expects to renew and all of the foreseeable costs of renewal
within the time horizon are taken into account. The requirement of an expectation to renew isconsidered to be met if all of the following conditions are met:a.

The renewal is consistent with previous business practice and documented strategy.

b.

The replacement of the risk mitigation instrument does not take place more often thanevery three months, except for Currency risk or Equity risk where the replacement of
the risk mitigation instrument does not take place more often than every month.

c.

The risk that the risk mitigation arrangement cannot be replaced due to an absence ofliquidity in the market is not material under different market conditions and there is nomaterial basis or operational risks compared to the risk mitigation effect. If the
instruments mitigating Currency or Equity risk are replaced more frequently than every
three months, then the IAIG justifies to its group wide supervisor that:i.

the market for these instruments is sufficiently liquid at the relevant tenor; andii. these instruments do not pose a materially greater risk than those replaced lessfrequently than every three months.
d.

The replacement of the risk mitigation arrangement is not conditional on any future
event that is outside of the control of the IAIG. Where the replacement of the risk
mitigation arrangement is conditional on any future event that is within the control of
the IAIG, then the conditions are clearly set out in the documented strategy referred toin point a).

e.

The renewal is realistic regarding the availability of the arrangement and its cost is
deducted from the value attributed to the instrument. This deduction takes into accountthe risk that the cost may increase during the following 12 months.

f.

Any additional risk stemming from the risk mitigation arrangement (eg Credit risk) is
taken into account in the ICS risk charges.

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g.

The IAIG is able to demonstrate to its GWS that the required instruments will beavailable for renewal from a deep and liquid market under all reasonably foreseeable
eventualities over the following 12 months. Where this is not the case, the benefit
recognised for the renewal of the risk mitigation arrangement is limited to 80% of thefull risk mitigating value of the arrangement at the reporting date.

111. The renewal of risk mitigation arrangements with respect to non-life Premium risk may
be taken into account if the IAIG expects to renew and the costs of renewal within the time
horizon are taken into account. The requirement of an expectation to renew is considered tobe met if all of the following conditions are met:a.

The renewal is consistent with previous business practice and documented strategy;b.

The renewal is realistic with regards to availability of the arrangement and its cost 13;
andc.

Any additional risk stemming from the risk mitigation arrangement (eg Credit risk) is
taken into account in the relevant ICS risk charges.

112. When modelling natural catastrophe risk, the renewal of the arrangements may betaken into account if all of the following conditions are met:a.

The renewal is consistent with previous business practice and documented strategy;b.

The renewal is realistic regarding the availability of the arrangement and its cost; andc.

Any additional risk stemming from the risk mitigation arrangement (eg Credit risk) isalso taken into account in the natural catastrophe risk modelling.

113. Risk mitigation arrangements are not recognised in the calculation of the ICS
Operational risk charge.
7.1.2

Geographical segmentation

114. For those risk charges calculated using a geographical segmentation, the following
regions are used:a.

European Economic Area (EEA) and Switzerland;b.

US and Canada;c.

China;d.

Japan;e.

Other developed markets; andf.

Other emerging markets.

13 Costs may include, but are not limited to, ceded premiums to the reinsurer and commissions.

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115.

The jurisdictions included in each region are listed in Table 4:
Table 4: Geographical segmentation
RegionJurisdictions included

EEA and
Switzerland

Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic,
Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal,
Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom, Iceland,
Liechtenstein, Norway and Switzerland

US and Canada

US14 and Canada

China

Mainland China and Macao SAR

Japan

Japan

Other developed
markets15

Australia, New Zealand, Israel, San Marino, Korea, Singapore, Chinese Taipei
and Hong Kong SAR

Other emerging
markets

A list of emerging markets is provided in Table E of the Statistical Appendix ofthe IMF World Economic Outlook April 201616. For completeness, if a country
is not listed in the regions above, it is classified as “Other emerging markets”.

7.1.3

Management actions

116. The impact of management actions for each individual risk is calculated consistently
with the provisions set out in section 5.2.4. The impact of management actions is based onrealistic assumptions and reflects the IAIG’s obligations to policyholders as well as legal
provisions applicable to the IAIG.
117. A cap on the overall credit for management actions is set at the total amount of
insurance liabilities for future bonuses or other discretionary benefits. This cap is applied after
aggregating the total of management actions post-diversification across the risks.
7.2

Insurance risks

7.2.1

Grouping of policies for life insurance risks

118. The projections of the stressed cash flows are conducted at the same level of
granularity as the pre-stress cash flows. Where the pre-stress cash flows have been projectedby applying some grouping of policies, the same grouping of policies is applied to the stressedcash flows.

14

Including American Samoa, Guam, Northern Mariana Island, Puerto Rico and US Virgin Islands.

15 ‘Other developed’ taken from IMF list of advanced economies minus countries mentioned in otherregions as of April 2016.
16 See http://www.imf.org/external/pubs/ft/weo/2016/01/pdf/text.pdf (accessed on 12 May 2016).

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119. From a practicality standpoint, grouping by portfolios of products (or policies) exposed
to homogeneous insurance risks within the class can be applied. For this purpose, ahomogeneous risk group encompasses a collection of policies with similar risk characteristics.
120. Homogeneous risk groups are reasonably stable over time. Where necessary, for thedetermination of homogeneous risk groups, IAIGs take into account items such as:a) Underwriting policy;b) Claims settlement pattern;c) Risk profile of policyholders;d) Product features, in particular guarantees; ande) Future management actions.
7.2.2

Calculation of life insurance risk charge

121.

The correlation matrix used for aggregating the life risk charges is the following:
Table 5: Life risks correlation matrix
Mortality

Longevity

Morbidity/
Disability

Lapse

ExpenseMortality

100%

-25%

25%

0%

25%

Longevity

-25%

100%

0%

25%

25%

Morbidity/
Disability

25%

0%

100%

0%

50%

Lapse

0%

25%

0%

100%

50%

Expense

25%

25%

50%

50%

100%

7.2.2.1 Mortality risk
122. The prescribed stress for the calculation of the Mortality risk charge consists of anincrease of x% in mortality rates at all ages for all policies where an increase in mortality rates
leads to a decrease in the NAV.
123.

The stress factors for Mortality risk are given in Table 6:
Table 6: Mortality risk stress factors
RegionEEA and Switzerland
US and Canada
China
Japan
Other developed markets
Other emerging markets

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12.5 %
12.5 %
12.5 %
10.0 %
12.5 %
12.5 %

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7.2.2.2 Longevity risk
124. The prescribed stress for the calculation of the longevity risk charge consists of adecrease of x% in mortality rates at all ages for all policies where a decrease in mortality rates
leads to a decrease in the NAV.
125.

The stress factors for Longevity risk are given in Table 7:
Table 7: Longevity risk stress factors
RegionEEA and Switzerland
US and Canada
China
Japan
Other developed markets
Other emerging markets

x%17.5 %
17.5 %
17.5 %
17.5 %
17.5 %
17.5 %

7.2.2.3 Morbidity and Disability risk
7.2.2.3.1 Segmentation
126. The Morbidity and disability risk is applied to benefits evaluated on a similar to life
technical basis. Irrespective of the legal or contractual classification of insurance obligations,the assignment to life or non-life activities is based on the type of techniques used to calculate
insurance obligations17.
7.2.2.3.2 Sub-risks to be covered
127. For the purpose of the calculation of the Morbidity and disability risk charge, similar tolife insurance obligations are split in the following four mutually exclusive benefit segments:a) Category 1: Medical expenses


Products providing any kind of compensation (either fixed or based on realcosts) for medical expenses, in-patient or not. The compensation depends
directly on the treatment or expenses incurred by the policyholder, and is notdirectly dependent on the time spent in a given health status.

b) Category 2: Lump sum in case of a health eventProducts providing a single payment at the occurrence of a specified health
event or the occurrence of an accident resulting in a certain level of disability.

c) Category 3: Short-term recurring payments


Products providing a recurring amount of compensation for a period dependingon the time spent in a given temporary health status, such as inability to workor hospitalisation.

17 A technical basis is considered similar to life when it involves the explicit use of biometric variables

such as mortality, morbidity and recovery rates by age.
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d) Category 4: Long-term recurring payments


Products providing a fixed annuity in case of long-term/permanently
deteriorated health status.

128. The distinction between Category 3 and Category 4 is made according to thetemporary versus permanent characteristics of the recurring benefit. A benefit that iscontractually limited to a given period, common to all policyholders, is classified as short-termrecurring. A benefit that is to be paid life-long, or for a period depending on individual
policyholder circumstances, without any upfront short-term limitations, is considered as longterm recurring.
129.

Each benefit category is divided into two segments by original contract term:a) Short-term: Includes contracts with an original term of up to five years.
b) Long-term: Includes contracts with an original term longer than five years.

130. When a policy includes coverage belonging to several of the above benefit categories,
each of the different components of such a policy is subject to the relevant stress. When apolicy provides a combination of benefits between medical expenses and short-term recurring
payments (Categories 1 and 3), it may either be split into both categories, or considered under
Category 3 altogether.
7.2.2.3.3 Calculation
131. The prescribed stresses for the calculation of the Morbidity/Disability risk charge
depend on the benefit category:a) For benefit categories i = 1, 2 and 3, the stress is defined as an instantaneous
relative increase in inception rates, as specified in Table 8 and Table 9.
The inception rate stress is applied differently depending on the underlying type of
benefits:

For benefits where claim costs are explicitly modelled using inception rates
and/or recovery rates, the stress is only applied to inception rates. If only
recovery rates are modelled, the stress is applied as a decrease in recovery
rates.

For other benefits in categories 1-3, with no explicit inception rates and/or
recovery rates, the stress factors are directly applied to medical claim payment
amounts.

b) For the benefit category 4, the risk charge is calculated for both contract term
segments as the maximum of the Inception Rate risk charge and the Recovery
Rate risk charge, where:The Inception Rate risk charge is calculated as the change in NAV following
the increase in inception rates as specified in Table 8 and Table 9; andThe Recovery Rate risk charge is calculated as the change in NAV following
the decrease in recovery rates of 20% (same stress for both short-term andlong-term contracts).

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Table 8: Morbidity/Disability risk stress factors – Location of risk Japan
Category (i)Short-termLong-term

1

20%

8%

2

25%

8%

3

20%

10%

4

inception rate stress= 25%, recovery
rate stress=20%

inception rate stress= 20%, recovery
rate stress = 20%

Table 9: Morbidity/Disability risk stress factors – All other locations of risk
Category (i)Short-termLong-term

1

20%

8%

2

25%

20%

3

20%

12%

4

inception rate stress= 25%, recovery
rate stress=20%

inception rate stress= 20%, recovery
rate stress = 20%

7.2.2.4 Lapse risk
132. The calculation of the maximum of the level and trend component and mass lapse
component, referred to in paragraph 109 of the ICS Level 1 document, is performed at thelevel of each region listed in section 7.1.2.
133. The Lapse risk charge for the IAIG is then obtained as the sum of Lapse risk charges
over all regions.
7.2.2.4.1 Level and Trend component
134. For each region listed in section 7.1.2, the prescribed stress for the calculation of theLevel and Trend component is the most adverse of an upward stress and a downward stress.
135. The upward stress consists of an increase of x% in the assumed option take-up rates,
subject to a maximum of 100%, in all future years for all homogeneous risk groups adversely
affected by such risk.
136. The downward stress consists of a decrease of x% in the assumed option take-up
rates in all future years for all homogeneous risk groups adversely affected by such risk.
137.

The stress factors are specified in Table 10:

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Table 10: Level & Trend Lapse risk stress factors
Regionx%

EEA and Switzerland40%

US and Canada

40%

China

40%

Japan

20%

Other developed markets

40%

Other emerging markets

40%

138. All options that can affect the amount of insurance coverage, including options thatallow for partial or full termination, or increase in the insurance cover, are affected by the lapse
stress factors.
139. For each region listed in section 7.1.2, the Level and Trend component is first
determined for each homogeneous risk group before aggregating across all homogeneousrisk groups.
140. When the calculation of the current estimate involves the use of a dynamic lapse
function18, the Level and Trend component stress is applied to the base rate of the dynamic
lapse function.
7.2.2.4.2 Mass Lapse Component
141. For each region listed in section 7.1.2, the prescribed stress for the calculation of theMass Lapse component consists of:an immediate surrender of 30% of retail policies; andan immediate surrender of 50% of non-retail policies.

142.
zero.

The Mass Lapse component for each homogeneous risk group is subject to a floor of143. For each region listed in section 7.1.2, the Mass Lapse component is first determinedfor each homogeneous risk group before aggregating across all homogeneous risk groups.
7.2.2.5 Expense risk
144. The prescribed stresses for the calculation of the expense risk charge consists of a
relative increase of x% in unit expense assumptions and an absolute increase of y% perannum in expense inflation, with x and y specified in Table 11.

18 A dynamic lapse function varies the lapse rate used in the calculation of insurance liabilities dependingon the difference between the return the insurer is providing on its policies and the returns provided bycompetitors.
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Table 11: Expense risk stress factors
RegionEEA and Switzerland
US and Canadax%(unit expense)
6%
6%

China

8%

Japan

6%

Other developed markets

8%

Other emerging markets

8%y%(expense inflation)
1%
1%
Year 1 – 10: 3%;
Year 11 – 20: 2%;
Year 21 onwards: 1%
1%
Year 1 – 10: 2%;
Year 11 onwards: 1%
Year 1 – 10: 3%;
Year 11 – 20: 2%;
Year 21 onwards: 1%

145. The stresses to the unit expense and expense inflation assumptions are applied
simultaneously.
7.2.3

Calculation of Non-Life Risk Charge

7.2.3.1 Segments/Lines of Business146. Each exposure for Premium risk and Claims Reserve risk is mapped to a line ofbusiness based on the location of risk. Each line of business has a corresponding ICS
segment, as specified in Table 13. Any jurisdiction not explicitly listed in Table 13 is allocatedto either Other developed markets or Other emerging markets according to Table 4.
7.2.3.2 Definition of ICS Segments and Risk Charges
147.

Each ICS segment is assigned:a.

An ICS category: a high level grouping of the type of business (property-like, liabilitylike, motor-like, other, mortgage and credit); andb.

A risk factor for the purpose of calculating the risk charge.

148. Premium risk factors do not include the impact of catastrophe events since catastropherisk is a separate risk within the ICS.
149. Some of the Claims Reserve risk factors take into account latent liability risk. The
purpose of the latent liability risk charge is to capture risk from liability exposures that is notadequately captured by historical claims experience.
150. Table 13 provides the list of ICS segments, the associated ICS category, as well as
the risk charges for Premium and Claims Reserve risks. The definitions of ICS segments areprovided in Annex 2:.
7.2.3.3 Aggregation
151. The calculation of non-life risk charges for each ICS segment takes into accountdiversification effects.

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152. The first step of aggregation combines each ICS segment’s Premium risk and Claims
Reserve risk charges, applying a 25% correlation factor between the Premium and Claims
Reserve risk charges for all segments (with the exception of mortgage and credit as outlined
below).
153. Mortgage business and credit business are added across all regions and thenaggregated with Real Estate risk and Credit risk, respectively.
154. The second step of aggregation is within ICS categories, where a correlation matrix is
applied across segments of a given category. The correlation factors are specified in Table 12
below:
Table 12: Within Category Correlation Factors
ICS Categories
Liability-likeMotor-like
Property-like
Other

Correlation factor
between segments
within the category
50%
75%
50%
25%

155. The third step of aggregation is within each region listed in section 7.1.2, using a 50%
correlation factor between each of the four ICS categories.
156. The fourth step of aggregation is across regions, using a 25% correlation factor
between each region’s total risk charge.
157. As an example, Figure 1 shows how non-life risk exposures are categorised into
regions, geographical segments, ICS categories and ICS segments.

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Figure 1: Categorisation of non-life risk exposure, showing how Singapore Motor-like ICS
Category is aggregated

7.2.3.4 Input Data Required
158. The Premium risk charge for each ICS segment is calculated as the relevant risk factor
multiplied by the greater of the net premium earned and net premium to be earned.
159. The Claims Reserve risk charge for each ICS segment is calculated as the relevantrisk factor multiplied by the net current estimate.
Table 13: ICS Non-Life Segmentation
ICS
Category

Premiumrisk
factorClaimsReserverisk
factorMedical expense insurance

Other

15%

10%

Income protection

Other

25%

35%

Workers' Compensation

Liability-like

25%

27%

Motor vehicle liability - Motor
third party liability

Motor-like

20%

15%

ICS Segment

EEA and
Switzerland

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CanadaClaimsReserverisk
factorICS Segment

ICS
Category

Premiumrisk
factorMotor, other classes

Motor-like

20%

15%

Marine, aviation andtransport

Property-like

35%

25%

Fire and other damage

Property-like

17.5%

17.5%

General liability - third party
liability

Liability-like

35%

27%

Credit and suretyship

Credit35%

50%

Legal expenses

Other

15%

40%

Assistance

Other

15%

50%

Miscellaneous financial loss

Other

30%

35%

Non-proportional healthreinsurance

Other

50%

45%

Non-proportional Casualty
reinsurance

Liability-like

55%

45%

Non-proportional marine,
aviation and transport
reinsurance

Property-like

55%

40%

Non-Proportional property
reinsurance

Property-like

45%

40%

Property - personal

Property-like

35%

25%

Home Warranty

Property-like

30%

25%

Product Warranty

Property-like

30%

25%

Property - commercial

Property-like

30%

30%

Aircraft

Property-like

45%

35%

Automobile - liability/personal
accident

Motor-like

35%

20%

Automobile - other

Motor-like

35%

20%

Boiler and Machinery

Property-like

30%

25%

Equipment Warranty

Property-like

30%

25%

Credit Insurance

Credit45%

30%

Credit Protection

Credit45%

30%

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ICS
Category

Premiumrisk
factorClaimsReserverisk
factor

Other

45%

30%

Property-like

35%

30%

Other

45%

40%

Liability

Liability-like

50%

38%

Mortgage

Mortgage

45%

30%

SuretyCredit

45%

30%

Title

Liability-like

35%

30%

MarineProperty-like

45%

35%

Accident and Sickness

Other

45%

30%

Other Approved Products

Other

45%

35%

Auto physical damage

Motor-like

12.5%

10%

Homeowners/ Farm owners

Property-like

30%

15%

Special property

Property-like

25%

17.5%

Private passenger auto
liability/ medical

Motor-like

15%

15%

Commercial auto/ truck
liability/ medical

Motor-like

15%

15%

Workers' compensation

Liability-like

15%

16%

Commercial multi-peril

Liability-like

30%

26%

Medical professional liability - Occurrence

Liability-like

40%

45%

Medical professional liability– Claims-Made

Liability-like

30%

35%

Other Liability – Occurrence

Liability-like

17.5%

28%

Other Liability – Claims-Made

Liability-like

15%

20%

Products liability

Liability-like

45%

47%

Reinsurance – nonproportional assumed
property

Property-like

35%

25%

Reinsurance – nonproportional assumed liability

Liability-like

45%

39%

ICS Segment

Fidelity
Hail
Legal Expenses

US

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ChinaJapan

ClaimsReserverisk
factorICS Segment

ICS
Category

Premiumrisk
factorSpecial liability

Liability-like

30%

25%

Mortgage insurance

Mortgage45%

30%

Fidelity/surety

Credit35%

40%

Financial Guaranty

Credit

45%

25%

Other

Other

25%

35%

Reinsurance – nonproportional assumed
financial lines

Other

45%

20%

Motor

Motor-like

10%

20%

Property, includingcommercial, personal andengineering

Property-like

30%

45%

Marine and Special

Property-like

25%

45%

Liability

Liability-like

10%

36%

Agriculture

Property-like

25%

35%

CreditCredit45%

35%

Short-term Accident

Other

10%

10%

Short-term Health

Other

10%

10%

Short-term Life

Other

10%

20%

Others

Other

35%

20%

Fire

Property-like

20%

35%

Hull

Property-like

40%

35%

Cargo

Property-like

35%

40%

Transit

Property-like

40%

35%

Other

10%

15%

Automobile

Motor-like

7.5%

10%

Aviation

Property-like

50%

45%

Credit35%

40%

Machinery

Property-like

35%

40%

General Liability

Liability-like

17.5%

27%

Personal Accident

Guarantee Ins.

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Australia and
New ZealandClaimsReserverisk
factorICS Segment

ICS
Category

Premiumrisk
factorContractor's All Risks

Property-like

35%

40%

Movables All Risks

Property-like

17.5%

25%

Workers' Compensation

Liability-like

35%

22%

Misc. Pecuniary Loss

Other

35%

45%

Nursing Care Ins.

Other

35%

45%

Others

Other

35%

40%

Householders

Property-like

30%

20%

Commercial Motor

Motor-like

25%

20%

Domestic Motor

Motor-like

25%

20%

Other type A

Other

25%

20%

Travel

Other

35%

25%

Fire and ISR

Property-like

30%

25%

Marine and Aviation

Property-like

35%

25%

Consumer Credit

Credit35%

15%

Other Accident

Other

35%

25%

Other type B

Other

35%

35%

Mortgage

Mortgage

45%

30%

CTP

Motor-like

45%

35%

Public and Product Liability

Liability-like

45%

31%

Professional Indemnity

Liability-like

45%

35%

Employers’ Liability

Liability-like

45%

36%

Short tail medical expenses

Other

15%

25%

Other type C

Other

45%

35%

Householders - non-prop
reins

Property-like

45%

30%

Commercial Motor - non-prop
reinsMotor-like

45%

30%

Domestic Motor - non-prop
reinsMotor-like

45%

30%

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ICS
Category

Premiumrisk
factorClaimsReserverisk
factorOther non-prop reins type A

Other

45%

30%

Travel - non-prop reins

Other

45%

35%

Fire and ISR - non-prop reins

Property-like

55%

40%

Marine and Aviation - nonprop reins

Property-like

55%

40%

Consumer Credit - non-prop
reinsCredit55%

40%

Other Accident - non-prop
reins

Other

55%

40%

Other non-prop reins type B

Other

55%

35%

Mortgage - non-prop reinsMortgage

50%

35%

CTP - non-prop reins

Motor-like

55%

40%

Public and Product Liability non-prop reins

Liability-like

55%

43%

Professional Indemnity - nonprop reins

Liability-like

55%

40%

Employer’s Liability - nonprop reins

Liability-like

55%

43%

Other non-prop reins type C

Other

55%

40%

Accident and health

Other

30%

25%

Motor vehicle, damage andliability

Motor-like

25%

15%

Aircraft, damage and liability

Property-like

45%

40%

Ships, damage and liability

Property-like

45%

40%

Goods in transit

Property-like

45%

50%

Fire and Property damage

Property-like

35%

20%

General liability

Liability-like

45%

26%

Pecuniary loss

Other

45%

35%

Property-like

45%

25%

ICS Segment

Hong Kong
SAR

Non-proportional treaty
reinsurance

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ICS Segment

ICS
Category

Proportional treaty
reinsurance

Property-like

35%

35%

Fire, technology, overseas

Property-like

25%

30%

Package

Property-like

35%

50%

Maritime

Property-like

45%

45%

Other

35%

50%

Liability-like

12.5%

31%

Foreigners

Other

15%

10%

Advance payment refund
guarantee

Credit50%

50%

Other Non-life

Other

45%

50%

Private vehicle (personal
injury)Motor-like

15%

30%

Private vehicle (property,
vehicles damage)

Motor-like

25%

35%

Vehicle for commercial or
business purpose(personal
injury)Motor-like

25%

20%

Vehicle for commercial or
business purpose(property,
vehicles)Motor-like

25%

20%

Other motor

Motor-like

15%

20%

Personal Accident

Other

30%

25%

Singapore/Health

Other

25%

20%

Singapore/Fire

Property-like

30%

25%

Marine and Aviation - Cargo

Property-like

35%

30%

Motor

Motor-like

30%

25%

Work Injury Compensation

Liability-like

35%

31%

Credit35%

30%

Property-like

35%

30%

Credit35%

30%

Personal injury
Workers accident, liability

Korea

Singapore

ClaimsReserverisk
factorPremiumrisk
factorBonds
Engineering Construction
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Chinese
TaipeiClaimsReserverisk
factorICS Segment

ICS
Category

Premiumrisk
factorMortgage

Mortgage

35%

30%

Others- non liability class

Other

35%

30%

Marine and Aviation - Hull

Property-like

45%

35%

Professional indemnity

Liability-like

35%

35%

Public liability

Liability-like

35%

31%

Others - liability class

Liability-like

35%

31%

Fire - residence

Property-like

25%

40%

Fire - commercial

Property-like

55%

45%

Marine - inland cargo

Property-like

30%

25%

Marine - overseas cargo

Property-like

30%

25%

Marine - hull

Property-like

55%

45%

Marine - fish boat

Property-like

45%

45%

Marine - aircraft

Property-like

55%

45%

Motor - personal vehicle

Motor-like

25%

25%

Motor - commercial vehicle

Motor-like

25%

25%

Motor - personal liability

Motor-like

25%

25%

Motor - commercial liability

Motor-like

25%

25%

Liability - public, employer,
product, etc.

Liability-like

35%

36%

Liability - professional

Liability-like

35%

35%

Engineering

Property-like

55%

45%

Nuclear power station

Property-like

55%

45%

Guarantee - surety, fidelity

Credit55%

45%

CreditCredit55%

45%

Property-like

35%

40%

Other

15%

10%

Property-like

45%

35%

Other property damage
Accident
Property Damage commercial earthquake

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OtherDeveloped

ClaimsReserverisk
factorICS Segment

ICS
Category

Premiumrisk
factorComprehensive - personal
property and liability

Property-like

45%

45%

Comprehensive - commercial
property and liability

Property-like

45%

45%

Property damage - typhoonand flood

Property-like

55%

45%

Property damage compulsory earthquake

Property-like

55%

45%

Health

Other

15%

10%

Motor

Motor-like

30%

20%

Property damage

Property-like

30%

25%

Accident, protection andhealth (APH)

Other

35%

30%

Short tail medical expenses

Other

35%

25%

Other short tail

Other

35%

30%

Marine, Air, Transport (MAT)

Property-like

35%

35%

Workers' compensation

Liability-like

35%

36%

Public liability

Liability-like

35%

31%

Product liability

Liability-like

35%

43%

Professional indemnity

Liability-like

35%

35%

Other liability and other longtail

Liability-like

35%

36%

Non-proportional motor,
property damage, APH and
MAT

Property-like

50%

40%

Catastrophe reinsurance

Property-like

50%

40%

Non-proportional liability

Liability-like

50%

44%

Non-proportional professional
indemnity

Liability-like

50%

40%

Mortgage insurance

Mortgage45%

35%

Credit45%

35%

Commercial credit insurance

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ICS
Category

Premiumrisk
factorClaimsReserverisk
factor

Other

50%

40%

Motor

Motor-like

35%

25%

Property damage

Property-like

35%

30%

Accident, protection andhealth (APH)

Other

35%

30%

Short tail medical expenses

Other

35%

25%

Other short tail

Other

35%

30%

Marine, Air, Transport (MAT)

Property-like

35%

35%

Workers' compensation

Liability-like

45%

36%

Public liability

Liability-like

45%

36%

Product liability

Liability-like

45%

47%

Professional indemnity

Liability-like

45%

35%

Other liability and other longtail

Liability-like

45%

36%

Non-proportional motor,
property damage, APH and
MAT

Property-like

50%

45%

Catastrophe reinsurance

Property-like

50%

45%

Non proportional liability

Liability-like

50%

48%

Non-proportional professional
indemnity

Liability-like

50%

45%

Mortgage insurance

Mortgage50%

40%Commercial credit insurance

Credit50%

40%

Other medium-term

Other

55%

40%

ICS Segment

Other medium-term

Other
Emerging

7.2.4

Calculation of Catastrophe Risk Charge

7.2.4.1 Scope of Calculation
160. When calculating the Catastrophe risk charge, all lines of business exposed toCatastrophe risk are considered. To avoid double counting with the other ICS risk charges,
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a.

Life and similar to life health business are included only for the pandemic and theterrorism scenarios; andb.

The impact on financial markets and the whole economy (Market and Credit risks) is
not included in the calculation of Catastrophe risk.

7.2.4.2 Covered Perils
161.
a.

The perils covered by Catastrophe risk are:Natural catastrophe:i.

Tropical cyclone, hurricane, typhoon;

ii. Extra-tropical windstorm/winter storm;iii. Earthquake; andiv. Other material natural perils, such as:b.



Flood;



Tornado, hail, convective storms;



Other risks.

Other catastrophes (Man-Made Perils/Scenarios):i.

Terrorist attack;ii. Pandemic; andiii. Credit and Surety.
162. The impact of catastrophe claim events include both the main peril and any secondary
perils associated with the main peril.
7.2.4.3 Natural Catastrophe163. Stochastic catastrophe models may be used to calculate loss amounts resulting fromnatural catastrophe events.
164.

Loss amounts are calculated considering:a.

The impact of natural catastrophe on all lines of business affected;b.

An allowance for non-modelled exposures including expected new business over thetarget time horizon of one year that could be affected by the listed perils; andc.

An allowance for non-modelled perils and regions reported as part of the other natural
catastrophe losses. This may include perils and regions that are not modelledindividually or specifically but for which potential losses are assessed using otherapproaches.

165. The natural catastrophe risk charge is the difference between the 99.5th percentile andthe mean of the total annual aggregate losses, net of protections. The annual aggregate losses
are calculated as the aggregation of losses across all regions and perils.

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7.2.4.4 Other Catastrophe Scenarios
166. The loss amounts for the following perils are determined according to the scenarios
described below.
167. The impact of the scenarios is calculated for all lines of business affected by therespective scenario, unless otherwise specified in the scope of the calculation.
7.2.4.4.1 Terrorist Attack
168.

The risk charge is the sum of the losses from the following two components:a.

Total loss of property (including building, content, motor vehicles) from insurance
contracts and the impact on other insurance contracts resulting directly from the lossof property; andb.

The losses from life insurance contracts, health coverage and workers’ compensation.

169. For both the life and non-life components, the scenario is a five-tonne bomb blast for
the largest geographical risk concentration partly or fully located within a radius of 500 metres.
To determine this concentration, all buildings (including properties for own use) areconsidered. The largest concentration is determined separately for the life and non-life
components.
170. For property damage, including insured properties and related covers, the following
assumptions are made:

100% damage ratio within a circular zone of a 200 metre radius;

25% damage ratio for the next circular zone up to a 400 metre radius; and

10% damage ratio between 400 and 500 metres.

171.

For fatalities, the following assumptions are made:

15% fatality rate within a circular zone of a 200 metre radius; and

1.5% fatality rate between 200 and 500 metres.

172.

For disabilities, the following assumptions are made:

20% disability rate within a circular zone of a 200 metre radius; and

10% fatality rate between 200 and 500 metres.

7.2.4.4.2 Pandemic
173. The scenario is an increase in the number of deaths following a global pandemic. The
risk charge is the total loss amount to all individual and group insurance products covering
Mortality risk in any part of the world resulting from the increase of 1.0 in the number of deaths
per thousand insureds.
7.2.4.4.3 Credit and Surety174.

The risk charge is the sum of the losses from the following three components:a.

Mortgage insurance;b.

Trade credit; andPublicLevel 2 Document:
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c.

Surety.

7.2.4.4.3.1

Mortgage insurance

175. The scenario is calculated as an aggregate loss amount resulting from an increase infrequency and severity due to the specified decline in home prices. A 25% decline in homeprices is assumed to persist for the entire one-year time period. The total loss amount includes
the impact of both an increase in frequency of delinquency and defaults and an increased loss
severity that result from the decline in home prices.
7.2.4.4.3.2

Trade Credit

176. The credit stress scenario for trade credit is defined as the total loss amount due to theinability of customers of the policyholder to pay for goods delivered and/or services provided.
The trade credit coverage indemnifies the policyholder for bad debt losses incurred due to acustomer’s inability to pay. A policyholder’s customer’s inability to pay is indicated by anincrease in both the probability of default and the loss given default of that customer. The total
loss amount is adjusted for any existing loss mitigation, including reimbursements frompolicyholder, retention etc.
Table 14: Credit stress factors for trade credit
Rating category
Investment Grade
Non-Investment Grade
7.2.4.4.3.3

Factor80%
200%

Surety177. The credit stress scenario for surety is defined as the total net potential loss amountbased on the penal sum of the surety bond. A surety bond indemnifies the policyholder fromthe principal’s inability to perform its contractual obligation. The penal sum represents the
maximum amount that the IAIG is required to pay to the beneficiary. The IAIG calculates thelargest net potential losses for its ten largest exposures to surety counterparties (principals)
using the methodology described below. The total net potential loss amount assumes that the
two largest net losses have occurred, and is therefore equal to the sum of the two largest net
losses.
7.2.4.5 Aggregation of Catastrophe Risks
178. For the purpose of calculating the Catastrophe risk charge, the other catastrophe
scenarios are assumed to be mutually independent and independent of the natural
catastrophe perils. Consequently, the total ICS catastrophe capital charge will be calculated
as follows:22
2
2
𝐼𝐶𝑆𝐶𝑎𝑡 = √𝐼𝐶𝑆𝑁𝑎𝑡𝐶𝑎𝑡+ 𝐼𝐶𝑆𝑇𝑒𝑟𝑟𝑜𝑟+ 𝐼𝐶𝑆𝑃𝑎𝑛𝑑+ 𝐼𝐶𝑆𝐶𝑟𝑒𝑑𝑖𝑡& 𝑆𝑢𝑟𝑒𝑡𝑦

7.2.4.6 Calculation of the Recoverable Amount to be used for the Calculation of Contingent
Credit Risk
179. The recoverable amount is calculated as the difference between the risk charge forCatastrophe risk calculated as if the risk mitigation arrangements did not exist, and the risk
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charge for Catastrophe risk calculated taking into account qualifying risk mitigation
arrangements.
180. The recoverable amount is allocated by credit rating categories, using the following
steps:a.

For the aggregate of the Natural Catastrophe risk and for each Other catastrophe
scenario, calculate the recoveries by rating class and the gross and net losses;b.

Aggregate all gross and net losses using the aggregation approach described above.
The difference between aggregated gross and net losses is the total recoverable; andc.

The recoverable by rating class is equal to the total recoverable multiplied by the ratioof the sum over all scenarios of the recoveries in that rating class to the sum over all
scenarios of the recoveries for all rating classes.

7.2.4.7 Safeguards for Natural Catastrophe Models
181. In order to assess the appropriateness of stochastic natural catastrophe models, IAIGs
provide information on the following safeguards.


Safeguard 1 – Description of the scope of application: IAIGs describe the perimeter ofthe natural catastrophe model’s calculation.



Safeguard 2 – Validation: IAIGs demonstrate that a rigorous process is in place bywhich they can establish whether their natural catastrophe model framework is soundor whether improvements are needed.

Safeguard 3 – Sign-off by senior management: The senior management of the IAIG
has ownership of the natural catastrophe model, and the model complies with thevalidation process prescribed by the natural catastrophe model governance process.



Safeguard 4 – Statistical quality test: The statistical quality test addresses issues
related to the following technical aspects of the natural catastrophe model:
o methodology and assumptions;o coverage of material risks;o data (including external data) and expert judgment;o aggregation of risks and diversification effects;
o consistency with the method used for the calculation of technical provisions;o allowance for risk mitigation techniques and future management actions; ando financial guarantees and contractual options.



Safeguard 5 – Use test and governance: The use test reflects the IAIG’s view of its
risks and is used in decision making.

Safeguard 6 – Documentation standards: The documentation of the natural
catastrophe model, including its use and other related aspects:
o facilitates the supervisory review of the model;
o facilitates Senior Management’s understanding; ando recognises the weaknesses of the model.



Safeguard 7 – List of catastrophe risk sources that are not modelled: IAIGs recognise
the limitations in the scope of their natural catastrophe model. IAIGs make a list of

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natural catastrophe risks specified in the ICS but not modelled, and explain why thoserisks are not modelled.
7.3

Market Risks

7.3.1

Calculation of the market risk charge

182.

The correlation matrix used for aggregating the market risk charges is the following:
Table 15: Market risks correlation matrix
Interest
rate

NDSR
Up

NDSR
Down

EquityReal
AssetCurrency
Estateconcentration

Interest rate

100%

25%

25%

25%

25%

25%

0%

NDSR Up

25%

100%

100%

75%

50%

25%

0%

NDSR Down

25%

100%

100%

0%

0%

25%

0%

Equity

25%

75%

0%

100%

50%

25%

0%

Real estate

25%

50%

0%

50%

100%

25%

0%

Currency

25%

25%

25%

25%

25%

100%

0%

Asset
concentration

0%

0%

0%

0%

0%

0%

100%

7.3.2

Interest rate risk

183. All assets and liabilities sensitive to changes in interest rates are taken into account in
the calculation of the Interest Rate risk charge, with the exception of financial instruments
issued by the IAIG that qualify as capital resources.
184. For current estimates of insurance liabilities calculated with a dynamic lapse functionthat uses the interest rate as an input variable, the base lapse assumptions stay unchanged
under the interest rate stresses, but lapse rates react to the interest rate scenarios used to
calculate the Interest Rate risk charge.
185.

The Interest Rate risk charge is calculated as:𝑚𝑎𝑥 (0, ∑ 𝑀𝑅𝑖 + VaR 99.5 (∑ 𝐿𝑇𝑖 ))𝑖𝑖where:


𝑖 is an index over all currencies in which the IAIG is exposed to Interest Rate risk;
𝑀𝑅𝑖 is the result of the mean reversion scenario for currency 𝑖, obtained as describedin paragraph 188; and𝐿𝑇𝑖 is a random variable encompassing the results of the level up, level down, twist upto-down and twist down-to-up scenarios for currency 𝑖, as specified in paragraph 186.

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186.

For currency 𝑖, 𝐿𝑇𝑖 is defined as:1
𝑁 −1 (0.995)

× (𝐿𝑈𝑖 max(𝑋𝑖 , 0) − 𝐿𝐷𝑖 min(𝑋𝑖 , 0) + 𝑇𝑈𝑖 max(𝑌𝑖 , 0) − 𝑇𝐷𝑖 min(𝑌𝑖 , 0))

where:




187.



𝑁 −1 (0.995) is the 99.5% quantile of the standardised normal distribution;
𝐿𝑈𝑖 and 𝐿𝐷𝑖 are the results of the level up and level down scenarios respectively,
obtained as described in paragraph 188;
𝑇𝑈𝑖 and 𝑇𝐷𝑖 are the results of the twist up-to-down and twist down-to-up scenarios
respectively, obtained as described in paragraph 188; and𝑋𝑖 and 𝑌𝑖 are independent random variables following a standardised normal
distribution.
In addition, the random variables 𝑋𝑖 and 𝑌𝑖 are such that:
For any 𝑖 ≠ 𝑗, 𝑐𝑜𝑟𝑟(𝑋𝑖 , 𝑋𝑗 ) = 𝑐𝑜𝑟𝑟(𝑌𝑖 , 𝑌𝑗 ) = 0.75; andFor any 𝑖 and 𝑗, 𝑐𝑜𝑟𝑟(𝑋𝑖 , 𝑌𝑗 ) = 0.

188. For currency 𝑖, 𝑀𝑅𝑖 , 𝐿𝑈𝑖 , 𝐿𝐷𝑖 , 𝑇𝑈𝑖 and 𝑇𝐷𝑖 correspond to the change in the IAIG’s Net
Asset Value when recalculating the value of all relevant assets and liabilities using the mean
reversion, level up, level down, twist up-to-down and twist down-to-up stressed yield curves
respectively, obtained using the methodology described in paragraphs 189 to 197.
189. For each currency, the stressed yield curve for the mean reversion scenario is obtainedby adding the following yield curve to the initial yield curve, up to the LOT:
∆𝐿. 𝐿𝑒𝑣𝑒𝑙 𝑐𝑢𝑟𝑣𝑒 + ∆𝑆. 𝑆𝑙𝑜𝑝𝑒 𝑐𝑢𝑟𝑣𝑒 + ∆𝐶. 𝐶𝑢𝑟𝑣𝑎𝑡𝑢𝑟𝑒 𝑐𝑢𝑟𝑣𝑒
where:


𝐿𝑒𝑣𝑒𝑙 𝑐𝑢𝑟𝑣𝑒 is the curve equal to 1 for all maturities;

𝑆𝑙𝑜𝑝𝑒 𝑐𝑢𝑟𝑣𝑒 is the curve equal to𝐶𝑢𝑟𝑣𝑎𝑡𝑢𝑟𝑒 𝑐𝑢𝑟𝑣𝑒 is the curve equal to

𝜆 is the exponential decay rate of the Nelson Siegel model19 for the risk-free yield
curve;

1−𝑒 −𝜆𝜏for any maturity 𝜏;𝜆𝜏
1−𝑒 −𝜆𝜏− 𝑒 −𝜆𝜏 for any maturity 𝜏;
𝜆𝜏



∆𝐿
( ∆𝑆 ) is the vector defined as (𝐼 − 𝑒 −𝐾 )(𝜇 − 𝑉0 );∆𝐶

𝐼 is the 3𝑥3 identity matrix;



𝐾1
𝐾=(

𝜇1
𝜇
) and 𝜇 = ( 2 ) are parameters of the process followed by the vector
𝜇3
𝐾3
0

𝐾2
0
𝑉𝑡 below, described by the equation:

19

As described in the article Diebold, F.X. and Li, C (2006) Forecasting the Term Structure ofGovernment Bond Yields in Journal of Econometrics, 130, 337-364
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𝑑𝑉𝑡 = 𝐾(𝜇 − 𝑉𝑡 )𝑑𝑡 + Σ𝑑𝑊𝑡



190.

𝛽1𝑡
𝑉𝑡 = (𝛽2𝑡 ), where 𝛽1𝑡 , 𝛽2𝑡 and 𝛽3𝑡 correspond to the Nelson Siegel parameters19 for𝛽3𝑡
the risk-free yield curve at time 𝑡; and𝑊𝑡 is a 3-dimensional Wiener process and Σ is a lower triangular matrix of real nonnegative factors.
For the mean reversion scenario, the value of the LTFR remains unchanged.

191. For each currency, the stressed yield curve for the level up scenario is obtained byadding the following yield curve to the initial yield curve, up to the LOT:
𝑠. 𝑁 −1 (0.995). [𝑠𝑙1 . 𝐿𝑒𝑣𝑒𝑙 𝑐𝑢𝑟𝑣𝑒 + 𝑠𝑙2 . 𝑆𝑙𝑜𝑝𝑒 𝑐𝑢𝑟𝑣𝑒 + 𝑠𝑙3 . 𝐶𝑢𝑟𝑣𝑎𝑡𝑢𝑟𝑒 𝑐𝑢𝑟𝑣𝑒]
where:


𝑠𝑙1(𝑠𝑙2 ) = 𝑐𝑜𝑠(𝜃)𝑀𝑒1 + 𝑠𝑖𝑛(𝜃)𝑀𝑒2 ;𝑠𝑙3

𝑀 = √(ΣΣ𝑇 )⨀ (−(𝐾 +𝐾 )𝑖𝑗1−𝑒)
𝐾𝑖 +𝐾𝑗, with Σ and 𝐾𝑖 denoting the parameters of the equation𝑖𝑗

described in paragraph 189, and ⨀ the Hadamard product operator;

𝑒1 and 𝑒2 are the eigenvectors associated with the highest and second highest
eigenvalues, respectively, of the matrix 𝑁 𝑇 𝑁 ;
𝐿𝑂𝑇
𝑁=(
0

0
)𝑀 ;

𝑎
𝑏

1−𝑒 −𝜆𝜏1−𝑒 −𝜆𝜏
∑𝐿𝑂𝑇
and
𝑏
=
(
− 𝑒 −𝜆𝜏 ) ;
𝜏=1
𝜆𝜏
𝜆𝜏



𝑎 = ∑𝐿𝑂𝑇
𝜏=1

2
𝜃 = 𝐴𝑟𝑐𝑡𝑎𝑛 ∑𝜏=1
;
𝐿𝑂𝑇
(𝜏)



ℎ𝑖 (𝜏) = (1,

1 𝑖𝑓 (𝑠𝑙1 . 𝐿𝑒𝑣𝑒𝑙 𝑐𝑢𝑟𝑣𝑒𝐿𝑂𝑇 + 𝑠𝑙2 . 𝑆𝑙𝑜𝑝𝑒 𝑐𝑢𝑟𝑣𝑒𝐿𝑂𝑇 + 𝑠𝑙3 . 𝐶𝑢𝑟𝑣𝑎𝑡𝑢𝑟𝑒 𝑐𝑢𝑟𝑣𝑒𝐿𝑂𝑇 ) ≥ 0𝑠={−1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒

192.

∑𝐿𝑂𝑇 ℎ (𝜏)𝜏=1 ℎ11−𝑒 −𝜆𝜏 1−𝑒 −𝜆𝜏, 𝜆𝜏 − 𝑒 −𝜆𝜏 ) 𝑀𝑒𝑖 , 𝑖 = 1, 2 ; and𝜆𝜏For the level up scenario, the LTFR is increased by 10%.

193. For each currency, the stressed yield curve for the level down scenario is obtained byadding the following yield curve to the initial yield curve, up to the LOT:
− 𝑠. 𝑁 −1 (0.995). [𝑠𝑙1 . 𝐿𝑒𝑣𝑒𝑙 𝑐𝑢𝑟𝑣𝑒 + 𝑠𝑙2 . 𝑆𝑙𝑜𝑝𝑒 𝑐𝑢𝑟𝑣𝑒 + 𝑠𝑙3 . 𝐶𝑢𝑟𝑣𝑎𝑡𝑢𝑟𝑒 𝑐𝑢𝑟𝑣𝑒]
194.

For the level down scenario, the LTFR is decreased by 10%.

195. For each currency, the stressed yield curve for the twist up-to-down scenario is
obtained by adding the following yield curve to the initial yield curve, up to the LOT:
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𝑁 −1 (0.995). [𝑠𝑡1 . 𝐿𝑒𝑣𝑒𝑙 𝑐𝑢𝑟𝑣𝑒 + 𝑠𝑡2 . 𝑆𝑙𝑜𝑝𝑒 𝑐𝑢𝑟𝑣𝑒 + 𝑠𝑡3 . 𝐶𝑢𝑟𝑣𝑎𝑡𝑢𝑟𝑒 𝑐𝑢𝑟𝑣𝑒]
where:
𝑠𝑡1(𝑠𝑡2 ) = 𝑐𝑜𝑠(𝜃)𝑀𝑒1 − 𝑠𝑖𝑛(𝜃)𝑀𝑒2
𝑠𝑡3
196. For each currency, the stressed yield curve for the twist down-to-up scenario is
obtained by adding the following yield curve to the initial yield curve, up to the LOT:
− 𝑁 −1 (0.995). [𝑠𝑡1 . 𝐿𝑒𝑣𝑒𝑙 𝑐𝑢𝑟𝑣𝑒 + 𝑠𝑡2 . 𝑆𝑙𝑜𝑝𝑒 𝑐𝑢𝑟𝑣𝑒 + 𝑠𝑡3 . 𝐶𝑢𝑟𝑣𝑎𝑡𝑢𝑟𝑒 𝑐𝑢𝑟𝑣𝑒]
197.

For the twist scenarios, the LTFR remains unchanged.

7.3.3

Non-Default Spread risk

198. All liabilities sensitive to changes in spreads are taken into account in the calculationof the NDSR charge, with the exception of financial instruments issued by the IAIG that qualify
as capital resources.
199. All assets that contribute to the calculation of the spread adjustments for valuation
purposes (Table 3 in section 5.2.5.3.2.1), are taken into account in the calculation of the NDSR
charge, with the exception of sovereign assets.
200. The stresses are applied to spreads after risk correction. For insurance liabilities, theprescribed stresses are applied as parallel shifts to the spreads by risk category used tocompute the adjustments specified in section 5.2.5 for valuation purposes.
201. The upward and downward stresses used for the calculation of the NDSR charge are
specified in Table 16.
Table 16: Stress factors for Non-Default Spread risk
ICS RCUp (in bps)
Down (in bps)
1
+50
-50
2
+50
-50
3
+70
-70
4-7
+100
-100
Subject to the following relative limit, calculated based on the absolute value of the
spread over the risk-free yield curve:
Relative limit
No relative limit
50%
7.3.4

Equity risk

202. The following definitions apply to the equity segments listed in the ICS Level 1
document.
203. Listed equity in developed markets includes equities listed on the securities exchangesof equity markets included in the FTSE Developed Index: Australia, Austria, Belgium,
Luxembourg, Canada, Denmark, Finland, France, Germany, Hong Kong SAR, Ireland, Israel,
Italy, Japan, Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South Korea,
Spain, Sweden, Switzerland, UK, and US.

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204. Any equity market not included in the FTSE Developed Index is considered an
emerging market.
205. Investments in subordinated debt are included in the equity risk charge within thesegment hybrid debt/preference shares.
206. The segment other equity is comprised of all investments not included in the previous
equity segments.
207. The four level scenarios (one for each asset segment) and volatility scenario aredefined as:a.

An instantaneous decrease by 35% of the market prices of all listed shares indeveloped markets.

b.

An instantaneous decrease by 48% of the market prices of all listed shares in emerging
markets.

c.

An instantaneous decrease of the market prices of hybrid debt/preference shares by
x%, which x based on the ICS rating category (RC) of the asset, as specified in Table
17.
Table 17: Stress factors for hybrid debt/preference shares
ICS RC

x%

1-2

4%

3

6%

4

11%

5

21%

6-7

35%

d.

An instantaneous decrease by 49% of the market prices of all assets classified as other
equity, as defined in paragraph 206.

e.

An instantaneous absolute increase by x% of the implied volatilities of all the asset
classes listed above, with x having the values provided in Table 18. For maturities not
specified, the increase is interpolated linearly.

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Table 18: Absolute stress factors for implied volatilities

208.
a.

Maturity(months)

x%

0-1

42%

3

28%

6

23%

12

20%

24

17%

36

16%

48

15%

60

14%

84

14%

120

12%

144

11%

180

10%

240

7%

300

4%

360 andabove

0%

The results of the stresses listed above are aggregated in two steps:
Step 1: The total level risk is calculated by aggregating the impact of the stress foreach level scenario using the following correlation matrix:
Table 19: Equity correlation matrix
Equity segmentb.

Developed Emerging Hybrid/preferred Other

Developed

100%

75%

100%

75%

Emerging

75%

100%

75%

75%

Hybrid/preferred

100%

75%

100%

75%

Other

75%

75%

75%

100%

Step 2: The total Equity risk charge is calculated by summing the total level risk (from
Step 1) and the impact of the stress under the volatility scenario.

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7.3.5

Real estate risk

209. The stress scenario referred to in the ICS Level 1 document is a decrease of 25% inreal estate prices. Assets and liabilities subject to the stress are:a.

Commercial investment real estate;b.

Residential investment real estate;c.

Real estate for own use;d.

Other assets whose value is impacted by a change in real estate prices; ande.

Liabilities, both insurance and other, whose value is impacted by a change in realestate prices.

7.3.6

Currency risk

210. In order to determine the Currency risk charge, IAIGs determine their net open position
for all currencies other than the reporting currency. The net open position for each currency is
calculated as the sum of the following:a.

The net spot position, defined as all assets less liabilities, including accrued interest
and accrued expenses;b.

The net forward position, defined as all net amounts under forward foreign exchangetransactions, including currency futures and the interest and principal on currency
swaps;c.

The delta equivalent amounts of currency options;d.

Guarantees and similar instruments that are certain to be exercised and are likely tobe irrevocable;e.

At the discretion of the IAIG, net future income and expenses not yet accrued but
already fully hedged;f.

Any other item representing a profit or loss in the foreign currency;g.

Minus the amount of capital required locally to support the activities in the foreign
currency, subject to a cap of 10% of net insurance liabilities in that currency.

211. The deduction referred to in point g) of paragraph 210 is applied to long positions onlyand shall not change any long position to a short position. This deduction applies only if the
IAIG has operations in the jurisdiction of the foreign currency.
212. The net open currency position excludes assets that are fully deducted from capital
resources, and liabilities that qualify for inclusion in consolidated capital resources.
213. The net insurance liability reported for each currency consists of the current estimate
net of any reinsurance assets, plus all deferred tax assets and liabilities associated with thecurrent estimate and reinsurance assets.
214. Forward currency positions are valued at spot market exchange rates as at thereporting date.
215. The Currency risk charge is equal to the higher of the aggregated losses incurredunder the following two scenarios:
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a.

Scenario 1: all currencies in which the IAIG has a net long position decrease in value,
while all of the currencies in which the IAIG has a net short position remain unchanged.
The amount of the decrease of each foreign currency relative to the reporting currency
is found in the currency stress matrix in Table 20 below.

b.

Scenario 2: all currencies in which the IAIG has a net short position increase in value,
while all of the currencies in which the IAIG has a net long position remain unchanged.
The amount of the increase of each foreign currency relative to the reporting currency
is found in the currency stress matrix in Table 20 below.

216. For each scenario, the losses by currency are aggregated using a correlation formulafor which the assumed correlation of losses between each pair of foreign currencies is 50%.

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Table 20: Currency risk stress factors
Against
Ref
Curr
AUD

AUD

BRL

CAD

CHF

CLP

CNY

COP

CZK

DKK

EUR

GBP

HKD

0%

50%

25%

40%

35%

40%

40%

35%

35%

35%

35%

40%

BRL

50%

0%

50%

65%

50%

55%

55%

60%

60%

60%

55%

55%

CAD

25%

50%

0%

35%

30%

25%

35%

35%

30%

30%

30%

25%

CHF

40%

60%

35%

0%

45%

30%

45%

25%

20%

20%

30%

35%

CLP

35%

50%

30%

45%

0%

30%

40%

40%

40%

40%

35%

30%

CNY

35%

55%

25%

35%

30%

0%

35%

35%

30%

30%

25%

5%

COP

40%

55%

35%

50%

40%

35%

0%

45%

45%

45%

40%

35%

CZK

35%

55%

35%

30%

40%

35%

45%

0%

15%

15%

30%

35%

DKK

35%

55%

30%

20%

35%

30%

40%

15%

0%

5%

25%

30%

EUR

35%

55%

30%

20%

35%

30%

40%

15%

5%

0%

25%

30%

GBP

35%

55%

30%

30%

35%

25%

40%

30%

25%

25%

0%

25%

HKD

35%

55%

25%

35%

30%

5%

35%

35%

30%

30%

25%

0%

HUF

40%

60%

40%

35%

45%

45%

50%

25%

25%

25%

35%

45%

IDR

45%

60%

40%

50%

45%

35%

45%

50%

45%

45%

45%

35%

ILS

35%

55%

30%

35%

35%

25%

35%

35%

30%

30%

30%

25%

INR

35%

50%

25%

35%

30%

20%

35%

35%

30%

30%

30%

15%

JPY

50%

65%

40%

35%

45%

30%

50%

45%

35%

35%

40%

30%

KRW

30%

50%

25%

40%

30%

25%

35%

35%

35%

35%

30%

25%

MXN

35%

50%

30%

45%

35%

30%

35%

40%

40%

40%

40%

30%

MYR

35%

50%

25%

35%

30%

15%

30%

35%

30%

30%

25%

15%

NOK

35%

55%

30%

30%

40%

35%

40%

25%

20%

20%

30%

35%

NZD

20%

55%

30%

40%

40%

40%

45%

40%

35%

35%

35%

40%

PEN

35%

50%

25%

35%

30%

15%

30%

35%

30%

30%

30%

15%

PHP

35%

50%

25%

35%

30%

15%

35%

35%

30%

30%

30%

15%

PLN

35%

55%

35%

40%

40%

40%

45%

25%

25%

25%

35%

40%

RON

35%

50%

35%

30%

40%

30%

45%

25%

20%

20%

30%

30%

RUB

45%

60%

40%

50%

40%

35%

45%

45%

40%

40%

45%

35%

SAR

40%

55%

25%

35%

30%

5%

35%

35%

30%

30%

25%

5%

SEK

35%

55%

30%

30%

40%

35%

45%

25%

20%

20%

30%

35%

SGD

30%

50%

20%

30%

30%

15%

30%

30%

25%

25%

25%

15%

THB

35%

55%

30%

35%

30%

20%

35%

35%

30%

30%

30%

20%

TRY

70%

75%

70%

75%

70%

70%

75%

70%

70%

70%

70%

70%

TWD

35%

50%

25%

30%

30%

10%

35%

35%

25%

25%

25%

10%

USD

40%

55%

25%

35%

30%

5%

35%

35%

30%

30%

25%

5%

ZAR

45%

60%

45%

55%

50%

55%

55%

50%

50%

50%

50%

55%

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Against
Ref
Curr
AUD

HUF

IDR

ILS

INR

JPY

KRW

MXN

MYR

NOK

NZD

PEN

PHP

40%

45%

35%

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50%

30%

35%

35%

35%

20%

40%

35%

BRL

60%

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55%

55%

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50%

50%

50%

55%

55%

55%

55%

CAD

40%

40%

30%

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30%

30%

25%

25%

CHF

35%

50%

35%

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45%

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CNY

45%

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25%

15%

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40%

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COP

50%

45%

35%

35%

50%

35%

35%

30%

40%

45%

35%

35%

CZK

25%

50%

35%

35%

45%

35%

40%

35%

25%

40%

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35%

DKK

25%

45%

30%

30%

35%

30%

40%

30%

20%

35%

30%

30%

EUR

25%

45%

30%

30%

35%

35%

40%

30%

20%

35%

30%

30%

GBP

35%

45%

30%

30%

40%

30%

35%

25%

30%

35%

30%

30%

HKD

45%

35%

25%

15%

30%

25%

30%

15%

35%

40%

15%

15%

HUF

0%

55%

40%

40%

55%

40%

45%

40%

30%

40%

45%

45%

IDR

55%

0%

40%

35%

50%

40%

45%

35%

45%

50%

35%

35%

ILS

40%

40%

0%

25%

40%

30%

30%

25%

35%

40%

25%

25%

INR

40%

35%

25%

0%

35%

25%

30%

20%

35%

35%

20%

20%

JPY

50%

50%

40%

35%

0%

40%

50%

35%

40%

50%

35%

35%

KRW

40%

40%

30%

25%

40%

0%

30%

25%

35%

35%

25%

25%

MXN

45%

45%

35%

30%

50%

30%

0%

25%

40%

40%

30%

30%

MYR

40%

35%

25%

20%

35%

25%

25%

0%

30%

35%

20%

20%

NOK

30%

45%

35%

35%

40%

35%

40%

30%

0%

35%

35%

35%

NZD

40%

50%

40%

35%

50%

35%

40%

35%

35%

0%

40%

40%

PEN

45%

35%

25%

20%

35%

25%

30%

20%

35%

40%

0%

20%

PHP

40%

35%

25%

20%

35%

25%

30%

20%

35%

35%

20%

0%

PLN

25%

50%

40%

40%

55%

35%

40%

40%

30%

40%

40%

40%

RON

30%

45%

30%

30%

40%

35%

40%

30%

30%

40%

35%

35%

RUB

50%

50%

40%

35%

50%

40%

40%

35%

40%

50%

35%

40%

SAR

45%

35%

25%

15%

30%

25%

30%

15%

35%

40%

15%

15%

SEK

25%

45%

35%

35%

45%

35%

40%

30%

20%

35%

35%

35%

SGD

35%

35%

20%

15%

30%

20%

30%

15%

25%

30%

15%

15%

THB

40%

35%

25%

20%

35%

25%

35%

20%

35%

35%

20%

20%

TRY

70%

75%

70%

70%

75%

70%

70%

70%

70%

70%

70%

70%

TWD

40%

35%

25%

15%

30%

20%

30%

15%

30%

35%

15%

15%

USD

45%

35%

25%

15%

30%

25%

30%

15%

35%

40%

15%

15%

ZAR

50%

60%

50%

50%

65%

45%

50%

45%

45%

50%

50%

50%

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Against
Ref Curr

PLN

RON

RUB

SAR

SEK

SGD

THB

TRY

TWD

USD

ZAR

AUD

35%

40%

45%

40%

35%

30%

35%

55%

35%

40%

45%

BRL

55%

50%

60%

55%

55%

50%

55%

70%

55%

55%

65%

CAD

35%

30%

40%

25%

30%

20%

30%

55%

25%

25%

45%

CHF

35%

30%

45%

35%

30%

25%

35%

65%

30%

35%

55%

CLP

40%

40%

40%

30%

40%

30%

35%

60%

30%

30%

50%

CNY

40%

30%

35%

5%

35%

15%

20%

60%

10%

5%

50%

COP

45%

45%

45%

35%

45%

35%

35%

60%

35%

35%

55%

CZK

25%

25%

45%

35%

25%

30%

35%

60%

35%

35%

50%

DKK

25%

20%

40%

30%

20%

25%

30%

60%

25%

30%

50%

EUR

25%

20%

40%

30%

20%

25%

30%

60%

25%

30%

50%

GBP

35%

30%

40%

25%

30%

25%

30%

60%

25%

25%

50%

HKD

40%

30%

35%

5%

35%

15%

20%

60%

10%

5%

55%

HUF

25%

30%

50%

45%

25%

35%

40%

60%

40%

45%

50%

IDR

50%

45%

50%

35%

45%

35%

35%

70%

35%

35%

60%

ILS

35%

30%

40%

25%

35%

20%

25%

55%

25%

25%

50%

INR

40%

30%

35%

15%

35%

15%

20%

55%

15%

15%

50%

JPY

50%

40%

50%

30%

40%

30%

35%

70%

30%

30%

65%

KRW

35%

35%

40%

25%

35%

20%

25%

55%

20%

25%

45%

MXN

40%

40%

40%

30%

40%

30%

35%

60%

30%

30%

50%

MYR

35%

30%

35%

15%

30%

15%

20%

55%

15%

15%

45%

NOK

30%

30%

40%

35%

20%

25%

35%

60%

30%

35%

45%

NZD

40%

40%

50%

40%

35%

30%

35%

60%

35%

40%

50%

PEN

40%

30%

35%

15%

35%

15%

20%

60%

15%

15%

50%

PHP

40%

30%

40%

15%

35%

15%

20%

55%

15%

15%

50%

PLN

0%

30%

45%

40%

30%

35%

40%

55%

40%

40%

50%

RON

30%

0%

40%

30%

25%

25%

35%

60%

30%

30%

50%

RUB

45%

40%

0%

35%

45%

35%

40%

65%

35%

40%

55%

SAR

40%

30%

35%

0%

35%

15%

20%

60%

10%

5%

55%

SEK

30%

25%

45%

35%

0%

30%

35%

60%

30%

35%

50%

SGD

35%

25%

35%

15%

30%

0%

15%

55%

10%

15%

45%

THB

40%

30%

40%

20%

35%

15%

0%

55%

20%

20%

50%

TRY

70%

70%

75%

70%

70%

65%

70%

0%

70%

70%

75%

TWD

35%

30%

35%

10%

30%

10%

20%

55%

0%

10%

50%

USD

40%

30%

35%

5%

35%

15%

20%

60%

10%

0%

55%

ZAR

50%

50%

55%

55%

50%

45%

50%

60%

50%

55%

0%

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7.3.7

Asset concentration risk

7.3.7.1 Assets other than real estate217.

For assets other than real estate, the Asset concentration risk charge is calculated as:𝑓×(∑𝐸𝑖>𝑇(𝐸𝑖 − 𝑇)(𝑑. 𝐾𝑖𝑒𝑞 + 𝐾𝑖𝑐𝑟 )(𝑑. 𝐾 𝑒𝑞 + 𝐾 𝑐𝑟 )+ 𝑇)where:
𝑓 = 0.71656 ;

𝑑 = 0.95 ;𝐸𝑖 is the net exposure to group of connected counterparties 𝑖;

𝑇 is an exposure threshold determined by the IAIG in such a way that the number ofgroups of connected counterparties 𝑖 for which 𝐸𝑖 > 𝑇 is equal to or greater than 10
but does not exceed 100;𝐾𝑖 is the Equity risk charge associated with counterparty 𝑖, before diversification andmanagement actions;

𝐾𝑖𝑐𝑟 is the Credit risk charge associated with counterparty 𝑖, before diversification andmanagement actions;𝐾 𝑒𝑞 is the total Equity risk charge of the IAIG, before diversification and management
actions; and𝐾 𝑐𝑟 is the total Credit risk charge of the IAIG, before diversification and management
actions.

𝑒𝑞

218. Groups of connected counterparties are determined according to the definition
provided by the Basel Committee on Banking Supervision (BCBS)20. Specifically, two or morenatural or legal persons are considered a group of connected counterparties if at least one of
the following criteria is satisfied:a.

Control relationship: one of the counterparties, directly or indirectly, has control over
the other(s); orb.

Economic interdependence: if one of the counterparties were to experience financial
problems, the other(s), as a result, would also be likely to encounter financial problems.

219. Exposures to national governments are excluded from the Asset concentration risk
charge calculation. Public sector exposures, not issued or guaranteed by a national
government, such as provincial, state or municipal debt, are included within the Asset
Concentration risk charge calculation with their corresponding Credit and Equity risk charges.
220. The determination of the gross counterparty exposures includes both on- and offbalance sheet positions, and considers the following:

20 As specified in the BCBS publication Supervisory framework for measuring and controlling large

exposures (April 2014), which also outlines criteria for assessing whether ‘control’ or ‘economic
interdependence’ exists.
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a.

Exposures to reinsurance counterparties are included on a pre-stress basis21;b.

The determination of OTC derivatives exposures is based on a credit-equivalent basis,
as applicable, and exposures to central counterparties are excluded;c.

Exposures are based on a look-through approach for investment funds and structured
products;d.

Non-affiliated (external) guarantees, commitments, bank deposits, receivables andany other items subject to the possibility of financial loss due to counterparty default
are included; ande.

Gross exposures are calculated based upon the MAV basis described in section 5,
except where otherwise specified.

221.

The determination of net counterparty exposures considers the following:a.

Exposures from assets held in separate accounts or life insurance contracts where theinvestment risks fully flow-through to policyholders are excluded. Nevertheless, assetsbacking any guarantees to policyholders are included;b.

Asset exposures may be netted against liability exposures to the extent that they are
subject to a legally enforceable right of offset;c.

For exposures covered by collateral or unconditional and irrevocable guarantees, thesubstitution approach specified in sections 7.4.2.1.1 and 7.4.2.2.3 may be used for the
portion of the exposure covered by the collateral or the guarantees. The exposure to
the primary counterparty is then replaced by the exposure to the collateral or guarantor.
Where national government exposures are substituted for corporate exposures, thecorresponding amounts are excluded from the determination of the Asset
Concentration risk charge, in line with the provisions of paragraph 219; andd.

For collateralised non-life reinsurance exposures, the haircut approach specified in
section 7.4.2.1.2 is used in lieu of the substitution approach.

7.3.7.2 Real estate
222. In order to calculate the Asset concentration risk charge for real estate, property
exposures are determined on the basis of single property, or group of properties within a 250
metres radius, including exposures from both direct and indirect holdings.
223. The Asset Concentration risk charge for any property exposure as defined above iscalculated as 25% of the net property exposure exceeding 3% of the IAIG’s total net
investment assets relating to insurance activities. The net property exposures are calculated
in line with paragraphs 220 and 221.

21 The contingent risk associated with catastrophe scenarios is not included in the exposure.

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7.4

Credit Risk

7.4.1

Calculation of Credit risk charge

7.4.1.1 Exposure classes
224. The Credit risk charge applies to all senior debt obligations of specified exposure
classes of borrowers. Preferred shares and hybrid obligations, including subordinated debt,
are excluded from the calculation of the Credit risk charge, and are instead subject to theEquity risk charge for hybrid debt/preference shares described in section 7.3.3.
225. Credit exposures to national governments, multilateral development banks andsupranational organisations are not subject to the Credit risk charge. Regional governments
and municipal authorities and other government entities whose debt is not issued or
guaranteed by the national government, are classified as public sector entities. Exposures tocommercial undertakings owned but not guaranteed by governments or municipal authorities
are classified in the corporates category.
226. The corporates category includes exposures to banks and securities dealers, but
excludes exposures to reinsurers. Rated commercial mortgages are included in the corporate
exposure class.
227. The securitisation category includes all holdings of mortgage-backed securities andother asset-backed securities. It also includes any other assets where the cash flow from anunderlying pool of exposures is used to service payments by a SPV to bondholders. If any of
the assets in the pool of exposures underlying a securitisation exposure is itself asecuritisation, then the exposure belongs to the re-securitisation category.
228. The category short-term obligations of regulated banks includes demand deposits andother obligations that have an original maturity of less than three months, and that are drawn
on a bank subject to the solvency requirements of the Basel Framework. All other bank
exposures are included in the corporates category.
229. Assets that are held for unit-linked business or in separate accounts and for which allcredit risk on the assets fully flows through to policyholders are excluded from the Credit risk
charge. However, IAIGs calculate a Credit risk charge for the increase in related liabilities (egdue to decreased future fee income) that would result from a credit risk loss on those assets,
calculated as specified in this section.
230. A non-paid-up financial instrument that qualifies for inclusion in capital resources issubject to the same credit risk charge as a direct credit exposure to the contingent capitalprovider.
231. The Credit risk charge for off-balance sheet exposures is based on credit equivalentamounts calculated as specified in Section 7.4.1.4.
7.4.1.2 Distribution of exposures by maturity
232. For calculating the Credit risk charge, an effective maturity is calculated as follows foreach credit exposure:
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 =PublicLevel 2 Document:
ICS Version 2.0 for the monitoring period
March 2020

∑𝑡 𝑡 ∗ 𝐶𝐹𝑡∑𝑡 𝐶𝐹𝑡Page 68 of 133

where 𝐶𝐹𝑡 denotes the cash flows (principal, interest payments and fees) contractually payable
by the borrower in period 𝑡.
233. Where it is not possible to calculate the effective maturity of the contracted payments
as noted above, a conservative measure is used, such as the maximum remaining time (inyears) that the borrower is permitted to take to fully discharge its contractual obligation(principal, interest, and fees) under the terms of the loan agreement.
234. For OTC derivatives subject to a master netting agreement, the maturity is calculated
as the weighted average of the maturities of the transactions subject to netting, with theweights proportional to the transactions’ notional amounts.
235. All exposures to a group are aggregated and split by rating category before calculating
the effective maturity.
236. When an exposure is redistributed into another rating category due to the presence ofan eligible guarantee or collateral, the effective maturity is calculated based on the term of theunderlying exposure, not the term of the guarantee or collateral.
7.4.1.3 Reinsurance exposures
237. The use of AM Best credit ratings is restricted to the calculation of the Credit risk charge
on reinsurance exposures. The mapping of AM Best insurer financial strength ratings to the
ICS ratings categories is provided in section 3.4.
238. Reinsurance exposures include all positive on-balance sheet reinsurance assets andreceivables. Negative exposures are not included.
239. Reinsurance exposures are considered net of cessions to mandatory insurance poolsthat are backed by either a governmental entity or jointly by the insurance market. Cessions
to these mandatory pools are subject to a separate calculation.
240. Reinsurance exposures include all credit recognised in the ICS risk charges due to thepresence of reinsurance.
241. In the case of catastrophe scenarios and life insurance stresses, the impact of the
scenarios and stresses (before management actions) are calculated on a gross and net ofreinsurance basis. The difference between the gross and net of reinsurance basis is thenallocated to Credit risk categories based on the profile of the reinsurers that have provided
cover. This calculation is made at the Catastrophe risk charge and Life insurance risk charge
level (ie after diversification of the components of those risk charges).
242. Modified coinsurance and funds withheld arrangements are subject to a risk charge
even if there is no on-balance sheet reinsurance asset or the reinsurance asset is fully offset
by payables.
243. For funds withheld and similar arrangements, IAIGs may treat payables and otherliabilities due to a reinsurer in the same manner as collateral provided that the arrangement
meets the all of the following conditions:a.

The IAIG has executed a written, bilateral netting contract or agreement with thereinsurer from which the asset is due that creates a single legal obligation. As a resultof such an agreement, the IAIG would have only one obligation for payment or one
claim to receive funds based on the net sum of the liabilities and amounts due in the

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event the reinsurer failed to perform due to any of the following: default, bankruptcy,
liquidation or similar circumstances.
b.

The IAIG has a written and reasoned legal opinion that, in the event of any legal
challenge, the relevant courts or administrative authorities would find the amount owed
under the netting agreement to be the net amount under the laws of all relevant
jurisdictions. In reaching this conclusion, the legal opinion must address the validity
and enforceability of the entire netting agreement under its terms.
i.

The laws of all relevant jurisdictions are:
 The law of the jurisdiction where the reinsurer is incorporated and, if theforeign branch of a reinsurer is involved, the laws of the jurisdiction inwhich the branch is located;

The law governing the individual insurance transaction; andThe law governing any contracts or agreements required to effect the
netting arrangement.

ii. A legal opinion is recognised as such by the legal community in the IAIG’s homejurisdiction or by a memorandum of law that addresses all relevant issues in areasoned manner.
c.

The IAIG has procedures in place to update legal opinions as necessary to ensure
continuing enforceability of the netting arrangement in light of possible changes in
relevant laws.

7.4.1.4 Off-balance sheet exposures
7.4.1.4.1 Credit equivalent amount for OTC derivatives
244. The credit equivalent amount for OTC derivatives is calculated using the current
exposure method from Annex 4, section VII of the Basel Framework22. Under this method,
IAIGs calculate the current replacement cost by summing:a.

The total replacement cost (obtained by marking to market) of all its contracts withpositive value; andb.

An amount for potential future credit exposure calculated on the basis of the total
notional principal amount of its book, split by residual maturity as specified in Table 21.
Table 21: Calculation of potential future credit exposure

Residual
Maturity
One year or
lessInterest
Rate

0.0%

Exchange
Rate andGold
1.0%

Equity6.0%

Precious
Metals Except
Gold

Other
Commoditie
s

7.0%

10.0%

22 Accessible at http://www.bis.org/publ/bcbs128.pdf

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Over
one
year to five
years

0.5%

5.0%

8.0%

7.0%

12.0%

Over
years

1.5%

7.5%

10.0%

8.0%

15.0%

five

245. Credit derivatives are not subject to the current exposure method. Credit protectionthat is received is treated according to the provisions for guarantees and credit derivatives (cf.
Section 7.4.2.2), while credit protection that is sold is treated as an off-balance sheet direct
credit substitute subject to a 100% credit conversion factor (cf. Section 7.4.1.4.2).
246. For contracts with multiple exchanges of principal, the factors are multiplied by the
number of remaining payments in the contract.
247. For contracts that are structured to settle outstanding exposure following specified
payment dates and where the terms are reset so that the market value of the contract is zeroon these specified dates, the residual maturity is considered to be the time until the next reset
date. In the case of interest rate contracts with remaining maturities of more than one year
and that meet the above criteria, the add-on factor is subject to a floor of 0.5%.
248.

Contracts not covered by any category in Table 21 are treated as other commodities.

249. No potential credit exposure is calculated for single currency floating/floating interest
rate swaps; the credit exposure on these contracts is evaluated solely on the basis of theirmark-to-market value.
250. The add-ons are based on effective rather than stated notional amounts. Where thestated notional amount is leveraged or enhanced by the structure of the transaction, IAIGs
use the actual or effective notional amount when determining potential future exposure.
251. Potential credit exposure is calculated for all OTC contracts (with the exception of
single currency floating/floating interest rate swaps), regardless of whether the replacement
cost is positive or negative.
252. IAIGs may net contracts that are subject to novation23 or any other legally valid form of
netting provided the following conditions are satisfied.
a.

The IAIG has executed a written, bilateral netting contract or agreement with eachcounterparty that creates a single legal obligation, covering all included bilateraltransactions subject to netting. The result of such an arrangement is that the IAIG only
has one obligation for payment or one claim to receive funds based on the net sum of
the positive and negative mark-to-market values of all the transactions with thatcounterparty in the event that counterparty fails to perform due to any of the following:
default, bankruptcy, liquidation or similar circumstances.

23 Novation refers to a written bilateral contract between two counterparties under which any obligation

to each other to deliver a given currency on a given date is automatically amalgamated with all otherobligations for the same currency and value date, legally substituting one single amount for the previous
gross obligations.
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b.

The IAIG has a written and reasoned legal opinion that, in the event of any legal
challenge, the relevant courts or administrative authorities will find the exposure under
the netting agreement to be the net amount under the laws of all relevant jurisdictions.
In reaching this conclusion, the legal opinion addresses the validity and enforceabilityof the entire netting agreement under its terms.
i.

The laws of all relevant jurisdictions are:
 The law of the jurisdiction where the counterparties are incorporated
and, if the foreign branch of a counterparty is involved, the laws of thejurisdiction in which the branch is located;

The law governing the individual insurance transactions; andThe law governing any contracts or agreements required to effect the
netting arrangement.

ii. A legal opinion is recognised as such by the legal community in the IAIG’s homejurisdiction or by a memorandum of law that addresses all relevant issues in areasoned manner.
c.

The IAIG has internal procedures to verify that, prior to recognising a transaction as
being subject to netting for capital purposes, the transaction is covered by a legal
opinion that meets the above criteria.

d.

The IAIG has procedures in place to update legal opinions as necessary to ensure
continuing enforceability of the netting arrangements in light of possible changes in
relevant laws.

e.

The IAIG maintains all required documentation in its files.

253. Any contract containing a walkaway clause24 is not eligible to qualify for netting for the
purpose of calculating the Credit risk charge.
254. Credit exposure on bilaterally netted forwards, swaps, purchased options and similar
derivatives transactions is calculated as the sum of the net mark-to-market replacement cost,
if positive, plus an add-on based on the notional principal of the individual underlying contracts.
However, for purposes of calculating potential future credit exposures of contracts subject tolegally enforceable netting agreements in which notional principal is equivalent to cash flows,
notional principal is defined as the net receipts falling due on each value date in each currency.
255. The calculation of the gross add-ons is based on the legal cash flow obligations in all
currencies. This is calculated by netting all receivable and payable amounts in the same
currency for each value date. The netted cash flow obligations is converted to the reporting
currency using the current forward rates for each value date. Once converted the amounts
receivable for the value date are added together and the gross add-on is calculated bymultiplying the receivable amount by the appropriate add-on factor.
256.

The future credit exposure for netted transactions is the sum of:

24 A walkaway clause is a provision within the contract that permits a non-defaulting counterparty tomake only limited payments, or no payments, to the defaulter.
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a.

40% of the add-on as calculated in paragraph 255; andb.

60% of the add-on multiplied by the ratio of net current replacement cost to positive
current replacement cost (NGR) where:𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑛𝑒𝑡 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡

𝑁𝐺𝑅 = 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑟𝑒𝑝𝑙𝑎𝑐𝑒 𝑐𝑜𝑠𝑡 𝑓𝑜𝑟 𝑡𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛𝑠 𝑠𝑢𝑏𝑒𝑐𝑡 𝑡𝑜 𝑙𝑒𝑔𝑎𝑙𝑙𝑦 𝑒𝑛𝑓𝑜𝑟𝑐𝑒𝑎𝑏𝑙𝑒 𝑛𝑒𝑡𝑡𝑖𝑛𝑔 𝑎𝑟𝑟𝑎𝑛𝑔𝑒𝑚𝑒𝑛𝑡𝑠

7.4.1.4.2 Credit equivalent amount for other off-balance sheet exposures257. Off-balance sheet exposures that are not arising from OTC derivatives are converted
into credit exposure equivalents through the use of credit conversion factors (CCFs) applied
to the item’s notional amount:a.

Commitments with an original maturity up to one year and commitments with an
original maturity over one year receive a CCF of 20% and 50%, respectively. However,any commitments that are unconditionally cancellable at any time by the IAIG without
prior notice, or that effectively provide for automatic cancellation due to deterioration
in a borrower’s creditworthiness, receive a 0% CCF;b.

Direct credit substitutes receive a CCF of 100%. If an IAIG has guaranteed, sold acredit derivative for, or otherwise assumed the credit risk of a debt security, the risk
charge is the same as if the IAIG were directly holding the underlying security;c.

Sale and repurchase agreements and asset sales with recourse, where the credit risk
remains with the IAIG, receive a CCF of 100%;d.

Forward asset purchases, forward deposits and partly-paid shares and securities,
which represent commitments with certain drawdown, receive a CCF of 100%;e.

Transaction-related contingent items receive a CCF of 50%;f.

Note issuance facilities (NIFs) and revolving underwriting facilities (RUFs) receive a
CCF of 50%;g.

Short-term self-liquidating trade letters of credit that an IAIG either issues or confirms
arising from the movement of goods receive a 20% CCF;

h.

Where there is an undertaking to provide a commitment on an off-balance sheet item,
IAIGs apply the lower of the two applicable CCFs;

i.

Off-balance sheet securitisation exposures receive a CCF of 100%.

7.4.1.5 Securities financing transactions
258. The rating category for a securities financing transaction is the lower of that of thecounterparty to the transaction, or that of the securities lent. Collateral received under
securities financing transactions is recognised according to the same criteria as collateral
received under regular lending transactions (cf. section 7.4.2.1).
7.4.1.6 Credit risk stress factors
259. The following tables contain the ICS Credit risk stress factors for the exposure classes
by ICS RC and maturity:

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Table 22: Credit risk stress factors for public sector entities
ICS RC

Maturity:
0-1

1-2

2-3

3-4

4-5

5-6

6-7

7-8

8-9

9-10

10-11

11-12

12-13

13-14

14+

1 or 2

0.1%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

1.0%

1.1%

1.1%

1.2%

1.2%

1.2%

1.3%

3

0.4%

1.0%

1.3%

1.5%

1.8%

2.0%

2.2%

2.4%

2.5%

2.7%

2.8%

2.9%

3.0%

3.0%

3.1%

4

1.0%

2.2%

2.6%

3.0%

3.3%

3.6%

3.9%

4.1%

4.2%

4.4%

4.5%

4.6%

4.7%

4.8%

4.9%

5

2.5%

5.1%

6.0%

6.6%

7.0%

7.3%

7.5%

7.6%

7.6%

7.7%

7.8%

7.8%

7.9%

7.9%

7.9%

6

6.3%

10.8

11.8

12.3

12.5

12.7

12.7

12.7

12.7

12.7

12.7

12.7

12.7

12.7

12.7

%

%

%

%

%

%

%

%

%

%

%

%

%

%

24.7

25.2

25.3

25.3

25.3

25.3

25.3

25.3

25.3

25.3

25.3

25.3

25.3

25.3

%

%

%

%

%

%

%

%

%

%

%

%

%

%

7

22.0%

Unrated

2.5%

5.1%

6.0%

6.6%

7.0%

7.3%

7.5%

7.6%

7.6%

7.7%

7.8%

7.8%

7.9%

7.9%

7.9%

In Default

35.0%

35.0

35.0

35.0

35.0

35.0

35.0

35.0

35.0

35.0

35.0

35.0

35.0

35.0

35.0

%

%

%

%

%

%

%

%

%

%

%

%

%

%

Table 23: Credit risk stress factors for corporates and reinsurance
ICS RC

Maturity:
0-1

1-2

2-3

3-4

4-5

5-6

6-7

7-8

8-9

9-10

10-11

11-12

12-13

13-14

14+

1 or 2

0.2%

0.7%

0.9%

1.2%

1.4%

1.6%

1.7%

1.9%

2.0%

2.1%

2.2%

2.3%

2.4%

2.4%

2.5%

3

0.6%

1.3%

1.6%

1.8%

2.1%

2.3%

2.6%

2.8%

3.0%

3.2%

3.3%

3.4%

3.5%

3.6%

3.7%

4

1.4%

3.0%

3.6%

4.1%

4.5%

4.9%

5.1%

5.3%

5.4%

5.6%

5.7%

5.8%

5.9%

6.0%

6.0%

5

3.6%

7.1%

8.3%

9.0%

9.4%

9.7%

9.8%

9.8%

9.8%

9.8%

9.8%

9.8%

9.8%

9.8%

9.8%

6

8.9%

14.4

15.3

15.6

15.6

15.6

15.6

15.6

15.6

15.6

15.6

15.6

15.6

15.6

15.6

%

%

%

%

%

%

%

%

%

%

%

%

%

%

7

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

Unrated

6.3%

10.7

11.8

12.3

12.5

12.6

12.7

12.7

12.7

12.7

12.7

12.7

12.7

12.7

12.7

%

%

%

%

%

%

%

%

%

%

%

%

%

%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

11-12

12-13

13-14

14+

In Default

35%

Table 24: Credit risk stress factors for securitisations
ICS RC

Maturity:
0-1

1-2

2-3

3-4

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5-6

6-7

7-8

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9-10

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1 or 2

0.2%

0.7%

0.9%

1.2%

1.4%

1.6%

1.7%

1.9%

2.0%

2.1%

2.2%

2.3%

2.4%

2.4%

2.5%

3

0.6%

1.3%

1.6%

1.8%

2.1%

2.3%

2.6%

2.8%

3.0%

3.2%

3.3%

3.4%

3.5%

3.6%

3.7%

4

1.4%

3.0%

3.6%

4.1%

4.5%

4.9%

5.1%

5.3%

5.4%

5.6%

5.7%

5.8%

5.9%

6.0%

6.0%

5

10.8%

21.3

24.9

27.0

28.2

29.1

29.4

29.4

29.4

29.4

29.4

29.4

29.4

29.4

29.4

%

%

%

%

%

%

%

%

%

%

%

%

%

%

100

100

100

100

100

100

100

100

100

100

100

100

100

100

%

%

%

%

%

%

%

%

%

%

%

%

%

%

100

100

100

100

100

100

100

100

100

100

100

100

100

100

%

%

%

%

%

%

%

%

%

%

%

%

%

%

100

100

100

100

100

100

100

100

100

100

100

100

100

100

%

%

%

%

%

%

%

%

%

%

%

%

%

%

100

100

100

100

100

100

100

100

100

100

100

100

100

100

%

%

%

%

%

%

%

%

%

%

%

%

%

%

6

100%

7

100%

UnratedIn Default

100%

100%

Table 25: Credit risk stress factors for re-securitisations
ICS RC

Maturity:
0-1

1-2

2-3

3-4

4-5

5-6

6-7

7-8

8-9

9-10

10-11

11-12

12-13

13-14

14+

1 or 2

0.4%

1.4%

1.8%

2.4%

2.8%

3.2%

3.4%

3.8%

4.0%

4.2%

4.4%

4.6%

4.8%

4.8%

5.0%

3

1.2%

2.6%

3.2%

3.6%

4.2%

4.6%

5.2%

5.6%

6.0%

6.4%

6.6%

6.8%

7.0%

7.2%

7.4%

4

2.8%

6.0%

7.2%

8.2%

9.0%

9.8%

10.2

10.6

10.8

11.2

11.4

11.6

11.8

12.0

12.0

%

%

%

%

%

%

%

%

%

5

21.6%

42.6

49.8

54.0

56.4

58.2

58.8

58.8

58.8

58.8

58.8

58.8

58.8

58.8

58.8

%

%

%

%

%

%

%

%

%

%

%

%

%

%

6

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

7

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

Unrated

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

In Default

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

260. The Credit risk stress factor for policy loans is 0%. The stress factor for short-term
obligations of regulated banks, as defined in paragraph 228, is 0.4%. The stress factor forreceivables from agents and brokers is 6.3%. All other assets receive a stress factor of 8%.
IAIGs may exclude outstanding premiums from the exposure if insurance liabilities arerecorded for the contracts relating to the outstanding premiums and the outstanding premiums
are unrecorded in line with the release of the insurance liabilities when the contracts expire
upon the policyholder’s default.
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7.4.1.7 Mortgage Loans
7.4.1.7.1 Commercial and agricultural mortgages where repayment depends on property
income261. Depending on data availability, the risk charge is calculated using one of the threefollowing methods, in decreasing order of preference:a.

Method 1: risk charge based on the ICS Commercial Mortgage (CM) category as
determined by loan-to-value (LTV) and debt service coverage ratio (DSCR);b.

Method 2: risk charge based on the ICS CM category as determined by LTV only; orc.

Method 3: no Credit Quality Differentiator used.

262. For agricultural and commercial Method 1, the mapping of the ICS CM categories 1 to
5 to LTV and DSCR is provided in Table 26. Categories CM6 and CM7 are for delinquentloans and loans in foreclosure, respectively.
Table 26: Mapping of ICS CM categories, Method 1
LTV

DSCR

263.

CM

<60%

60% to 69.9%

70% to 79.9%

80% to 89.9%

90% to 99.9%>= 100%

< 0.6

CM3

CM3

CM3

CM4

CM4

CM5

0.6 to 0.79

CM3

CM3

CM3

CM4

CM4

CM5

0.8 to 0.99

CM3

CM3

CM3

CM4

CM4

CM5

1 to 1.19

CM2

CM2

CM3

CM3

CM4

CM4

1.2 to 1.39

CM2

CM2

CM3

CM3

CM3

CM3

1.4 to 1.59

CM1

CM2

CM2

CM2

CM3

CM3

1.6 to 1.79

CM1

CM1

CM1

CM2

CM3

CM3

1.8 to 1.99

CM1

CM1

CM1

CM2

CM2

CM2

>= 2

CM1

CM1

CM1

CM2

CM2

CM2

For agricultural and commercial Method 1, the following stress factors are used:
Table 27: Stress factors for agricultural and commercial mortgages, Method 1
ICS CM
Categories

Stress factors

CM1

4.8%

CM2

6.0%

CM3

7.8%

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CM4

15.8%

CM5

23.5%

CM6

35%

CM7

35%

264. For agricultural and commercial Method 2, where only LTV data is available, themapping of the ICS CM categories 1 to 4 to LTV and the associated stress factors are provided
in Table 28. As for Method 1, categories CM6 and CM7 are for delinquent loans and loans inforeclosure, respectively.
Table 28: Stress factors for agricultural and commercial mortgages, Method 2
ICS CM
Categories

Stress factors

LTV
Minimum

LTV
Maximum

CM1

4.8%

0%

59%

CM2

6.0%

60%

79%

CM3

7.8%

80%

99%

CM4

15.8%

100%

NA

CM5

Not applicable

CM6

35%

CM7

35%

265. For agricultural and commercial Method 3, where LTV and DSCR data are notavailable, a flat 8% stress factor is used.
7.4.1.7.2 Commercial and agricultural mortgages where repayment does not depend on
property income
266. When the LTV ratio of the mortgage is above 60%, the risk factor is that of a regularcredit exposure to the borrower. When the LTV ratio of the mortgage is 60% or lower, the risk
factor is the lower of 3.6% or the risk factor for a regular credit exposure to the borrower.
7.4.1.7.3 Residential mortgages
267. For performing25 residential mortgage loans for which repayment depends on income
generated by the underlying property, the factors applied are based on the mortgage’s LTV
ratio, as specified in the following table:
25 The distinction between performing and non-performing is consistent with the Basel Committee’s

definition, which establishes criteria for categorising loans and debt securities that are centred arounddelinquency status (90 days past due) and the unlikeliness of repayment. As such, non-performing
exposures encompass: (1) all exposures defaulted, as defined under the Basel framework; or (2) all
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Table 29: Factors for residential mortgages for which repayment depends on income
generated by the underlying property

LTV

Stressfactors

LTV ≤ 60%

4.2%

60% < LTV ≤ 80%

5.4%

LTV > 80%

7.2%

268. For performing residential mortgage loans for which repayment does not depend on
income generated by the underlying property, the factors applied are based on the mortgage’s
LTV ratio, as specified in the following table:
Table 30: Factors for residential mortgages for which repayment does not depend on
income generated by the underlying property

LTV

Stressfactors

LTV ≤ 40%1.5%

40% < LTV ≤ 60%

1.8%

60% < LTV ≤ 80%

2.1%

80% < LTV ≤ 90%

2.7%

90% < LTV ≤ 100%

3.3%

LTV > 100%

4.5%

269.

For non-performing mortgage loans, the factor applied is 35%.

7.4.2

Recognition of collateral, guarantees and credit derivatives

7.4.2.1 Recognition of collateral270.

A collateralised transaction is one in which:a.

An IAIG has a credit exposure or potential credit exposure; andb.

That credit exposure or potential credit exposure is hedged in whole or in part bycollateral posted by a counterparty or by a third party on behalf of the counterparty.

271.

Only the following collateral categories are eligible to be recognised:

exposures impaired (ie exposures that have undergone a downward adjustment to their valuation due
to deterioration in their creditworthiness); or (3) material exposures that are more than 90 days past dueor where there is evidence that full repayment of principal and interest without realization of collateralis unlikely, regardless of the number of days past due.
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a.

Securities that are either issued by a sovereign entity or have ICS RC 4 or better;

b.

Gold;

c.

Mutual funds where:d.

a price is publicly quoted daily; andthe mutual fund is limited to investing in the eligible collateral listed above.
Letters of credit.

272. The Credit risk charge calculation takes into account collateral provided all of thefollowing requirements are met:a.

The effects of collateral are not double counted. In particular, collateral on claims forwhich an issue-specific rating is used that already reflects that collateral is notrecognised. All criteria around the use of ratings remain applicable to collateral.

b.

All documentation used in collateralised transactions are binding on all parties andlegally enforceable in all relevant jurisdictions. The IAIG has conducted sufficient legal
review to verify this and have a well-founded legal basis to reach this conclusion, andundertaken such further review as necessary to ensure continuing enforceability.

c.

The legal mechanism by which collateral is pledged or transferred ensures that the
IAIG has the right to liquidate or take legal possession of the collateral in a timely
manner in the event of the default, insolvency or bankruptcy (or one or more otherwisedefined credit events set out in the transaction documentation) of the counterparty(and, where applicable, of the custodian holding the collateral). Furthermore, the IAIG
has taken all necessary steps to fulfil those requirements under the law applicable tothe IAIG’s interest in the collateral for obtaining and maintaining an enforceable
security interest, eg by registering it with a registrar, or for exercising a right to net or
set off in relation to title transfer collateral.

d.

The credit quality of the counterparty and the value of the collateral do not have amaterial positive correlation. For example, securities issued by the counterparty – orby any related group entity – are not eligible.

e.

The IAIG has clear and robust procedures for the timely liquidation of collateral toensure that any legal conditions required for declaring the default of the counterparty
and liquidating the collateral are observed, and that collateral can be liquidated
promptly.

f.

Where collateral is held by a custodian, the IAIG takes reasonable steps to ensure thatthe custodian segregates the collateral from its own assets.

g.

The collateral is pledged for at least the life of the exposure.

273. Where the collateral is denominated in a currency different from that in which theexposure is denominated, the amount of the exposure deemed to be protected is 80% of theamount of collateral, converted at current exchange rates.
7.4.2.1.1 Default approach to the recognition of collateral: the substitution approach

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274. The portion of an exposure that is collateralised by eligible financial collateral valued
at market is redistributed into the rating category applicable to the collateral instrument, while
the remainder of the exposure is assigned the rating category appropriate to the counterparty.
7.4.2.1.2 Alternative approach for collateralised non-life reinsurance exposures: the haircut
approach
275. Under the haircut approach, collateral may be recognised if it satisfies requirements a)to f) of paragraph 272 and is pledged for at least one year.
276. The haircut approach reduces the exposure amount to account for collateral held by
the ceding insurer. The adjusted reinsurance exposure is defined by:
Adjusted Reinsurance Exposure= Reinsurance Assets and Receivables + Capital Requirements – Collateral
where Capital Requirements consist of the risk charges for Non-life risk, Catastrophe risk,
Market risks and Credit risk on the reinsured business and/or its supporting collateral,aggregated using the correlations specified in section 7.6.
277. The risk charges for Non-life and Catastrophe risks are equal to the reduction in the
ICS risk charges attributable to the reinsurance arrangement. This amount is aggregated with
the Market risk charge and the Credit risk charges using 25% correlations.
278.

The Credit and Market risk charges are specified as follows:a.

The Credit risk charge is calculated for all of the assets held as collateral.

b.

The Asset Concentration risk charge is the granularity adjustment for all of the assets
held as collateral, calculated on a standalone basis (ie in isolation from the ceding
insurer’s own asset portfolio).

c.

The Currency risk charge is calculated on a standalone basis for the reinsured liabilities
in combination with the assets held as collateral. For the purpose of this calculation,
the base currency is taken to be the currency in which the ceded liabilities aredenominated, and the deduction referred to in point g of paragraph 210 is not applied.

d.

The Interest Rate and Non-Default Spread risk charges are calculated on a standalone
basis for the ceded liabilities in combination with the assets held as collateral.

e.

The Equity and Real Estate risk charges are calculated for all of the assets held ascollateral.

f.

The Asset Concentration, Currency, Interest Rate, Non-Default Spread, Equity andReal Estate risk charges are aggregated to obtain the Market risk charge using thecorrelations specified in section 7.3.1.

279. The resulting Credit risk charge for collateralised non-life reinsurance is equal to theadjusted reinsurance exposure multiplied by the Credit risk factor applicable to the reinsurer.
7.4.2.2 Recognition of guarantees and credit derivatives
280. In order to determine the ICS RC of their counterparties, IAIGs may take into accountthe credit protection provided by guarantees and credit derivatives, provided that all of thefollowing conditions are met:
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a.

The guarantees or credit derivatives are direct, explicit, irrevocable and unconditional.

b.

The guarantor or protection provider belongs to a higher rating category than the
counterparty covered by the guarantee or protection.

c.

The IAIG fulfils certain minimum conditions relating to risk management described in
section 7.4.2.2.1.

281. The capital treatment is founded on the substitution approach, whereby the protected
portion of a counterparty exposure is assigned the rating category of the guarantor orprotection provider, while the uncovered portion retains the rating category of the underlying
counterparty.
7.4.2.2.1 Risk management requirements
282. The minimum conditions referred to in paragraph 280, applicable to both guarantees
and credit derivatives, are the following:a.

The effects of credit protection are not double counted. In particular, no recognition is
given to credit protection on claims for which an issue-specific rating is used that
already reflects that protection. All criteria around the use of ratings remain applicableto guarantees and credit derivatives.

b.

With the exception of credit protection provided by sovereigns as specified inparagraph 296, a guarantee, counter-guarantee or credit derivative must represent a
direct claim on the protection provider and must explicitly refer to a specific exposure
or pool of exposures, so that the extent of the cover is clearly defined andincontrovertible.

c.

The credit protection contract is irrevocable, except in case of non-payment by theprotection purchaser of money due in respect of the credit protection contract.

d.

There is no clause in the contract that allows the protection provider to unilaterally
cancel the credit cover or to increase the effective cost of cover as a result of
deteriorating credit quality in the hedged exposure.

e.

The contract is unconditional, ie there is no clause in the protection contract outside
the direct control of the IAIG that could prevent the protection provider from being
obliged to pay out in a timely manner in the event that the original counterparty fails to
make the payment(s) due.

f.

All documentation used for documenting guarantees and credit derivatives are bindingon all parties and legally enforceable in all relevant jurisdictions. IAIGs have conductedsufficient legal review to verify this and have a well-founded legal basis to reach thisconclusion, and undertake such further review as necessary to ensure continuing
enforceability.

283. In addition to the requirements set in paragraph 282, the recognition of a guarantee issubject to all of the following conditions:a.

On the qualifying default/non-payment of the counterparty, the IAIG pursues theguarantor in a timely manner for any monies outstanding under the documentation
governing the transaction. The guarantor makes one lump sum payment of all monies
under such documentation to the IAIG, or the guarantor assumes the future payment

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obligations of the counterparty covered by the guarantee. The IAIG has the right toreceive any such payments from the guarantor without first having to take legal actionin order to pursue the counterparty for payment.
b.

The guarantee is an explicitly documented obligation assumed by the guarantor.

c.

Except as noted in the following sentence, the guarantee covers all types of payments
the underlying obligor is expected to make under the documentation governing thetransaction, for example notional amount, margin payments etc. Where a guarantee
excludes certain types of payment, the corresponding amounts are treated as
unsecured amounts.

284. In addition to the requirements set in paragraph 282, the recognition of a credit
derivative contract is subject to all of the following conditions:a.

The credit events specified by the contracting parties cover at a minimum:i.

The failure to pay the amounts due under the terms of the underlying obligationthat are in effect at the time of such failure (with a grace period that is in line withthe grace period in the underlying obligation);

ii. The bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure
or admission in writing of its inability generally to pay its debts as they become due,
and analogous events; andiii. The restructuring of the underlying obligation involving forgiveness or
postponement of principal, interest or fees that results in a credit loss event (iecharge-off, specific provision or other similar debit to the profit and loss account).
b.

If the credit derivative covers obligations that do not include the underlying obligation,
point g) below governs whether the asset mismatch is permissible.

c.

The credit derivative does not terminate prior to the expiration of any grace periodrequired for a default on the underlying obligation to occur as a result of a failure to
pay.

d.

Credit derivatives allowing for cash settlement are recognised for capital purposes
insofar as a robust valuation process is in place in order to estimate loss reliably. Thereis a clearly specified period for obtaining post-credit event valuations of the underlying
obligation. If the reference obligation specified in the credit derivative for purposes ofcash settlement is different than the underlying obligation, point g) below governs
whether the asset mismatch is permissible.

e.

If the protection purchaser’s right/ability to transfer the underlying obligation to theprotection provider is required for settlement, the terms of the underlying obligation
provide that any required consent to such transfer be not unreasonably withheld.

f.

The identity of the parties responsible for determining whether a credit event has
occurred is clearly defined. This determination is not the sole responsibility of theprotection seller. The protection buyer has the right/ability to inform the protection
provider of the occurrence of a credit event.

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g.

h.

i.

A mismatch between the underlying obligation and the reference obligation under thecredit derivative (ie the obligation used for purposes of determining cash settlement
value or the deliverable obligation) is permissible if:i.

The reference obligation ranks pari passu with or is junior to the underlying
obligation; andii.

The underlying obligation and reference obligation share the same obligor (ie thesame legal entity) and legally enforceable cross-default or cross-acceleration
clauses are in place.

A mismatch between the underlying obligation and the obligation used for purposes ofdetermining whether a credit event has occurred is permissible if:i.

The latter obligation ranks pari passu with or is junior to the underlying obligation;
and

ii.

The underlying obligation and reference obligation share the same obligor (ie thesame legal entity) and legally enforceable cross-default or cross-acceleration
clauses are in place.

Only credit default swaps and total return swaps that provide credit protection
equivalent to guarantees are eligible for recognition. Where an IAIG buys credit
protection through a total return swap and records the net payments received on theswap as net income, but does not record offsetting deterioration in the value of theasset that is protected (either through reductions in fair value or by increasing
provisions), the credit protection is not recognised.

285. When the restructuring of the underlying obligation is not covered by the credit
derivative, but the other requirements above are met, partial recognition of the credit derivativeis allowed, up to a maximum of 60% of the lower of:a.

The amount of the credit derivative; andb.

The amount of the underlying obligation.

7.4.2.2.2 Eligible guarantors
286. Only the credit protection provided by the following counterparties are eligible forrecognition:a.

Sovereigns;b.

Externally rated public sector entities, banks and securities firms with a higher rating
category than that of the counterparty; andc.

Other entities, including parent, subsidiaries and affiliate companies of an obligor,
provided they have a higher rating category than that of the obligor.

In addition, a guarantee or credit protection provided by a related party (parent, subsidiary oraffiliate) of the IAIG is not eligible for recognition.
7.4.2.2.3 Capital treatment

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287. The protected portion of a counterparty exposure is assigned the rating category of theprotection provider. The uncovered portion of the exposure is assigned the rating category of
the underlying counterparty.
288. Where the amount guaranteed or covered with credit protection is less than the amountof the exposure, and the secured and unsecured portions are of equal seniority (ie the IAIG
and the guarantor share losses on a pro-rata basis), the protected portion of the exposure
receives the treatment applicable to eligible guarantees and credit derivatives, and theremainder is treated as unsecured.
289. Where an IAIG transfers a portion of the risk of an exposure in one or more tranches
to protection sellers and retains some level of risk, and the risk transferred and the risk retained
are of different seniority, all tranches are considered as securitisation exposures based on theratings of the guarantors. If a tranche does not carry a rating, it is considered as an unrated
securitisation exposure even if the underlying exposure is rated. Where such treatment leads
to a Credit risk charge higher that the risk charge calculated without taking the guarantee into
account, IAIGs may ignore the guarantee.
290. Materiality thresholds on amounts due below which no payment is made in the eventof loss are considered unrated securitisation exposures.
7.4.2.2.4 Currency mismatches
291. Where the credit protection is denominated in a currency different from that in which
the exposure is denominated, the amount of the exposure deemed to be protected is 80% of
the nominal amount of the credit protection, converted at current exchange rates.
7.4.2.2.5 Maturity mismatches
292. When the residual maturity of the credit protection is less than that of the underlying
exposure (maturity mismatch) and the credit protection has either an original maturity of lessthan one year or a residual maturity of less than three months, the protection is not recognised.
293.

In other cases of maturity mismatch, the following adjustment is applied:

𝑃𝑎 = 𝑃 ∗𝑡 − 0.25
𝑇 − 0.25

where:
𝑃𝑎 is the value of the credit protection adjusted for maturity mismatch;
𝑃 is the nominal amount of the credit protection, adjusted for currency mismatch if
applicable;
𝑇 is the lower of 5 and the residual maturity of the exposure expressed in years; and𝑡 is the lower of 𝑇 and the residual maturity of the credit protection arrangement
expressed in years.

294. The residual maturity of the underlying exposure is taken as the longest possible
remaining time before the counterparty is scheduled to fulfil its obligation, taking into accountany applicable grace period.
295. For the credit protection, embedded options that may reduce the term of the protection
are taken into account so that the shortest possible effective maturity is used. In particular:
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a.

Where a call is at the discretion of the protection seller, the residual maturity
corresponds to the remaining time to the first call date.

b.

Where a call is at the discretion of the IAIG buying protection but the terms of thearrangement at origination contain a positive incentive for the IAIG to call thetransaction before contractual maturity, the residual maturity corresponds to theremaining time to the first call date.

7.4.2.2.6 Sovereign counter-guarantees
296. Claims covered by a guarantee that is indirectly counter-guaranteed by a sovereign
may be treated as covered by a sovereign guarantee provided that:a.

The sovereign counter-guarantee covers all credit risk elements of the claim;b.

Both the original guarantee and the counter-guarantee meet all the operational
requirements for guarantees, except that the counter-guarantee need not be direct andexplicit to the original claim; andc.

The cover is robust, and there is no historical evidence suggesting that the coverageof the counter-guarantee is less than effectively equivalent to that of a direct sovereignguarantee.

7.4.2.2.7 Other items
297. Where an IAIG has multiple types of risk mitigation arrangements covering a single
exposure, this exposure is subdivided into portions covered by each type of risk mitigation
arrangement and the rating category for each portion is determined separately.
298. When a credit protection provided by a single protection provider has different
maturities, it is subdivided into separate protections.
7.4.3

Use of external credit ratings

7.4.3.1 Eligible external credit ratings
299. IAIGs may use ratings produced by rating agencies other than those referred to inparagraph 149 of the ICS Level 1 document, provided that both of the following requirements
are met:a.

The rating agency is regulated or recognised by a suitable government authority in allof the jurisdictions in which the agency issues ratings that the IAIG chooses to use.

b.

The rating agency publishes at least annually publicly available default and transition
statistics extending back at least seven years, and satisfies all of the following six
criteria:i.

Objectivity: The rating agency’s methodology for assigning credit assessments isrigorous, systematic, and subject to some form of validation based on historicalexperience. Moreover, assessments are subject to ongoing review and are
responsive to changes in financial conditions. The agency has an assessment
methodology for each market segment, including rigorous back testing that has
been applied for at least one year and, preferably, three years.

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ii. Independence: The rating agency is independent and is not subject to political or
economic pressures that may influence the rating. The assessment process is freefrom any constraints that could arise in situations where the composition of theboard of directors or the shareholder structure of the assessment institution may
be seen as creating a conflict of interest.
iii. International access/Transparency: The individual assessments, the key elements
underlining the assessments, and whether the issuer participated in theassessment process are made publicly available on a non-selective basis. In
addition, the general procedures, methodologies and assumptions for arriving atassessments used by the rating agency are publicly available.
iv. Disclosure: A rating agency discloses the following information: its code of conduct;
the general nature of its compensation arrangements with assessed entities; its
assessment methodologies, including the definition of default, the time horizon,
and the meaning of each rating; the actual default rates experienced in each
assessment category; and the transitions of the assessments, eg the likelihood of
AA ratings becoming A over time.
v. Resources: A rating agency has sufficient resources to carry out high quality credit
assessments. These resources allow for substantial ongoing contact with seniorand operational levels within the entities assessed in order to add value to thecredit assessments. Such assessments are based on methodologies that combine
qualitative and quantitative approaches.
vi. Credibility: The rating agency’s external credit assessments are widely used byindependent parties (investors, insurers, trading partners). In addition, the rating
agency has internal procedures to prevent the misuse of confidential information.
7.4.3.2 Definition of rating categories
300. The mapping of the agency’s ratings to ICS RCs is based on the average of the threeyear Cumulative Default Rates (CDRs) associated with the agency’s ratings, as follows:
Table 31: Mapping of ratings by other rating agencies

ICS RC

Average 3-year CDR
based on over 20
years of publisheddata

Average 3-year CDR
based on between 7
and 20 years of
published data

1
2

0 ≤ CDR ≤ 0.15%

3

0.15% < CDR ≤ 0.35%

0 ≤ CDR ≤ 0.15%

4

0.35% < CDR ≤ 1.20%

0.15% < CDR ≤ 0.35%

51.20% < CDR ≤10.00%

0.35% < CDR ≤ 1.20%

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610.00% < CDR ≤25.00%

1.20% < CDR ≤10.00%

7

CDR > 25%

CDR > 10%7.4.3.3 Use of ratings
301. IAIGs choose the rating agencies they intend to rely on and use their ratings
consistently for each type of credit exposure.
302. Any rating used to determine an ICS RC is publicly available, ie the rating is publishedin an accessible form and included in the rating agency’s transition matrix.
303. If an IAIG is relying on multiple rating agencies and there is only one rating for aparticular security, that assessment is used to determine the ICS RC. If there are two ratingsfrom the rating agencies used by an IAIG, and those two ratings are mapped to different ICS
RC, the IAIG uses the ICS RC corresponding to the lower of the two ratings. If there are threeor more ratings for a security from an IAIG’s chosen rating agencies, one of the ratings that
corresponds to the highest ICS RC is excluded, and the rating that corresponds to the highest
rating category of those that remain is used to determine the ICS RC of the security.
304. Where a particular security has one or more issue-specific rating, the ICS RC for that
security is based on these ratings. Otherwise, the following principles apply:a.

Where the borrower has a specific rating for an issued debt security other than the one
in which the IAIG is invested, an ICS RC of 4 or better on the rated security may only
be applied to the IAIG’s unrated investment if it ranks pari passu or senior to the rated
security in all respects. If not, the credit rating cannot be used and the IAIG’s
investment is treated as an unrated obligation.

b.

Where the borrower has an issuer rating, only senior securities issued by that issuer
will benefit from an investment-grade (ICS RC 4 or better) issuer assessment; otherunassessed securities issued by that issuer are treated as unrated. If either the issuer
or one of its issues has an ICS RC of 5 or weaker, this rating is used to determine the
ICS RC for an unrated claim on the issuer.

c.

Short-term assessments for a given security or facility can be used only for that security
or securities issued by that rated facility. They can neither be generalised to othershort-term securities nor used to support a rating category assignment for an unrated
long-term security.

d.

Where the rating category for an unrated exposure is based on the rating of anequivalent exposure to the borrower, a foreign currency rating may be used only for
exposures denominated in that foreign currency. Domestic currency ratings, if
separate, are used to determine the rating category for securities denominated in thedomestic currency only.

305.
a.

The following additional conditions apply to the use of ratings:
External assessments for one entity within a corporate group are not used to determine
the rating category for other entities within the same group.

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b.

No rating based on assets that the entity possesses is inferred for an unrated entity.
The use of internal ratings is not allowed.

c.

IAIGs do not recognise collateral or guarantees in the Credit risk charge calculation if
these credit enhancements have already been reflected in the issue-specific rating.

d.

IAIGs do not use a rating that is at least partly based on unfunded support (egguarantees, credit enhancement or liquidity facilities) provided by the IAIG itself or oneof its affiliates.

e.

Any assessment used takes into account the entire amount of Credit risk exposure an
IAIG has with regard to all payments owed to it. In particular, if an IAIG is owed bothprincipal and interest, the assessment fully takes into account the Credit risk
associated with repayment of both principal and interest.

7.4.3.4 Exposures in default
306. Assets for which there is reasonable doubt about the timely collection of the full amountof principal or interest, including those assets that are contractually more than 90 days inarrears, are considered as defaulted exposures for the calculation of the Credit risk charge.
307. The exposure amount for a defaulted asset is taken net of all balance sheet writedowns and specific provisions that have been recorded for the asset.
7.4.4

Supervisor-owned and controlled credit assessment (SOCCA) processes

308.

A SOCCA process may be recognised in the ICS if all of the following criteria are met:a.

Objectivity: The SOCCA’s methodology for assigning credit assessments is rigorous,
systematic, and subject to some form of validation. Moreover, assessments are subject
to ongoing review and responsive to changes in financial condition.

b.

Independence: The SOCCA process is aligned with the regulatory objectives of thesupervisor, evidenced by the supervisor’s approval of the credit assessment process.
Any outsourcing arrangement of the credit assessment is held to the same standardsof competency and independence as the in-house credit assessment processes.

c.

International access/transparency: IAIGs with operations outside the jurisdiction of the
SOCCA process can request designations/ratings be assigned to securities they own.
Public access to the credit assessment is available through third-party platforms.

d.

Disclosure: Default statistics over time are developed for each designation/rating sothat three-year cumulative default rates (CDRs) can be derived from publishedstatistics.

e.

Resources: Staff has appropriate qualifications and experience to undertake the credit
assessment process. The SOCCA process relies on adequate resources to carry out
the credit assessments required by the supervisor.

f.

Credibility: The SOCCA process relies on internal procedures to prevent the misuse ofconfidential information. The SOCCA process has at least 10 years of demonstrable
business history in assessing the Credit risk of a large number of securities such thatstatistical performance data can be derived. All designations/ratings are updated at

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least on a yearly basis; in addition, the designations/ratings are reviewed as soon asa significant event occurs that may affect them.
g.

Alignment of interests with the purposes of prudential supervision: The entity
performing the credit assessment is fully owned and controlled by a supervisory
authority. There are policies approved by the supervisory authority as to how the credit
assessment process is applied.

7.5

Operational risk

309.

The Operational risk charge is calculated as follows:

𝑂𝑝 𝑟𝑖𝑠𝑘 𝑐ℎ𝑎𝑟𝑔𝑒 = max [non_life_premium_exposure ∗ factor, non_life_liability_exposure∗ factor] + non_life_growth_exposure ∗ factor+ max [life_(risk)_premium_exposure ∗ factor, life_(risk)_liability_exposure∗ factor] + life_(risk)_growth_exposure ∗ factor+ life_(non_risk)_liability_exposure ∗ factor
310. The Operational risk components are computed as factors multiplied by risk
exposures. The same factors are applied across geographical segments as defined in 7.1.2.
311.

The exposures and stress factors for Operational risk are set in the following table.
Table 32: Operational risk exposures and stress factors
Premium

GrowthLiabilities

Risk from Non-life Operations
Exposure

FactorGross written premium
GWP in(GWP) inmost recent financial year in
most recent financial
excess of the growthyear
threshold (20%) comparedto the previous year’s GWP
2.75%

2.75%

Gross current estimate

2.75%

Risk from Life Operations
Exposure

FactorLife (risk): GWP in
most recent financial
year

Life (risk): GWP in
most recent financial year inexcess of the growththreshold (20%) comparedto the previous year’s GWP

Life (risk): Gross current
estimate

Life (risk): 4%

Life (risk): 4%

Life (risk): 0.45%
Life (non-risk): 0.40%

Life (non-risk): Grosscurrent estimate

312. GWP includes all business (new and renewal) written during the specified financial
year before any allowance for reinsurance or other related recoverables. For single premium
policies, premiums are included in full as written during the year. For other insurance policies,
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GWP includes premiums due to the IAIG during the specified time period (financial year) on
all business in-force.
313. Gross current estimates are considered before any allowance for reinsurance or otherrelated recoverables.
314. To calculate the growth risk component of Operational risk, the GWP for the two mostrecent financial years for non-life and life (risk) are used. The figures are considered before
the effect of ceded reinsurance and on a consolidated basis.
7.6

Aggregation/Diversification of ICS Risk Charges

315.

The top-level aggregation matrix between major risk categories is:
Table 33: Aggregation matrix between risksLife

Non-life

Catastrophe

MarketCredit

Life

100%

0%

25%

25%

25%

Non-life

0%

100%

25%

25%

25%

Catastrophe

25%

25%

100%

25%

25%

Market

25%

25%

25%

100%

25%

Credit

25%

25%

25%

25%

100%

7.7

Non-Insurance Risk Charges

316. For insurance or insurance-related entities, the capital requirement is calculated as
described in sections 7.1 to 7.6.
317. For financial non-insurance entities with a sectoral capital requirement, the capitalrequirement is as follows:a.

For consolidated banking entities it is the maximum of Basel III risk-weighted assets
or leverage ratio.

b.

For consolidated non-banking entities it is equal to the maximum of the sectoral capitalrequirement and 15% of three year average gross income.

c.

For banking and non-banking entities reported as an equity method investment it isequal to the proportional sectoral charge.

d.

For both banking and non-banking entities reported as a market value investment it isequal to the equity charge on the investment as described in section 7.3.4.

318. For financial non-insurance entities without a sectoral capital requirement, the capitalrequirement is as follows:a.

For consolidated banking entities it is equal to 4% of the exposure as determined by
the leverage ratio.

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b.

For consolidated non-banking entities it is equal to 15% of three year average grossincome.

c.

For banking entities reported as an equity method investment it is equal to the
proportional sectoral leverage ratio.

d.

For non-banking entities reported as an equity method investment it is equal to the
proportional 15% of three year average gross income.

e.

For both banking and non-banking entities reported as a market value investment it isequal to the equity charge on the investment as described in section 7.3.4.

319. For non-financial entities, the capital requirement is equal to the equity charge on theequity method or market value investment as described in paragraph 207, a) to d).

8Reference ICS: Tax

8.1

General principles

320. The group effective tax rate (ETR) is calculated as a weighted average statutory
effective tax rate, weighted using the previous three-year average of GAAP earnings before
tax on a sub-group/entity level basis. The scope of the weighted average calculation is limited
to insurance-related activities, and GAAP earnings before tax is floored at zero.
321. Statutory effective tax rates that have been enacted or substantially enacted as of thereporting date are used for the group ETR calculation.26
8.2

Deferred tax from the ICS Adjustments

322. DTAs and DTLs arising from ICS Adjustments, before the utilisation assessment
defined by paragraph 323, may be offset if both of the following criteria are met:a.

The entity has a legally enforceable right to offset current tax assets against current
tax liabilities.

b.

Deferred taxes relate to income taxes levied by the same taxation authority on either:The same taxable entity; orDifferent taxable entities that intend either to settle current tax liabilities and assets on
a net basis, or to realise the assets and settle the liabilities simultaneously, in eachfuture period in which significant amounts of deferred taxes are expected to be settled
or recovered.

8.2.1

Utilisation assessment of DTAs recognised from the ICS Adjustments

323. The DTA recognised as a result of the ICS Adjustments is capped at any net GAAPDTL plus gross DTL recognised from the ICS Adjustments according to the following
calculation:Add:
26 For example, a tax authority announces tax rate changes that would have a material impact for future

periods. In such a case, the newly announced statutory effective tax rate is used in the group ETR
calculation.
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a.

Gross jurisdictional audited GAAP DTL; andb.

Gross DTL recognised from the ICS Adjustments.

Subtract:c.

Gross jurisdictional audited GAAP DTA; andd.

DTL associated with assets subject to deduction from Tier 1 capital resources (as per
section 6.4.1 of the Level 1 Document).

324.
zero.

If the calculation is negative, the DTA recognised as a result of the ICS Adjustments is325. The gross jurisdictional audited GAAP DTL and DTA referred to in paragraph 323 arelimited to DTL and DTA from insurance-related activities.
8.3

Tax effect on the ICS insurance capital requirement326.

The ICS insurance capital requirement is reduced by the amount of utilisable tax effect.

327. The utilisable tax effect on the ICS insurance capital requirement is calculated using
the following formula:max (0, min (notional tax effect on insurance capital requirement, 20%*ICS insurance
capital requirement, a + b + c - d))where:






8.3.1

notional tax effect on insurance capital requirement = ICS Insurance capitalrequirement * group ETR;
𝑎 = 85% ∗𝑇𝑎𝑥 𝑙𝑜𝑠𝑠 𝑐𝑎𝑟𝑟𝑦 𝑏𝑎𝑐𝑘 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦,∑𝑇𝑎𝑥 𝑠𝑢𝑏−𝑔𝑟𝑜𝑢𝑝⁄𝑒𝑛𝑡𝑖𝑡𝑖𝑒𝑠 min ()
𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑛𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑡𝑎𝑥 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑛 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡b = post-stress future taxable income ∗ group ETR;c = max (0, DTL for insurance-related activities on ICS balance sheet - DTA for
insurance-related activities on ICS balance sheet); andd = max [0, min (15% * ICS insurance capital requirement, DTA for insurance-related
activities on ICS balance sheet – DTL for insurance-related activities on ICS balance
sheet).
Component a: tax loss carry backs

328. A tax loss carry back is defined as a mechanism allowing a sub-group/entity to offset
current net operating losses against tax obligations from previous years (the number of years
allowed differs between jurisdictions).
329.

In order to perform the calculation of component a in the utilisable tax effect:

The tax loss carry back capacity for insurance-related activities is evaluated at the legal
entity or sub-group level, including any fiscal unity for corporate tax as of the ICS
reporting date.

The notional tax effect on the ICS insurance capital requirement is allocated between
tax sub-groups/entities using a weighted average based on GAAP/SAP insurance
liabilities.

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8.3.2Component b: post-stress future taxable income projections

330.

In order to perform the calculation of component b in the utilisable tax effect:When the IAIG projects net losses for the cumulative five-year period, component b is
set to zero.

Otherwise, component b is approximated by 50% of the total historical five years’
GAAP earnings before tax on the consolidated financial statement, adjusted formergers, acquisitions and dispositions.

8.3.3

Components c and d: Deferred taxes

331. DTA and DTL used in components c and d are net of deferred taxes associated withassets subject to deduction from Tier 1 capital resources (as per section 6.4.1 of the Level 1
Document).

9Additional Reporting

9.1

GAAP Plus

9.1.1

Overview

332. GAAP Plus begins with the group balance sheet as outlined in Section 4. The following
GAAP Plus approaches provide guidelines and specific examples for adjustments under thevarious jurisdictional GAAPs applicable for IAIGs so that each can arrive at a consolidated
GAAP Plus balance sheet following the application of these adjustments. Like the MAV
approach under the Reference ICS, GAAP Plus adjustments address only the most significant
or material items on the balance sheet, specifically, insurance-related liabilities and invested
assets.
333. GAAP Plus consists of four main approaches: US GAAP/SAP, Japanese GAAP, IFRS
and Chinese C-ROSS. Japanese GAAP Plus (J-GAAP Plus) is subject to the Monitoring
Period as specified in this document. US GAAP/SAP, IFRS and Chinese C-ROSS Plus
approaches are excluded from this document as they remain under development and subject
to Field Testing.
334.

For J-GAAP Plus, the following considerations apply:a.

A liability is recognised and derecognised in accordance with the IAIG’s jurisdictional
GAAP.

b.

The definition of contract boundaries is in accordance with the IAIG’s jurisdictional
GAAP.

c.

GAAP Plus estimates of insurance liabilities (and related reinsurance recoverables)
are calculated using discounting yield curves or rates as specified under applicablejurisdictional GAAP rules or as outlined in the applicable specific GAAP Plus approach.

d.

The calculation of GAAP Plus adjustments are based on up-to-date information andcredible assumptions.

e.

Policy loans are reported gross of insurance liabilities.

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f.

Non insurance liabilities (ie issued debt) are reported in accordance with jurisdictional
GAAP. Balances reported at cost are not adjusted to fair value.

g.

Risk margins, conservatism in assumptions and provisions for adverse deviation are
removed from the valuation of insurance liabilities where insurance liabilities are notcalculated as a whole.

h.

MOCE, as defined under the standard method, is added to the balance sheet as aliability.

i.

Any adjustments to deferred taxes follow the reference method as outlined in section
7.7.

335. When the insurance liability balances are calculated under more than one set of GAAP
rules, the IAIG uses the most appropriate GAAP Plus jurisdictional approach for eachcomponent of insurance liabilities in the aggregated balance sheet to adjust balances to a
current estimate liability.
336. An AOCI adjustment is included in capital resources in order to exclude any unrealised
gains and losses on available for sale debt securities that meet defined criteria provided in
section 9.1.2.1.
337. Aside from the AOCI adjustment, all adjustments detailed in section 6 apply equally to
J-GAAP Plus as for the Reference ICS.
338. J-GAAP Plus provides specific methodologies for certain risk charges. Unlessotherwise specified, the risk charges are calculated consistently with Section 7. These
calculations are detailed in sections 9.1.2.2 to 9.1.2.5.
9.1.2

Japanese GAAP (J-GAAP) Plus Approach

339. The following pertains to IAIGs reporting audited consolidated financial statements on
the basis of Japanese GAAP.
340. Invested Assets: No adjustment is required. Invested assets are reported consistent
with the treatment under J-GAAP. Certain assets backing life liabilities are subject to the AOCI
adjustment that reverses unrealised gains and losses reported in AOCI and, in essence,restates asset values from fair value to cost. See the GAAP Plus AOCI adjustment in section
9.1.2.1.
341. Life Insurance Liabilities (excluding group policies): Life insurance liabilities areadjusted to a current estimate by reflecting balances as derived from the Japanese GAAP
statutory cash flow test assuming a full time horizon.
a.

Under the full time horizon cash flow analysis, life insurers are required to assess
whether future cash flows generated from current assets cover the future cash flows(net of cash-inflows and cash-outflows) from insurance liabilities.

b.

The net amount in shortage or excess of insurance liabilities at the end of in-force
business is discounted and the resulting value is added to (or deducted from)insurance liabilities.

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c.

The discount rate is the current portfolio investment yield (book yield) plus
reinvestment assumption that is consistent with cash flows generated on the asset side
defined in paragraph 341 d).

d.

For purposes of projecting cash flows, investment returns from reinvestments and newmoney are defined based on an assumption that an IAIG invests in Japanese
Government bonds with an average duration equal to the average duration ofJapanese government bonds in which the IAIG invested in the previous financial year.

e.

The actual current experience, including mortality, lapse, expense ratio and interest
rate, is used in the calculation of the future cash flows for insurance liabilities.

f.

New business is not taken into consideration.

g.

The current portfolio investment yield (book yield) is used to generate the future cash
flows from the current asset portfolio.

h.

The future cash flow projection is on a pre-tax basis.

342. Group Life Insurance Liabilities: Group insurance contracts are scoped out from theJapanese GAAP statutory cash flow test. The J-GAAP Plus valuation approach for groupcontracts is the same as Japanese GAAP and therefore no adjustment is required.
343. Non-life Insurance Liabilities: Non-life insurance liabilities are adjusted to reflectbalances as derived from the Japanese GAAP statutory cash flow test assuming a full time
horizon.
a.

Under the full time horizon cash flow analysis, non-life insurers are required to assess
whether reported insurance liabilities (GAAP basis premium provision) is adequate tocover all expected future cash flow.

b.

The net amount in shortage or excess of insurance liabilities is discounted and theresulting value is added to (or deducted from) insurance liabilities.

c.

The actual experience including claim frequency, lapse, expense ratio and interest rateis used for the calculation of future cash flows in the insurance liability. New businessis not taken into consideration.

d.

Discounting is based on a government bond yield curve as specified under the future
cash flow analysis defined by the article 121 of the Japanese Insurance Act.]

344. Liabilities for Options and Guarantees: Options and guarantees are adjusted for JGAAP Plus using the method described under the MAV approach.
9.1.2.1 Capital Resources: AOCI Adjustment
345. The AOCI adjustment is applicable under J-GAAP Plus where life insurance liabilities
are discounted using an asset book yield and available for sale debt securities backing thoseliabilities are reported at fair value. The AOCI adjustment is not applicable where liabilities are
discounted using a market rate/curve. In order to address the asymmetry in accounting andthe resulting volatility in capital resources, an AOCI adjustment has been defined under JGAAP Plus such that unrealised gains/losses associated with available for sale debt securities
are deducted from Tier 1 capital resources if all of the following criteria are met:

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a.

IAIGs must meet all operational criteria in order to be eligible to use the AOCI
adjustment:i.

The IAIG maintains Asset/Liability Management Policies that provides for
specific identification and duration matching of asset/liability portfolios.

ii. The IAIG maintains systems and processes to evaluate the effectiveness of theduration matching including independent verification, regular tests andreporting to the Board of Directors.
iii. Evaluation of the effectiveness of duration matching includes the following test
which must be met in order for assets to be included in the AOCI adjustment:
𝐷(𝐿)iv. 0.8 ≤ 𝐷(𝐴) ≤ 1.25 where D is duration.
b.

The net unrealised gain/loss to be excluded must relate to debt securities that areclassified as available for sale and back long-term liabilities.

c.

The portfolio is segregated for the purpose of asset/liability matching.

d.

The unrealised gain/loss is not likely to be realised.

346. The related asset balances are restated to amortised cost for purposes of calculating
the Credit risk charge (Section 7.4) but are not restated on the reported J-GAAP Plus balance
sheet. The AOCI adjustment is reported as a direct adjustment to Capital Resources.
347. The AOCI adjustment is calculated beginning with the Accumulated unrealised gains(losses) on AFS debt securities reported in OCI balance as reported in the J-GAAP Plusbalance sheet. Deductions from this balance are applied for any unrealised gains/losses
relating to the following:a.

Debt securities that are backing short-term insurance liabilities. Short-term is defined
as having a contract duration of one year or less.

b.

Debt securities that are backing liabilities discounted using a market based rate/curve.

c.

Debt securities designated as fair value accounting hedges.

d.

Debt securities not meeting the operational criteria (eg not specifically identified in a
separate portfolio for asset/liability matching or not meeting the operational criteria
effectiveness test).

e.

Debt securities where, based on management judgment, it is more likely than not that
unrealised gains/losses would be realised through sale, conversion, prepayment, etc.
For example, this could include certain callable bonds where the call price is lower thanthe market price or residential mortgage backed securities (RMBS), student loans,consumer or other asset backed securities (ABS) that are likely to be prepaid. A more
likely than not assessment in this context is defined as a greater than 50% probabilityof occurrence based on facts and circumstances known to management as of thereporting date.

f.

Debt securities that have experienced significant credit impairment.

348. The AOCI adjustment is calculated net of tax, consistent with how unrealised gains
and losses are recorded in AOCI.
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9.1.2.2 Capital Requirement: Interest Rate Risk
9.1.2.2.1 Background349. Under J-GAAP Plus, the valuation of life insurance current estimates utilises a discountrate that is equivalent to the current asset book yield plus a reinvestment assumption equal toa government bond rate. Available for sale debt securities backing those liabilities are
essentially reported at amortised cost via an adjustment to capital resources referred to as the
AOCI adjustment (see Section 9.1.2.1). Other assets such as loans and held to maturity orheld for reserves securities are also reported at cost. For non-life insurance products under JGAAP Plus, insurance liabilities are discounted using a government bond yield curve, andavailable for sale debt securities are generally measured at fair value.
350. A shock to a market based curve does not translate to a change in value for assets
valued at cost (including assets subject to the AOCI adjustment). In addition, it does not impact
the book yield that is applied to discount cash flows used to measure certain life insurance
liabilities. The shock only has an impact on any reinvestment assumption portion of the
discount rate. For this reason, IAIGs apply the following method to calculate their J-GAAP PlusInterest Rate risk charge.
9.1.2.2.2 Liabilities
351. For those insurance liabilities on the J-GAAP Plus balance sheet that are valued using
yield curves/rates based on current market information, the Interest Rate risk charge iscalculated using the Reference ICS standard method approach. Thus, the standard method
Interest Rate risk approach is applicable for all non-life products under J-GAAP Plus as wellas any reported options and guarantees.
352. Where life insurance liabilities on the J-GAAP Plus balance sheet are discounted using
a book yield and a reinvestment assumption, the stressed IAIS yield curve scenarios only
apply to the portion of the rate reflecting the reinvestment assumption at each tenor andcurrency.
9.1.2.2.3 Assets
353. For assets measured at market value on the J-GAAP Plus balance sheet, the stresses
are the same as that used in the Reference ICS standard method.
354. For assets measured at amortised cost on the J-GAAP Plus balance sheet (eg loans
and bonds classified as held to maturity or held for reserves), interest rate risk stresses are
not applied.
355. Where unrealised gains and losses are added back to capital resources via the AOCI
adjustment (See Section 9.1.2.1), assets are essentially measured at amortised cost. Theinterest rate risk stresses, applied through the change in asset value, are offset by the change
in the AOCI adjustment. Therefore, the net impact of the stresses are zero, or the same as for
assets measured at cost.
9.1.2.3 Capital Requirement: NDSR
9.1.2.3.1 Background356. Under J-GAAP Plus, the valuation of life insurance current estimates utilises a discountrate that is equivalent to a book yield plus a reinvestment assumption equal to a government
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bond yield. Assets backing those liabilities are essentially reported at amortised cost via anadjustment to capital resources referred to as the AOCI adjustment (see Section 9.1.2.1).
Other assets such as loans and debt securities held to maturity or held for reserves may also
be reported at cost. For non-life insurance products under J-GAAP Plus, insurance liabilities
are valued using a government bond yield curve, and available for sale securities are generally
measured at fair value.
357. The NDSR stress does not translate to a change in value for assets valued at cost(either via the AOCI adjustment or for assets valued at cost on the J-GAAP Plus balance
sheet). In addition, it does not impact the discount rate used to measure life liabilities or thegovernment bond yield curve used to discount non-life liabilities. For this reason, IAIGs apply
different methodologies to calculate their GAAP Plus NDSR charge, depending on how
insurance liabilities and assets are valued.
9.1.2.3.2 Liabilities
358. For non-life insurance liabilities on the J-GAAP Plus balance sheet measured using agovernment bond yield curve, the NDSR stress is not applicable.
359. For life insurance liabilities on the J-GAAP Plus balance sheet that are discounted
using a book yield with a reinvestment rate based on the government bond rate (eg Japaneselife liabilities), a NDSR stress is not applicable.
9.1.2.3.3 Assets
360. For assets measured at fair value on the J-GAAP Plus balance sheet using yield
curves based on current market information, the impact of the NDSR stress is calculated byapplying the Reference ICS standard method approach.
361. For assets measured at cost on the J-GAAP Plus balance sheet, an NDSR stress is
not applicable.
362. Where unrealised gains and losses are added back to capital resources via the AOCI
adjustment (see Section 9.1.2.1), assets are essentially being measured at amortised cost.
The NDSR stress is applied through the change in asset value, which is offset by the change
in the AOCI adjustment. Therefore, the net impact of the stress is zero, or the same as for
assets measured at cost.
9.1.2.4 Capital Requirement: Credit Risk
363. Under J-GAAP Plus, available for sale debt securities that are included in the AOCI
adjustment to capital resources are reported on an amortised cost basis for purposes ofdetermining the credit risk charge. The credit risk factor is applied to the amortised costbalances in order to remain consistent with the valuation method reflected in capital resources.
9.1.2.5 Capital Requirement: Real Estate Risk
364. Under J-GAAP Plus, the real estate risk charge for owner-occupied property is
calculated as the difference, if positive, of the J-GAAP Plus balance sheet value on thereporting date less 75% of the property’s fair value on the reporting date. If the fair value ofsuch a property is not available, the risk charge is 25% of the property’s book value. The risk
charge is determined on a property-by-property basis.

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9.2

Other methods of calculation of the ICS capital requirement (“other methods”)

9.2.1

Internal Models

365. The main goal of internal models is to calculate capital requirements (at the risk levelor at the aggregated level) more tailored to the risks borne by the IAIG. Specificities of an IAIG
that cannot be captured in the standard method (eg specific risk mitigation arrangements) canbe reflected by an internal model. Internal models can also capture risks that are not includedin the standard method if these are material for a specific IAIG. Internal models are particularly
relevant in the context of IAIGs, which are large and complex insurance groups operating in
multiple jurisdictions.
366. Ten prerequisites, largely based on ICP 17, have been determined for the submissionof internal model results for the ICS capital requirement during the monitoring period.
367. In order to submit internal model results as part of the additional reporting during themonitoring period, IAIGs are required to complete a self-assessment template regarding
prerequisites 1 to 10 as outlined in the subsequent sections, within which the IAIG must:







Briefly describe the scope of application of the internal model (eg partial or full internal
model).
Provide evidence that the internal model to calculate the group capital requirement has
been validated independently (Prerequisite 2) (internally or externally) and signed-off
by the IAIG’s Board of Directors (Prerequisite 3).
Indicate the degree of compliance of the internal model with prerequisites 4 to 7:oStatistical quality test;oCalibration test;o

Use test and governance; andoDocumentation standards.

In the case of a partial internal model, the IAIG must also complete the self-assessment
template regarding Prerequisites 8 to 10, ie they need to:oJustify the reason for the limited scope of the internal model (ie absence ofcherry-picking);oProvide evidence that the resulting ICS capital requirement more appropriatelyreflects the risk profile of the IAIG; andoExplain how the partial internal model’s and standard method’s results can be
integrated.

368. Where the prerequisites are not fully met, but the IAIG would like to submit internal
model results during the monitoring period, then the IAIG should discuss this with its GWS.
Moreover, the IAIG should indicate the reasons for submitting results, despite not meeting all
prerequisites, in its self-assessment template along with details of how the internal model does
not meet the prerequisites.
369. Supervisory approval of the internal model for data submission is not a pre-requisite
during the monitoring period. Further, a model does not have to be used for regulatory capital
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purposes to satisfy the pre-requisites for reporting of internal model results during themonitoring period.
370. The specific internal model results to be submitted as part of additional reporting are
specified in the Level 3 document.
9.2.1.1 Prerequisite 1 – Description of the scope of application of internal models
371. IAIGs must describe the scope of application of their internal model (ie the perimeterof the internal model’s calculation). Two possible approaches are considered for the additional
reporting of internal model results during the monitoring period:a. Partial internal model – which involves the replacement of some parts of the standard
method calculation. For example:i.

One or more risk charges of the ICS standard method capital requirement (egMarket risk);ii. One or more sub-risk charges of the ICS standard method capital requirement(eg Equity risk);iii. One or more risk charges or sub-risk charges not captured by the the ICS
standard method capital requirement; oriv. The whole business of the IAIG, or only to one or more major business units orlegal entities.
b. Full internal model – which involves the replacement of the entire standard method
calculation.
9.2.1.2 Prerequisite 2: Validation
372. Internal model validation requires IAIGs to demonstrate that a rigorous process is inplace by which they can establish whether their internal model framework is sound or whether
improvements are needed. Validation should enable them to understand the internal model’s
capabilities and limitations better and confirm that the internal model and the supporting
processes are adequate and appropriate for the purpose. Validation should be an iterative
process by which an IAIG using an internal model periodically refines validation tools in
response to changing market and operating conditions. There is no universal validation
method, and the structure of the validation approach depends on the technical specificationsof the internal model, its purpose and its intended use.
373. ICP 17.13.6 Guidance states “…the insurer should review its own internal model andvalidate it so as to satisfy itself of the appropriateness of the model for use as part of its risk
and capital management processes”. In addition to an internal review, the insurer may
consider a regular independent, external review of its internal model by appropriate
specialists”.
374. ICP 17.18 states, when an insurer uses an internal model to determine regulatory
capital requirements, it should:“… monitor the performance of its internal model and regularly review and validate theongoing appropriateness of the model’s specifications”

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





“… demonstrate that the model remains fit for regulatory capital purposes in changing
circumstances against the criteria of the statistical quality test, calibration test and use
test”;“… notify the supervisor of material changes to the internal model made by it…”;“… properly document internal model changes”; and“… report information necessary for supervisory review…”.

375.
Validation should encompass both quantitative and qualitative elements. While it
might be possible to think of validation as a purely technical/mathematical exercise in which
outcomes are compared to estimates using statistical techniques, it is insufficient to focus
solely on comparing predictions to outcomes. In assessing the overall performance of aninternal model, it is important to assess the overall model and each of its building blocks
regarding the structure, governance, data and processes.
376. Finally, to achieve an effective validation, an objective challenge is essential.
Independent model validation helps IAIGs to evaluate and verify the overall performance of
their internal models. Proper independence of the validation function is therefore important,whether the validation is internal or external, and individuals performing the validation mustpossess the necessary skills, knowledge, expertise and experience.
9.2.1.3 Prerequisite 3: Sign-off of the Board of Directors of the IAIG
377. This prerequisite aims to ensure that the Board of Directors has ownership of theinternal model, and that the model complies with the validation process prescribed by theinternal model governance process.
378. Moreover, ICP 17 recommends a certain level of engagement by the Board of Directors
concerning the internal models as part of the use test, which will be further detailed in thesection of prerequisite 6.
9.2.1.4 Prerequisite 4: Statistical quality test
379.

Building on ICP 17.14 IAIGs need:“… to conduct a ‘statistical quality test’ which assesses the base quantitative
methodology of the internal model, to demonstrate the appropriateness of thismethodology, including the choice of model inputs and parameters, and to justify theassumptions underlying the model”; and provide evidence“… that the determination of the regulatory capital requirement using an internal model
addresses the overall risk position of the insurer and that the underlying data used in
the model is accurate and complete”.

380. The statistical quality test addresses issues related technical aspects of the internal
model, ie:methodology and assumptions;coverage of material risks;data (including external data) and expert judgment;

aggregation of risks and diversification effects;

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consistency with the method used for the calculation of technical provisions;allowance for risk mitigation techniques and future management actions; andfinancial guarantees and contractual options.

381. The statistical quality test concentrates on the individual building blocks of an internal
model. The different elements making up the internal model and the inputs used must passthis test.
382. The statistical quality test set out in ICP 17 allows considerable modelling freedom toinsurers. For example, ICP 17.14.1 Guidance states that “A range of approaches could
constitute an effective internal model for risk and capital management purposes, andsupervisors should encourage the use of a range of different approaches appropriate to thenature, scale and complexity of different insurers and different risk exposures. There areseveral different techniques to quantify risk which could be used by an insurer to construct its
internal model. In broad terms, these could range from basic deterministic scenarios tocomplex stochastic models. Deterministic scenarios would typically involve the use of stressand scenario testing reflecting an event, or a change in conditions, with a set probability tomodel the effect of certain events (such as a drop in equity prices) on the insurer's capital
position, in which the underlying assumptions would be fixed. In contrast, stochastic modellingoften involves simulating very large numbers of scenarios to reflect the likely distributions of
the capital required by, and the different risk exposures of, the insurer”. IAIGs should be at thehigh end regarding the nature, scale and complexity of the risks borne and the businessmodels and structure and thus it is expected that the modelling approach is commensuratewith such risk and business profile.
383. The statistical quality test also sets the boundaries within which IAIGs should takeresponsibility for specifying their approach to assess and aggregate risks. In conjunction withinternal model validation requirements, the statistical quality test promotes a well-structured,
documented and controlled process of model development and refinement which should beconsistently applied across the IAIG, including the different modelling areas. For example, ICP
17.14.3 Guidance states that “The IAIS considers that an insurer would generally be expected
to decide how best to aggregate and account for the risks to the whole of its business. The
determination of overall regulatory capital requirements by the internal model should consider
dependencies within, as well as across, risk categories. Where the internal model allows fordiversification effects, the insurer should be able to justify its allowance for diversification
effects and demonstrate that it has considered how dependencies may increase understressed circumstances”.
384. Data used to build the internal model are one of the main drivers of its performance.
ICP 17.14.4 Guidance states “Internal models need high-quality data in order to produce
sufficiently reliable results. The data used for an internal model should be current andsufficiently credible, accurate, complete and appropriate. Hence, a ‘statistical quality test’should examine the appropriateness of the underlying data used in the construction of theinternal model”. ICP 17.14.6 Guidance deals with the use of external data specifying that “…
any data not specific to the insurer would need to be carefully considered before deciding it
was appropriate for use as the basis for an insurer's ‘statistical quality test’. Even where
deemed appropriate, it may still be necessary to adjust the data to allow for differences infeatures between the data source and the insurer”.
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385. There is always a certain amount of expert judgement involved when selecting data
for an internal model. To this end, ICP 17.14.7 Guidance states that “In assessing suitabilityof data and of other inputs, eg assumptions, to the internal model, expert judgment should beapplied and supported by proper justification, documentation and validation”.
386. ICP 17.14.8 Guidance stresses the importance that “The methodology should also be
consistent with the methods used to calculate technical provisions”.
387. Moreover, ICP 17.14.9 states “statistical quality test should also include a review of
the internal model to determine whether the assets and products as represented in the model
truly reflect the insurer's actual assets and products. This should include an analysis ofwhether all reasonably foreseeable and relevant material risks have been incorporated,
including any financial guarantees and embedded options. Insurers should also consider
whether the algorithms used are able to take into account the action of management and thereasonable expectation of policyholders. Testing should include future projections within themodel and to the extent practicable ‘back-testing’ (the process of comparing the predictions
from the model with actual experience)”.
9.2.1.5 Prerequisite 5: Calibration test
388. ICP 17.15 states IAIG should “… conduct a ‘calibration test’ to demonstrate that theregulatory capital requirement determined by the internal model satisfies the specified
modelling criteria”.
389. The ICP definition of calibration is different from the general definition of calibration
used in statistics and actuarial science. For example, model calibration is often defined instatistics as the process of adjustment of the model parameters to obtain a model
representation of the processes of interest that satisfies pre-agreed criteria (eg Goodness-ofFit). ICP 17.15.2 Guidance states “The ’calibration test’ should be used by the IAIG to
demonstrate that the internal model is calibrated appropriately to allow a fair, unbiased
estimate of the capital required for the particular risk measure, level of confidence and time
horizon specified by the supervisor”. In the case of the ICS standard method, the calibration
target is VaR 99.5% over a one-year time horizon.
390. Where an IAIG uses a different confidence interval (eg 99.7% in order to maintain acertain investment grade rating), risk measure (eg TVaR for Cat Risk) or time horizon (eg toultimate) than the one set out for the ICS standard method capital requirement calculations, it
may need to recalibrate its model to the ICS capital requirement target criterion (ie VaR 99.5%
over a one year time horizon). Alternatively, the IAIG can provide quantitative evidence on
how this outcome compares to the ICS target criterion.
9.2.1.6 Prerequisite 6: Use test and governance
391.

According to ICP 17.16, IAIGs need:“… to fully embed the internal model, its methodologies and results, into the insurer’s
risk strategy and operational processes (the ‘use test’)”;

their “…Board and Senior management to have overall control of and responsibility forthe construction and use of the internal model for risk management purposes, andensure sufficient understanding of the model's construction at appropriate levels within
the insurer's organisational structure”. In particular, insurers need to provide evidence

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that their Board and Senior management understand the consequences of the internal
model's outputs and limitations for risk and capital management decisions; and“… to have adequate governance and internal controls in place with respect to theinternal model”.

392. The use test is, in effect, the evidence that should support the relationship of trust
between the supervisor and the regulated group. This trust is needed for the supervisor togain assurance that the internal model reflects the IAIG’s view of its risks and is used indecision making, and not developed with the purpose of reducing regulatory capital.
393. Consistent with ICP 17.16.1 Guidance, the IAIG should demonstrate that its internal
model is widely used and plays an important role in risk management and decision-making, atdifferent levels of management in the organisation, and the assessment of the economic andsolvency capital.
394. Moreover, ICP 17.16.5 Guidance states “The ‘use test’ is a key method by which theinsurer can demonstrate that its internal model is integrated within its risk and capitalmanagement and system of governance processes and procedures”. In other words, the IAIG
must provide evidence that the internal model is fully embedded in its operational andorganisational structure and demonstrate that the model remains useful and is appliedconsistently over time.
395. Furthermore, an IAIG “should demonstrate to the supervisor that an internal model
used for regulatory capital purposes remains useful and is applied consistently over time andthat it has the full support of and ownership by the Board and Senior management”.
396. Another key aspect of the use test is that according to ICP 17.16.6 Guidance the IAIG's
Senior management is responsible for the design and implementation of the internal modeland for ensuring the ongoing appropriateness of the model.
397. ICP 17.16.7 Guidance also notes that “For a model to pass the ‘use test’ it would be
expected that an insurer would have a framework for the model's application across business
units. This framework should define lines of responsibility for the production and use of
information derived from the model”.
398. ICP 17.16.8 Guidance stresses the importance of the governance, communication,
challenge and understanding of the model “An internal model should be subject to appropriate
review and challenge so that it is relevant and reliable when used by the insurer. The key
elements and results from the internal model should be understood by the key personnel within
the insurer, including the Board, and not only by those who have constructed it. This
understanding should ensure that the internal model remains a useful decision-making tool. If
the internal model is not widely understood, it will not be achieving its purpose and adding
value to the business. The ‘use test’ is key to ensuring the relevance of the internal model tothe insurer’s business”.
9.2.1.7 Prerequisite 7: Documentation standards
399. Building on ICP 17.17 the IAIG should “… document the design, construction andgovernance of the internal model, including an outline of the rationale and assumptions
underlying its methodology”. ICP 17.17 states further that “The supervisor requires the
documentation to be sufficient to demonstrate compliance with the regulatory validation
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requirements for internal models, including the statistical quality test, calibration test and use
test.
400.

The main aims of the documentation are:



Reducing key person risk;

facilitating the supervisory review and approval of the model;

facilitating Senior Management’s understanding; andrecognising the weaknesses of the model.

401. As stated in the ICP 17.17.1 Guidance, documentation should be thorough, detailed
and complete enough to be “… sufficient for a knowledgeable professional in the field to beable to understand its design and construction. This documentation should include
justifications for and details of the underlying methodology, assumptions and quantitative andfinancial bases, as well as information on the modelling criteria used to assess the level ofcapital needed”.
402. Moreover, ICP 17.17.2 Guidance states, “The insurer should also document, on an
ongoing basis, the development of the model and any major changes, as well as instanceswhere the model is shown to not perform effectively. Where there is reliance on an externalvendor/supplier, the reliance should be documented along with an explanation of theappropriateness of the use of the external vendor/supplier”.
9.2.1.8 Prerequisite 8: Absence of cherry-picking
403. According to ICP 17.12.4 Guidance, “The IAIS supports the use of internal models
where appropriate as they can be a more realistic, risk-responsive method of calculating
capital requirements, but discourages any ‘cherry-picking’ practices by insurers”.
404. From a supervisor’s perspective, the possibility of mixing and matching internal models
for some risks and businesses while using the standard method for the rest of the risks orbusinesses raises potential concerns about cherry-picking. To help mitigate these concerns,
consistent with ICP 17.12.14 Guidance, the IAIG should “… justify why it has chosen to only
use internal models for certain risks or business lines”. To this end, the IAIG should provide inits self-assessment the rationale for the limited scope of the internal model.
9.2.1.9 Prerequisite 9: The resulting ICS capital requirement more appropriately reflects therisk profile of the insurer
405. According to ICP 17.12.15, “…an insurer should be required to justify the limited scopeof the model and why it considers that using partial internal modelling for determining
regulatory capital requirements is more consistent with the risk profile of the business than thestandardised approach or why it sufficiently matches regulatory capital requirements”.
9.2.1.10 Prerequisite 10: Explain how the partial internal model and standard method’s results
can be integrated
406. It is essential that the integration of the partial internal model and the standard method
results is being carried out prudently and consistently to derive the overall ICS capitalrequirement. To this end, the IAIG should provide evidence that the partial internal model andstandard method results can be integrated. This prerequisite is particularly relevant for IAIGs
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whose internal model construction does not follow a similar design as the standard method(eg risks have not been defined or split along similar lines as in the standard method, thetarget criteria are different, etc.).
9.2.2

Dynamic Hedging

407. The reference ICS does not make allowance for the effect of market risk mitigation
techniques in the capital requirement beyond the basis of assets and liabilities existing at thereporting date of the ICS calculation. The principles of the ICS standard method ensure thatthe only risk mitigation arrangements recognised are those that mitigate risk borne by the IAIG
as at the reporting date of the calculation.
408. Dynamic hedging arrangements are not recognised for their risk mitigating properties
as this would conflict with this principle for the standard method. This is because the risk
charges in the standard method are calculated using instantaneous shocks which, by theirconstruction, do not capture any mitigating effects of subsequent hedging adjustments.
409. However, IAIGs are able to provide relevant information on dynamic hedging
programmes in order to support a future decision on its inclusion in the ICS. The IAIS isexamining whether there are any other methods for valuing these arrangements that could
better reflect the risk exposures of IAIGs and be incorporated into the ICS, rather than using
the standard method for specific products and risks.

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Glossary
Term

AcronymDefinition/Reference

Accumulated Other
Comprehensive
IncomeAOCI

See section 9.1 on “GAAP with Adjustments”

Basel Committeeon Banking
Supervision

BCBS

https://www.bis.org/bcbs/

CommonFramework for theSupervision of
IAIGs

ComFrame

https://www.iaisweb.org/page/supervisory-material/insurance-coreprinciples-and-comframe

Deferred Tax
Assets

DTAs

See section 6.3 on “Capital elements other than financial instruments”
and section 8 on “Tax Treatment”

Deferred Tax
Liabilities

DTLs

See section 6.3 on “Capital elements other than financial instruments”
and section 8 on “Tax Treatment”

Financial Stability
Board

FSB

http://www.fsb.org/

FutureDiscretionary
Benefits

FDB

See section 5.2.1.4

GAAP with
Adjustments

GAAP Plus

See section 9.1 on “GAAP with Adjustments”

Generally Accepted
Accounting
Principles

GAAP

https://en.wikipedia.org/wiki/Generally_accepted_accounting_principles

Insurance CapitalStandard

ICS

http://www.iaisweb.org/page/supervisory-material/insurance-capitalstandard

ICS Rating
Category

ICS RCSee section 3.4

Insurance Core
Principles

ICP

https://www.iaisweb.org/page/supervisory-material/insurance-coreprinciples-and-comframe

International
Association of
Insurance
Supervisors

IAIS

http://www.iaisweb.org/home

International
Financial ReportingStandards

IFRS

http://www.ifrs.org/About-us/IASB/Pages/Home.aspx

International
Monetary Fund

IMF

http://www.imf.org/external/index.htm

http://www.accountingfoundation.org/gaap

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Internationally
Active Insurance
Group

IAIG

Last Observed
Term

LOT

See section 5.2.5 on “Discounting”

Long Term Forward
Rate

LTFR

See section 5.2.5 on “Discounting”

https://www.iaisweb.org/page/supervisory-material/insurance-coreprinciples-and-comframe

See section 7.1.3 on “Management actions”

Management
Actions
Margin Over
Current Estimate

See the ICPs and ComFrame, adopted November 2019

MOCE

A margin that exceeds the current estimate in valuation of technicalprovisions to cover the inherent uncertainty of those obligations.
http://www.iaisweb.org/page/supervisory-material/glossary
See also ICP 14.7

Market-Adjusted
Valuation

MAV

See section 5 on “Market-adjusted valuation (MAV) approach”

National
Association of
Insurance
Commissioners

NAIC

http://www.naic.org/

Net Asset ValueNAV

The value of assets minus the value of liabilities.

Non-Default Spread
Risk

NDSR

See section 7.3.3

Supervisor-owned
and controlled
credit assessment
processes

SOCCA
processes

See section 7.4.4

Value at Risk

VaR

An estimate of the worst expected loss over a certain period of time ata given confidence level
http://www.iaisweb.org/page/supervisory-material/glossary

Weighted Averageof Multiple
Representative
Portfolios

WAMP

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Treatment of Non-Voting Interest Entities (Asset andInsurance Securitisations)
Asset Securitisations
Insurers must meet all of the following conditions in order to not consolidate a securitisation
originated by the group (excerpted from Basel III):a.

Significant credit risk associated with the underlying exposures has been transferredto third parties.

b.

The transferor does not maintain effective or indirect control over the transferred
exposures. The exposures are legally isolated from the transferor in such a way (egthrough the sale of assets or through sub-participation) that the exposures are put
beyond the reach of the transferor and its creditors, even in bankruptcy or receivership.
Banks should obtain legal opinion that confirms true sale.

c.

The transferor is deemed to have maintained effective control over the transferredcredit risk exposures if it: (i) is able to repurchase from the transferee the previouslytransferred exposures in order to realise their benefits; or (ii) is obligated to retain therisk of the transferred exposures. The transferor’s retention of servicing rights to the
exposures will not necessarily constitute indirect control of the exposures.

d.

The securities issued are not obligations of the transferor. Thus, investors whopurchase the securities only have claim to the underlying exposures.

e.

The transferee is an SPE and the holders of the beneficial interests in that entity havethe right to pledge or exchange them without restriction.

f.

Clean-up calls must satisfy the following conditions: (i) the exercise of the clean-up callmust not be mandatory, in form or in substance, but rather must be at the discretion of
the originating bank; (ii) the clean-up call must not be structured to avoid allocating
losses to credit enhancements or positions held by investors or otherwise structured
to provide credit enhancement; and (iii) the clean-up call must only be exercisable
when 10% or less of the original underlying portfolio or securities issued remains, or,for synthetic securitisations, when 10% or less of the original reference portfolio value
remains.

g.

The securitisation does not contain clauses that (i) require the originating bank to alter
the underlying exposures such that the pool’s credit quality is improved unless this isachieved by selling exposures to independent and unaffiliated third parties at market
prices; (ii) allow for increases in a retained first-loss position or credit enhancement
provided by the originating bank after the transaction’s inception; or (iii) increase theyield payable to parties other than the originating bank, such as investors and thirdparty providers of credit enhancements, in response to a deterioration in the credit
quality of the underlying pool.

h.

There must be no termination options/triggers except eligible clean-up calls,
termination for specific changes in tax and regulation or early amortisation provisions.

Asset Securitisations
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Insurers must meet all of the following conditions in order to not consolidate a securitisation
originated by the group (excerpted from Solvency II):a.

the SPE is any entity other than an insurer or reinsurer, which assumes risks from(re)insurers through reinsurance contracts or similar arrangements, and which funds
in full its risk exposures by issuing debt or any other financing arrangement therepayment rights of which are subordinated to the reinsurance obligations of the(re)insurer.

b.

where the SPE assumes risks from more than one (re)insurer, the solvency of that
SPE is not adversely affected by winding-up proceedings of any one of those(re)insurers.

c.

The SPE meets at all time the following conditions:i.

the SPE has at all times assets the market value of which is equal to or exceeds
the maximum payments – including expenses – of the SPE, and the SPE isable to pay the amounts it is liable for as they fall due;ii. the proceeds of the debt issuance or other financing mechanism are fully paidin.
d.

The contractual arrangements relating to the transfer of risk from a (re)insurer to a SPE
and from the SPE to the providers of debt or financing meet the following conditions:i.

The transfer of risk is effective in all circumstances;ii. The extent of risk transfer is clearly defined and incontrovertible;
iii. the claims of the providers of debt or financing mechanisms are at all times
subordinated to the reinsurance obligations of the SPE to the (re)insurers of
the IAIG;
iv. no payments are made to the providers of debt or financing, if following thosepayments the SPE would no longer be fully funded;
v. the providers of debt or finance to the SPEs have no rights of recourse to theassets of the (re)insurers;
vi. the providers of debt or finance to the SPEs have no rights to apply for thewinding-up of the SPE.

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Definition of ICS Non-Life Segments
ICS Segment
EEA and
Switzerland/Medical
expense insurance
EEA and
Switzerland/Income
protection
EEA and
Switzerland/Workers'
Compensation

Definition
Insurance obligation that covers the provision or financial
compensation for medical treatment or care including preventive or
curative medical treatment or care due to illness, accident, disability
or infirmity.
Insurance obligation that covers the financial compensation arisingfrom illness, accident, disability or infirmity (excluding medical
expense insurance).
Health insurance obligations which relate to accidents at work,
industrial injury and occupational diseases and where theunderlying business is not pursued on a similar technical basis tothat of life insurance.

EEA and
Switzerland/Motorvehicle liability - Motor
third party liability

Insurance obligations which cover all liabilities arising out of the useof motor vehicles operating on land (including carrier's liability).

EEA and
Switzerland/Motor,
other classes

Insurance obligations which cover all damage to or loss of land
vehicles (including railway rolling stock).

EEA and
Switzerland/Marine,
aviation and transport

Insurance obligations which cover all damage or loss to sea, lake,river and canal vessels, aircraft, and damage to or loss of goods intransit or baggage irrespective of the form of transport. Insurance
obligations which cover liabilities arising out of the use of aircraft,ships, vessels or boats on the sea, lakes, rivers or canals (including
carrier's liability).

EEA and
Switzerland/Fire andother damage

Insurance obligations which cover all damage to or loss of property(other than those included in motor (other) andmarine/aviation/transport) due to fire, explosion, natural forces
including storm, hail or frost, nuclear energy, land subsidence andany event such as theft.

EEA and
Switzerland/Generalliability - third party
liability

Insurance obligations which cover all liabilities other than those inmotor vehicle liability and marine, aviation and transport.

EEA and
Switzerland/Credit andsuretyship

Insurance obligations which cover insolvency, export credit,
instalment credit, mortgages, agricultural credit and direct andindirect suretyship.

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EEA and
Switzerland/Legal
expensesInsurance obligations which cover legal expenses and cost of
litigation.

EEA and
Switzerland/AssistanceInsurance obligations which cover assistance for persons who get
into difficulties while travelling, while away from home or while
away from their habitual residence.

EEA and
Switzerland/Miscellane
ous financial loss

Insurance obligations which cover employment risk, insufficiency of
income, bad weather, loss of benefit, continuing general expenses,
unforeseen trading expenses, loss of market value, loss of rent orrevenue, indirect trading losses other than those mentioned above,other financial loss (non-trading) as well as any other risk of non-life
insurance not covered by the lines of business above.

EEA and
Switzerland/Nonproportional healthreinsurance

Reinsurance on a non-proportional basis of health insuranceclasses.

EEA and
Switzerland/NonProportional Casualty
reinsurance

Reinsurance on a non-proportional basis of casualty classes (motor
vehicle liability and general liability).

EEA and
Switzerland/Nonproportional marine,
aviation and transport
reinsurance

Reinsurance on a non-proportional basis of marine, aviation andtransport.

EEA and
Switzerland/NonProportional property
reinsurance

Reinsurance on a non-proportional basis of property classes (othermotor, fire, credit/suretyship, legal expenses and assistance)

Canada/Property personal

Insurance against the loss of, or damage to, property, and includes
insurance against loss caused by forgery. It includes suchclassifications as habitational property and multi-peril policies,
including residential contents of buildings such as apartments,
rooming houses, motels, manufacturing and mercantile buildings
and the liability exposure of personal package policies issued withindivisible premiums. This line would include fire policies,
householder contents and homeowner personal risks, residential
burglary and theft and special residential glass coverage. Casualty
coverage such as personal liability for bodily injury would not be
included in this category.

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Canada/Home
Warranty

Refers to a contract of insurance issued by a warranty provider
covering defects in the construction of a new home andconsequential losses or costs incurred by the owner.

Canada/ProductWarranty

Insurance not incidental to any other class of insurance against
loss of, or damage to, personal property, other than a motor
vehicle, under which an insurer undertakes to pay the costs ofrepairing or replacing the personal property.

Canada/Property commercial

Insurance against the loss of, or damage to, property, and includes
insurance against loss caused by forgery and all commercial
property and multi-peril policies, but excludes all separate classes
of insurance as defined by regulators
Insurance against:

Canada/Aircraft

1. liability arising from bodily injury to, or the death of, a person, or
the loss of, or damage to, property, in each case caused by anaircraft or the use of an aircraft; or
2. the loss of, the loss of use of, or damage to, an aircraft.
Insurance:

Canada/Automobile liability/personal
accident

Canada/Automobile other1. against liability arising from bodily injury to, or the death of, aperson, or the loss of, or damage to, property, in each case causedby an automobile or the use or operation of an automobile; or
2. that falls within clause (i) or (ii) of the definition of accident andsickness insurance, if the accident is caused by an automobile or
the use or operation of an automobile, whether or not liability exists
in respect of the accident, and the policy includes insurance against
liability arising from bodily injury to, or the death of, a person
caused by an automobile or the use or operation of an automobile.
Insurance against the loss of, the loss of use of, or damage to, an
automobile.
Insurance against:

Canada/Boiler andMachinery

1. liability arising from bodily injury to, or the death of, a person, or
the loss of, or damage to, property, or against the loss of, or
damage to, property, in each case caused by the explosion or
rupture of, or accident to, pressure vessels of any kind or pipes,
engines and machinery connected to or operated by thosepressure vessels; or
2. liability arising from bodily injury to, or the death of, a person, or
the loss of, or damage to, property, or against the loss of, or
damage to, property, in each case caused by a breakdown ofmachinery.

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Canada/Equipment
Warranty

The sub-class of boiler and machinery insurance that covers loss ofor damage to a motor vehicle or to equipment arising from its
mechanical failure, but does not include automobile insurance orinsurance incidental to automobile insurance.

Canada/Credit
Insurance

Insurance against loss to a person who has granted credit if theloss is the result of the insolvency or default of the person to whom
the credit was granted.

Canada/Credit
Protection

Insurance under which an insurer undertakes to pay off credit
balances or debts of an individual, in whole or in part, in the eventof an impairment or potential impairment in the individual’s income
or ability to earn an income.

Canada/Fidelity

Insurance against loss caused by the theft, the abuse of trust or theunfaithful performance of duties by a person in a position of trust;and insurance under which an insurer undertakes to guarantee theproper fulfilment of the duties of an office.

Canada/Hail

Insurance against the loss of, or damage to, crops in the field
caused by hail.

Canada/Legal
ExpensesInsurance against the costs incurred by a person or persons forlegal services specified in the policy, including any retainer andfees incurred for the services, and other costs incurred in respect ofthe provision of the services.
Insurance, other than insurance that falls within another class of
insurance:
1. against liability arising from bodily injury to a person or thedisability or death of a person, including an employee;

Canada/Liability

2. against liability arising from the loss of, or damage to, property;or
3. if the policy includes the insurance described in sub-clause (i),against expenses arising from bodily injury to a person other than
the insured or a member of the insured’s family, whether or not
liability exists. Includes general liability, cyber liability, directors &liability, excess liability, professional liability, umbrella liability andpollution liability.

Canada/Mortgage

Insurance against loss caused by default on the part of a borrower
under a loan secured by a mortgage or charge on, or other security
interest in, real property.

Canada/Surety

Insurance under which an insurer undertakes to guarantee the due
performance of a contract or undertaking or the payment of apenalty or indemnity for any default.

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Insurance against loss or damage caused by:
1. the existence of a mortgage, charge, lien, encumbrance,servitude or any other restriction on real property;

Canada/Title

2. the existence of a mortgage, charge, lien, pledge, encumbrance
or any other restriction on personal property;
3. a defect in any document that evidences the creation of any
restriction referred to in sub-clause (i) or (ii);
4. a defect in the title to property; or
5. any other matter affecting the title to property or the right to theuse and enjoyment of property.
Insurance against liability arising from:
1. bodily injury to, or the death of, a person; or
2. the loss of, or damage to, property; orCanada/Marine

3. the loss of, or damage to, property, occurred during a voyage or
marine adventure at sea or on an inland waterway, or during adelay or a transit other than by water that is incidental to a voyageor marine adventure at sea or on an inland waterway.

Canada/ Accident andSickness
Canada/Other
Approved Products

Insurance against risks that do not fall within another class of
insurance.

US/ Auto physicaldamageAny motor vehicle insurance coverage (including collision,
vandalism, fire and theft) that insures against material damage toan insured’s vehicle.

US/ Homeowners/
Farm owners

Homeowners: coverage for personal property and/or structure withbroad personal liability coverage, for dwelling, appurtenant
structures, unscheduled personal property and additional living
expenses. Farm owners: similar, for farming and ranching risks;property + liability coverages for personal and business losses, onfarm dwellings and contents (eg mobile equipment and livestock),barns, stables, other farm structures and farm inland marine.

US/ Special property

Various, including: fire; allied lines; inland marine; earthquake;
burglary and theft. Fire insurance includes the loss to real or
personal property from damage caused by the peril of fire or
lightning, including business interruption, loss of rents, etc. Allied
lines are coverages generally written with property insurance, eg,
glass; tornado; windstorm and hail; sprinkler and water damage;
explosion, riot, and civil commotion; growing crops; flood; rain; anddamage from aircraft and vehicle, etc. Inland marine is coverage forproperty that may be in transit, held by a bailee, at a fixed location,

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a movable good that is often at different locations (eg, off road
construction equipment), or scheduled property (eg, Homeowners
Personal Floater) including items such as live animals and property
with antique or collector’s value. This line also includes
instrumentalities of transportation and communication, such as
bridges, tunnels piers, wharves, docks, pipelines, power and phonelines, and radio and television towers.

US/ Private passenger
auto liability/ medical

Coverage for financial loss resulting from legal liability for motor
vehicle related injuries (bodily injury and medical payments) ordamage to the property of others caused by accidents arising out of
the ownership, maintenance or use of a motor vehicle. Does notinclude coverage for vehicles used in a commercial business.

US/ Commercial auto/
truck liability/ medical

Similar to private passenger auto liability/medical, except forcommercial vehicles.

US/ Workers'
compensation

Insurance that covers an employer’s liability for injuries, disability ordeath to persons in their employment, without regard to fault, asprescribed by state or Federal workers’ compensation laws andother statutes. Includes employer’s liability coverage against thecommon law liability for injuries to employees (as distinguishedfrom the liability imposed by Workers’ Compensation Laws).
Excludes excess workers’ compensation.

US/ Commercial multiperil

Two or more insurance coverages for a commercial enterprise,
including various property and liability risks, that are included in thesame policy. Includes multi-peril policies other than farmowners,
homeowners and automobile policies.

US/ Medical
professional liability -Occurrence

For a licensed health care provider or health care facility against
legal liability resulting from the death or injury of any person due tothe insured’s misconduct, negligence, or incompetence in rendering
professional services. The insurance covers events occurring
during the policy coverage period.

US/ Medical
professional liability –Claims-Made

For a licensed health care provider or health care facility against
legal liability resulting from the death or injury of any person due tothe insured’s misconduct, negligence, or incompetence in rendering
professional services. The insurance covers claims presented
during the period of coverage.

US/Other Liability–
Occurrence

Insurance against legal liability resulting from negligence,carelessness, or a failure to act causing property damage or
personal injury to others. Typically, coverage includes liability forthe following: construction and alteration; contingent; contractual;elevators and escalators; errors and omissions; environmental
pollution; excess stop loss, excess over insured or self-insured
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operations; completed operations; nonmedical professional, etc.
Also includes indemnification coverage provided to self-insured
employers on an excess of loss basis (excess workers’
compensation). The insurance covers events occurring during thepolicy coverage period.
US/Other Liability –Claims-Made

Same types of coverages as other liability – occurrence above
except that the insurance covers claims presented during theperiod of coverage. The insurable event does not need to occur
during the policy period.

US/Products liability

Products liability - occurrence: covers events occurring during
coverage period. Products liability - claims made. - covers claims
made during the coverage period. Coverage for the manufacturer,
distributor, seller, or lessor of a product against legal liability
resulting from a defective condition causing personal injury, or
damage, to any individual or entity, associated with the use of the
product. Products liability - occurrence: covers events occurring
during coverage period. Products liability - claims made. - covers
claims made during the coverage period. Coverage for the
manufacturer, distributor, seller, or lessor of a product against legal
liability resulting from a defective condition causing personal injury,
or damage, to any individual or entity, associated with the use of
the product. Products liability - occurrence: covers events occurring
during coverage period. Products liability - claims made. - covers
claims made during the coverage period. Coverage for the
manufacturer, distributor, seller, or lessor of a product against legal
liability resulting from a defective condition causing personal injury,
or damage, to any individual or entity, associated with the use of
the product.

US/Reinsurance – nonproportional assumed
property

Non-proportional assumed liability reinsurance in fire allied lines,
ocean marine, inland marine, earthquake, group accident andhealth, credit accident and health, other accident and health, auto
physical damage, boiler and machinery, glass, burglary and theft
and international (of the foregoing).

US/Reinsurance – nonproportional assumed
liability

Non-proportional assumed liability reinsurance in farm owners
multiple-peril, homeowners’ multiple-peril, commercial multipleperil, medical professional liability, workers’ compensation, otherliability, products liability, auto liability, aircraft (all perils) andinternational (of the foregoing).

US/Special liability

Various insurance coverages including ocean marine, aircraft (allperils), and boiler and machinery. Ocean marine is coverage forocean and inland water transportation exposures; such as goods or
cargoes; ships or hulls; earnings; and liability. Aircraft is coverage
for aircraft (hull) and their contents; aircraft owner’s and aircraft
manufacturer’s liability to passengers, airports and other third

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parties. Boiler and machinery is coverage for the failure of boilers,machinery and electrical equipment. Coverage includes theproperty of the insured, which has been directly damaged by anaccident, costs of temporary repairs and expediting expenses andliability for damage to the property of others.
US/Mortgage insurance

Mortgage guaranty is indemnification of a lender from loss if aborrower fails to meet required mortgage payments.

US/Fidelity/surety

Fidelity is a bond covering an employer’s loss resulting from an
employee’s dishonest act (eg, loss of cash, securities, or
valuables). Surety is a three-party agreement where the insurer
agrees to pay a second party or make complete an obligation in
response to the default, acts, or omissions of a third party.

US/Financial Guaranty

Financial guaranty is a surety bond, insurance policy, or whenissued by an insurer, an indemnity contract and any guaranty
similar to the foregoing types, under which loss is payable upon
proof of occurrence of financial loss to an insured claimant, oblige
or indemnitee as a result of failure to perform a financial obligation.

US/Other

Coverages not included elsewhere which includes credit
coverages, warranty, and, where considered part ofproperty/casualty, accident/health coverages. The Schedule P“International” LOB should be allocated to the region(s) where risk
is located, but if this is not possible could be included in thissegment.

US/Reinsurance – nonproportional assumed
financial lines

Non-proportional assumed reinsurance in the following lines:
mortgage guaranty, financial guaranty, fidelity, surety, credit, andinternational (in the foregoing).

Japan/Fire

This insurance covers property damage for either commercial or
household caused by fire, windstorm, hail, water damage andearthquake

Japan/HullThis insurance covers damage of vessel.

Japan/Cargo

This insurance covers damage on good and property in transit byvessel.

Japan/Transit

This insurance is called as Inland marine, which covers property
being transported by other than vessel or aircraft.

Japan/Personal
Accident

This insurance covers loss by accidental bodily injury. Under thisinsurance, policyholder is reimbursed based on actual losses
occurred or receives a fixed benefit due to a certain accident event.

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Japan/Automobile

This insurance covers personal injury or automobile damage
sustained by the insured and liability to third parties for losses
caused by the insured. Please note fleet automobile insurance
should be included here.

Japan/Aviation

This insurance covers aircraft, goods or property in transit byaircraft and launch to the space, and liability arising from the loss ofor damage to the goods or property in transit or bodily injury orproperty loss or damage to third parties

Japan/Guarantee Ins.

This insurance covers financial loss caused by the insolvency or
payment default of customers to whom credit has been granted

Japan/Machinery

This insurance protects the insured against loss incurred as a resultof machinery breakdown.

Japan/General Liability

This insurance covers any legal obligations to pay compensationand costs for bodily injury, property loss or damage to third parties.

Japan/Contractor's All
Risks

This insurance is purchased by contractors to cover damage toproperty under construction.

Japan/Movables All
Risks

This insurance covers loss or damage to property other than motor,
aircraft and vessel.

Japan/Workers'
Compensation

This insurance covers no-fault basis compensation payments toemployees who sustained bodily injury or occupational diseaseduring or which arises out of the course of their employment, andprovides employers with protections against claims which theiremployees make for bodily injury or occupational disease caused
by tort.

Japan/Misc. Pecuniary
LossThis insurance provides the insured with tailor-made covers forconsequential losses that are not covered by any other classes ofbusiness.

Japan/Nursing Care
Ins.

This Insurance provides benefit to meet specified conditions
requiring the insured to be nursed. Under this insurance,
policyholder is reimbursed based on actual cost incurred or
receives a fixed benefit for nursing care.

Japan/Others

Includes any other non-life insurance not listed above.

China/Motor

A vehicle insurance that the object of insurance is vehicle itself andrelated liability to pay compensation.

China/Property,
including commercial,

Insurance that the object of insurance is property and related
interests.

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personal andengineering

China/Marine andSpecialInsurance that the object of insurance is watercraft and related
liability to pay compensation.

China/Liability

Insurance that the object of insurance is assumed liability of theinsurant to pay compensation to the third party.

China/Agriculture

Insurance that the object of insurance is the property loss ofagriculture caused by disasters.

China/Credit

Insurance that the object of insurance is the economical loss ofloaner because of the debtor’s incapacity or refusing to pay for thedebt.

China/Short-term
Accident

A short-term accident insurance, the object of insurance is thedeath or disability of insurant because of accident. The period of
insurance is usually no more than one year.

China/Short-term
HealthHealth insurance that the period of insurance is no more than one
year and without guaranteed renewable terms.

China/Short-term Life

A short-term life insurance, the object of insurance is the lift ofinsured. The period of insurance is usually no more than one year.

China/Others

Other insurances.

Australia&NZ/
Householders

This class covers the common Householders policies, including thefollowing classes/risks: contents, personal property, arson andburglary. Public liability normally attaching to these products is tobe separated.
This class also covers proportional reinsurance of householders
business.

Australia&NZ/
Commercial Motor

Motor vehicle insurance (including third party property damage)other than insurance covering vehicles defined below underDomestic Motor. It includes long and medium haul trucks, cranes
and special vehicles, and policies covering fleets.
This class also covers proportional reinsurance of commercial
motor.

Motor vehicle insurance (including third party property damage)covering private use motor vehicles including utilities and lorries,
Australia&NZ/ Domestic motor cycles, private caravans, box and boat trailers, and otherMotorvehicles not normally covered by business or commercial policies.
This class also covers proportional reinsurance of domestic motor.

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Australia&NZ/ Other
type A

Australia&NZ/ Travel

Other classes of business with similar characteristics tohouseholders and motor
This class also covers proportional reinsurance of other type A.
Insurance against losses associated with travel including loss ofbaggage and personal effects, losses on flight cancellations andoverseas medical costs.
This class also covers proportional reinsurance of travel insurance.

Australia&NZ/ Fire andISR

Australia&NZ/Marine
and Aviation

Australia&NZ/
Consumer Credit

Includes all policies normally classified as fire (includes sprinkler
leakage, subsidence, windstorm, hailstone, crop, arson and loss of
profits) and Industrial Special Risk
This class also covers proportional reinsurance of fire and industrial
special risk.
Includes Marine Hull and Marine Liability (including pleasure craft),and Marine Cargo (including sea and inland transit insurance). Also
includes Aviation (including aircraft hull and aircraft liability).
This class also covers proportional reinsurance of marine andaviation.
Insurance to protect a consumer's ability to meet the loan
repayments on personal loans and credit card finance in the eventof death or loss of income due to injury, illness or unemployment.
This class also covers proportional reinsurance of consumer credit.

Australia&NZ/ Other
Accident

Includes miscellaneous accident, all risks (baggage, sporting
equipment, guns), engineering when not part of Fire & ISR, plate
glass when not package, livestock, pluvius and sickness andaccident.
This class also covers proportional reinsurance of other accident.

Australia&NZ/ Other
type B

Australia&NZ/
Mortgage

Other classes of business with similar characteristics to Fire & ISR,
marine, aviation, consumer credit and other accident.
This class also covers proportional reinsurance of other type B.
Insurance against losses to a lender in the event of borrower
default on a loan secured by a mortgage over residential or otherproperty.
This class also covers proportional reinsurance of mortgage.

Australia&NZ/ CTP

Compulsory Third Party business.
This class also covers proportional reinsurance of CTP.

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Australia&NZ/ Publicand Product Liability

Public Liability covers legal liability to the public in respect of bodily
injury or property damage arising out of the operation of theinsured's business. Product Liability includes policies that provide
for compensation for loss and/or injury caused by, or as a result of,
the use of goods and environmental clean-up caused by pollution
spills where not covered by Fire and ISR policies. Includes builders
warranty and public liability attaching to householders policies.
This class also covers proportional reinsurance of public andproduct liability.

Australia&NZ/
Professional Indemnity

PI covers professionals against liability incurred as a result of errors
and omissions made in performing professional services that has
resulted in economic losses suffered by third parties. Includes
Directors' and Officers' Liability insurance plus legal expense
insurance. Cover for legal expenses is generally included in thistype of policy.
This class also covers proportional reinsurance of professional
indemnity.

Australia&NZ/
Employers’ Liability

Australia&NZ/ Short tailmedical expenses

Australia&NZ/ Other
type C

Includes workers' compensation, seaman's compensation anddomestic workers' compensation.
This class also covers proportional reinsurance of employer’s
liability.
Insurance obligation that covers the provision or financial
compensation for medical treatment or care including preventive or
curative medical treatment or care due to illness, accident, disability
or infirmity usually made during the term of the policy or shortly(typically, up to 1 year) after the coverage period of the insurance
has expired.
Other classes of business with similar characteristics to mortgage,
CTP, and other liability.
This class also covers proportional reinsurance of other type C.

Australia&NZ/
Householders - nonprop reins

Non-Proportional reinsurance of householders business (referdefinition).

Australia&NZ/
Commercial Motor non-prop reins

Non-Proportional reinsurance of commercial motor (referdefinition).

Australia&NZ/ Domestic Non-Proportional reinsurance of domestic motor business (refer
Motor - non-prop reins
definition).
Australia&NZ/ Other
non-prop reins type A

Non-Proportional reinsurance of other type A business (referdefinition).

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Australia&NZ/ Travel non-prop reins

Non-Proportional reinsurance of travel business (refer definition).

Australia&NZ/ Fire andISR - non-prop reins

Non-Proportional reinsurance of Fire & ISR business (referdefinition).

Australia&NZ/ Marine
and Aviation - non-prop
reins

Non-Proportional reinsurance of marine and aviation business(refer definition).

Australia&NZ/
Consumer Credit - nonprop reins

Non-Proportional reinsurance of consumer credit business (referdefinition).

Australia&NZ/ Other
Accident - non-prop
reins

Non-Proportional reinsurance of other accident business (referdefinition).

Australia&NZ/ Other
non-prop reins type B

Non-Proportional reinsurance of other type B business (referdefinition).

Australia&NZ/
Mortgage - non-prop
reins

Non-Proportional reinsurance of mortgage business (referdefinition).

Australia&NZ/ CTP non-prop reins

Non-Proportional reinsurance of CTP business (refer definition).

Australia&NZ/ Publicand Product Liability non-prop reins

Non-Proportional reinsurance of public and product liability
business (refer definition).

Australia&NZ/
Professional Indemnity- non-prop reins

Non-Proportional reinsurance of professional indemnity business(refer definition).

Australia&NZ/
Employer’s Liability non-prop reins

Non-Proportional reinsurance of employer’s liability business (referdefinition).

Australia&NZ/ Other
non-prop reins type C

Non-Proportional reinsurance of other type C business (referdefinition).

Hong Kong/ Accident
and health

Providing fixed pecuniary benefits or benefits in the nature ofindemnity (or a combination of both) against risks of the persons
insured
1. Sustaining injury or dying as a result of accident; or 2.Becoming
incapacitated in consequence of disease; or
3. Sickness.

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Hong Kong/Motorvehicle, damage andliability

This includes 1. Insurance against the risk of the person sustaining
injury or dying as a result of travelling as passenger on motor
vehicle; 2. Insurance upon loss of or damage to vehicles used onland, including motor vehicles but excluding railway rolling stock; or
3. Insurance against damage arising out of or in connection withthe use of motor vehicles on land, including third-party risks andcarrier's liability.

Hong Kong/Aircraft,damage and liability

This includes 1. Insurance against the risk of the person sustaining
injury or dying as a result of travelling as passenger on aircraft; 2.
Insurance upon aircraft or upon the machinery, tackle, furniture or
equipment of aircraft; or 3. Insurance against damage arising out ofor in connection with the use of aircraft, including third-party risks
and carrier's liability.

Hong Kong/Ships,
damage and liability

This includes 1. Insurance against the risk of the person sustaining
injury or dying as a result of travelling as passenger on marinetransport; 2. Insurance upon vessels used on the sea or on inland
water, or upon the machinery, tackle, furniture or equipment ofsuch vessels; or 3. Insurance against damage arising out of or inconnection with the use of vessels on the sea or on inland water,
including third-party risks and carrier's liability.

Hong Kong/Goods intransitInsurance upon loss of or damage to merchandise, baggage and allother goods in transit, irrespective of the form of transport (ieinclude goods in transit via motor, aircraft, ships and othertransport).

Hong Kong/Fire andProperty damage

This includes insurance against loss of or damage to property(other than property to which motor, aircraft, ships or goods intransit relates) due to 1. Fire, explosion, storm, natural forces otherthan storm, nuclear energy or land subsidence; or 2. hail or frost or
to any event (such as theft) other than those mentioned in 1.

Hong Kong/Generalliability

Insurance against risks of the persons insured incurring liabilities tothird parties, the risks in question not being risks to which motor,
aircraft or ships relates.

Hong Kong/Pecuniaryloss

This includes: 1. Insurance against risks of loss to the persons
insured arising from the insolvency or failure of debtors of theirs; 2.
Suretyship; 3. Insurance against risks attributable to interruptions of
the carrying on of business carried on by them or to reduction of
the scope of business so carried on; or 4. Insurance against risks ofloss to the persons insured attributable to their incurring legal
expenses (including costs of litigation).

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Hong Kong/Nonproportional treaty
reinsurance

In the event that it is impracticable to allocate the treaty reinsurance
business to the respective eight accounting classes of generalbusiness above, such business may be shown under 2 broadclasses, namely, Non-proportional Treaty Reinsurance andProportional Treaty Reinsurance

Hong
Kong/Proportional
treaty reinsurance

In the event that it is impracticable to allocate the treaty reinsurance
business to the respective eight accounting classes of generalbusiness above, such business may be shown under 2 broadclasses, namely, Non-proportional Treaty Reinsurance andProportional Treaty ReinsuranceThis includes fire insurance, technology insurance, original
overseas insurance, reinsurance assumed from overseas.
- fire insurance: insurance for residential fire, factory fire, generalfire (insurance for fire in any ordinary building and movable
property therein, excluding residential houses and factories) andother fire.
- technology insurance: insurance for construction, assembling,machinery, electronic devices and others. The definitions for eachare set out below.
1) construction: protection against damage and liability for damage
Korea/ Fire, technology,
to a building under construction.
overseas2) assembly: protection against damage and liability for damage toa structure in assembling progress.
3) machinery: insurance for damage to machinery.
4) electronic devices: insurance for damage to electronic devices
and costs and expenses for restoration of data.
- original overseas insurance: insurance for property damage,bodily injury, or liability for damages in connection with any goods
located in a foreign country.
- reinsurance assumed from overseas: assuming other insurer's
risk as a reinsurer from overseas.

Korea/Package

This includes package insurance for household and for business.
- for household: insurance for two or more types of damage among
insurance for an individual person's property damage, bodily injury,
and liability for damages.
- for business: insurance for two or more types of damage among
an enterprise's property damage, liability for damages, andinsurance for bodily injury of its members.

Korea/Maritime

This includes Marine, Transportation and aviation. More specificallythis includes cargo, ship, general maritime, marine liability,transportation, aviation, space, and other maritime.
1) cargo: insurance for risks in marine transportation of cargoes.
2) ship: insurance for damage to a ship.
3) general maritime: insurance for risks in marine activities, suchas risks in marine construction.

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Page 125 of 1334) marine liability: protection against liability for damage on theseas, such as insurance of liability for marine contamination(excluding ship and general marine).
5) transportation: insurance for risks in cargoes in inlandtransportation.
6) aviation: insurance for damage to aircraft, such as operationand navigation of aircraft (property) and protection against liability
for damages related to accidents of aircraft (liability for damages).
7) space: insurance for risks in successful launching andperformance of missions of artificial satellites (property) andprotection against liability for damages related to accidents ofartificial satellites (liability for damages).
8) other maritime: marine insurance products other than thoseclassified above.
This includes injury, travel and others (excluding those forforeigners).
1) injury: insurance for an insured person's bodily injury caused bya sudden and unexpected accident.
Korea/Personal injury2) travel: insurance for injuries inflicted while travelling within the
Republic of Korea (domestic travel), insurance for injuries inflicted
while travelling abroad (overseas travel) and insurance for injuries
inflicted on persons staying abroad for a long time, such as
students studying abroad and personnel stationed abroad (longstay abroad).
3) others: injury insurance products not listed above.

Korea/Workers
accident, liability

This includes insurance for workers' compensation for accidents
and insurance for liability.
- Workers’ compensation for accidents includes:
1) domestic: indemnity for accidents and employer's liability.
2) overseas: indemnity for accidents and employer's liability.
3) seafarers: indemnity for accidents and employer's liability.
4) occupational trainee: indemnity for accidents and employer's
liability.
- Insurance for liability includes:
1) general liability: personal liability, business liability, ship owner’s
liability, excursion and ferry ship business, roadtransportation business, gas accident, sports facilities, local
government and others.
2) product liability: product liability, product recall and productguarantee.
3) professional liability: malpractice and errors and omissions(E&O).

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Korea/Foreigners

This includes insurance for injury, travel and others provided forforeigners.

Korea/Advancepayment refund
guarantee

Insurance purchased by a builder for damage that a buyer may
sustain due to non-performance of repayment ofadvance payment in connection of building of a ship or constructionof marine facilities.

Korea/Other Non-life

General insurance products other than those specified above.

Korea/Private
vehicle(personal injury)

Insurance that indemnifies the policyholder from the liability fordamages incurred to a victim by killing or injuring another person asa consequence of an accident incurred while the insured owns or
manages a vehicle, among covers provided under an automobile
insurance policy for a private motor vehicle, which shall include theliability insurance under Article 5 (1) of the Guarantee ofAutomobile Accident Compensation Act.

Korea/Private
vehicle(property,
vehicles damage)

Insurance that indemnifies the policyholder from the liability fordamages incurred to another vehicle or the policyholder's own
vehicle as a consequence of an accident incurred while thepolicyholder owns or manages a vehicle, among covers provided
under an automobile insurance policy for a private motor vehicle.

Korea/Vehicle forcommercial or businesspurpose(personal
injury)Insurance that indemnifies the policyholder from the liability fordamages incurred to a victim by killing or injuring another person asa consequence of an accident incurred while the policyholder owns
or manages a motor vehicle, among covers provided under an
automobile insurance policy for a motor vehicle for commercial or
business purpose, which shall include the liability insurance under
Article 5 (1) of the Guarantee of Automobile Accident
Compensation Act.

Korea/Vehicle forcommercial or businesspurpose(property,
vehicles)Insurance that indemnifies the policyholder from the liability fordamages incurred to another vehicle or the policyholder's own
vehicle as a consequence of an accident incurred while thepolicyholder owns or manages a vehicle, among covers provided
under an automobile insurance policy for a motor vehicle forcommercial or business purpose.

Korea/Other motor

Automobile insurance other than insurance products specified
above.

Singapore/Personal
Accident

Refers to the insurance business of writing personal accident
policy.

Singapore/Health

Refers to the insurance business of writing health policy.

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Singapore/Fire

This insurance covers property damage for either commercial or
household caused by fire, windstorm, hail, water damage andearthquake

Singapore/Marine andAviation - Cargo

Includes insurance against risk of loss or damage of any cargo intransit, and any liability arising from such cargo in transit arisingfrom the use of a vessel or ship or aircraft.

Singapore/Motor

Includes insurance against risk of loss, damage or liability arisingout of or in connection with the use of motor vehicles.

Singapore/Work Injury
Compensation

This insurance covers compensation payments to employees who
sustained bodily injury or occupational disease during or whicharises out of the course of their employment.

Singapore/Bonds

Includes maid insurance and insurance under which an insurer
undertakes to guarantee (other than guarantees to which “Credit/
Credit related” relates to) the due performance of a contract orundertaking, or the payment of a penalty or indemnity for any
default.

Singapore/Engineering
Construction

Includes insurance against construction, erection, or engineeringrisks such as the loss or damage involved in a construction project,and installation and erection of ready built-engineering projects. It
also includes boiler and pressure vessel insurance, construction allrisk insurance, engineering all risk insurance, erection all risk
insurance, machinery all risk insurance and insurance on any otherspecialised equipment or machinery that are excluded from thestandard property insurance.

Singapore/Credit

Insurance protecting against the risk of non-payment of goods andservices by buyers and importers.

Singapore/Mortgage

Insurance protecting against losses on mortgage loans arising fromdefault by borrowers.

Singapore/Others- nonliability class

Other non-liability classes not covered elsewhere.

Singapore/Marine andAviation - Hull

Includes insurance against risk of physical loss or damage ofvessel or ship used on sea or inland water or aircraft, any liability
arising from such vessel or ship or aircraft, and damage of vesselor ship or aircraft while under construction. It also includes marine
terminal operator insurance and airport operator insurance andinsurance against aerospace risks.

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Includes insurance for professionals against risk of their liability totheir principals, clients, principal's clients, or any third parties
Singapore/ Professional
arising out of neglect, omission or error in the discharge of theirindemnity
professional duties. It also includes directors and officers liability
insurance, and errors and omission insurance.

Singapore /Public
liability

Includes insurance against risk of the insured’s liability to third party
in respect of bodily injury, property damage or any monetary losses
arising out of negligence (other than liability to which businessclasses “Cargo”, “Marine Hull”, “Aviation Hull” and “Motor” relate
to).

Singapore /Othersliability class

Other liability classes not covered elsewhere.

Chinese Taipei / Fire residence

Fire insurance for personal residence.

Chinese Taipei / Fire commercial

Fire insurance for commercial building.

Chinese Taipei / Marine- inland cargo

Marine insurance for inland cargo.

Chinese Taipei / Marine- overseas cargo

Marine insurance for overseas cargo.

Chinese Taipei / Marine- hullMarine insurance for hull.

Chinese Taipei / Marine- fish boat

Marine insurance for fish boat/vessel.

Chinese Taipei / Marine- aircraft

Aviation insurance for aircraft.

Chinese Taipei / Motor- personal vehicle

Motor insurance for personal vehicle.

Chinese Taipei / Motor- commercial vehicle

Motor insurance for commercial vehicle.

Chinese Taipei / Motor- personal liability

Motor insurance for personal liabilities.

Chinese Taipei / Motor- commercial liability

Motor insurance for commercial liabilities.

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Chinese Taipei /Liability - public,
employer, product, etc.

Public liability insurance, employer liability insurance, productliability insurance, etc.

Chinese Taipei /Liability - professional

Professional liability insurance.

Chinese Taipei/
Engineering

Engineering insurance.

Chinese Taipei /Nuclear power station

Insurance for nuclear power station.

Chinese Taipei /Guarantee - surety,
fidelity

Surety insurance, fidelity insurance, mortgage insurance, etc.

Chinese Taipei / Credit

Trade credit insurance, credit card insurance, small-amount loancredit insurance, etc.

Chinese Taipei /Other
property damage

Property damage insurances not included in other LOBs, eg cash
insurance, theft insurance, glass insurance, etc.

Chinese Taipei /Accident

Accident insurance for personal injuries or death.

Chinese Taipei /Property Damage commercial earthquake

Earthquake insurance (other than compulsory earthquake
insurance).

Chinese Taipei /Comprehensive personal property andliability

Comprehensive insurance for personal property and liabilities.

Chinese Taipei /Comprehensive commercial property
and liability

Comprehensive insurance for commercial property and liabilities.

Chinese Taipei /Property damage typhoon and flood

Typhoon and flood insurance.

Chinese Taipei /Property damage compulsory earthquake

Compulsory earthquake insurance (compulsory for personal
residence).

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Chinese Taipei / Health

Health insurance.

OTHER/Motor

This includes: Motor property damage: Damage to own and thirdparty motor vehicles (and related property damage) throughaccident, theft, fire and weather events, excluding liability for
personal injury; and Motor bodily insurances: Insurances relating to
the injury or death of third parties due to or related to motor
vehicles and accidents involving them. This may also extend toinclude the driver involved.

OTHER/ Property
damageThis includes, but is not limited to: 1. Property: Insurance of houseor other property (including house contents) against loss throughfire, windstorm etc., insurance of contents against losses due totheft, fire, windstorm, earthquake, impact, damages, water damage,and other natural and man-made perils. Contents insurances may
extend to loss or damage to property outside the home or its usual
location. 2. Fire and industrial: Loss or damage and loss ofearnings due to damage to commercial buildings and other physicalinfrastructure due to fire, windstorm and other perils. 3.
Consequential losses: Products covering consequential losses(such as ‘loss of profits’ or ‘business interruption’) is also includedin this segment; 4 Construction: This includes ‘construction all risks
and erection all risks’ (CAR/EAR) or similar written in connection
with construction projects. This includes the construction anderection of infrastructure projects and buildings.

OTHER/ Accident,
protection and health(APH)

This includes, but is not limited to: 1 Accident and sickness:
Accident cover provides benefits if an accident result in bodily injury
or death. Benefits are lump sum or periodic (typically for at most 2
years). Sickness cover is often an extension of accident insurance;
2 Other consumer accident: Property damage other thanhouseholders or motor vehicle. For example, travel insurance. 3.
Other commercial accident: Commercial property insurance otherthan Fire and Industrial risk and MAT, and other than commercial
long-term liability; 4 Consumer credit: Guarantee of repayments on
consumer credit contracts due to involuntary loss of employment; 5.
Consumer liability: Private individual's liability for personal injury
through personal actions or property

OTHER/ Short tailmedical expenses

Insurance obligation that covers the provision or financial
compensation for medical treatment or care including preventive or
curative medical treatment or care due to illness, accident, disability
or infirmity usually made during the term of the policy or shortly(typically, up to 1 year) after the coverage period of the insurance
has expired.

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Any non-Life products which do not fit into the segments above, do
not fit the definition of non-life medium-term business and where
OTHER/ Other short tail claims are usually made during the term of the policy or shortly(typically, up to 1 year) up to after the coverage period of theinsurance has expired.

OTHER/ Marine, Air,
Transport (MAT)This includes: 1. All damage or loss of river, canal, lake and sea
vessels, aircraft, goods in transit, liabilities from use of aircraft,ships and boats.; 2 Loss or damage to property, consequential third
party liability for damages to the property of others, andconsequential third party liability for personal injury to operators,
passengers and other.

OTHER/ Workers'
compensation

This insurance covers compensation payments to employees who
sustained bodily injury or occupational disease during or whicharises out of the course of their employment.

OTHER/ Public liability

Public liability insurance for bodily injury or damage to property.

OTHER/ Productliability

Product liability insurance for bodily injury or damage to property for
claims attributed to the use of products.

OTHER/ Professional
indemnity

Professional indemnity for a professional person or organisation for
claims for losses legal and other) attributed to professional
negligence (and related) in the services provided. For example,
medical malpractice and directors and officers insurance products.

OTHER/ Other liability
and other long tailAny non-life products which do not fit into the defined segments
above, do not fit the definition of non-life medium-term business
and where claims may be made many years (typically 1 or more
years) after the coverage period of the insurance has expired.
All other liability classes not covered elsewhere.

OTHER/ Nonproportional motor,
property damage, APH
and MAT

Non-Proportional reinsurance of motor, property damage andaccident/protection/health business, marine, aviation and transport(refer definition).

OTHER/ Catastrophe
reinsurance

Catastrophe Reinsurance is an inwards reinsurance line ofbusiness providing excess of loss protection or proportional
protection in respect of aggregate losses arising from a single
event or a combination of events. Typically, such business iscovering damages to property and is sold with an ‘hours’ clauseand provides protection against natural catastrophe perils such as
windstorms, earthquakes and man-made catastrophe such as actsof terrorism.

OTHER/ Nonproportional liability

Non-Proportional reinsurance of public liability, product liability andother liability (refer definition).

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OTHER/ Nonproportional
professional indemnity

Non-Proportional reinsurance of professional indemnity (referdefinition).

OTHER/ Mortgage
insurance

Indemnity to credit providers for losses due to the failure of aborrower to repay a loan secured by a mortgage over property.

OTHER/ Commercial
credit insurance

Indemnity for financial losses due to the failure of a commercial
entity to repay outstanding credit contracts or failure to perform
contracted services or deliver contracted products other than shortterm trade credit and suretyship insurance.

OTHER/ Other
medium-term

Any other non-life medium-term insurance products other than theabove and not included in non-life insurance segments above. This
includes, but is not limited to: Financing or monetising Insurancelinked securities (ILS, for example catastrophe bonds). For
example, embedded Value/Present Value of Future Profit
securitisations, ILS with financial risk as material trigger condition.

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