Document ID: chunk:federal_register_of_legislation:F2023L00733:front:0:p5
Version: federal_register_of_legislation:F2023L00733
Segment Type: other
Provision Reference: 
Character Range: 10593–13412

be recognised as a floor to the stressed value, but it must be reduced by multiplying it by (1 – default factor).

Derivatives
24.         Derivatives include forwards, futures, swaps, options and other similar contracts. Derivatives expose private health insurers to the full range of investment risks, even though in many cases there may be no, or only a very small, initial outlay.
25.         Changes to the capital base that would arise from changes in the value of derivatives must be included in the risk charges arising from each of the asset risk stresses.
26.         A risk charge must be applied to the fair value of over-the-counter derivatives in the default stress to allow for the risk of counterparty default. This is in addition to any charges that would arise from other asset risk stresses.

Extended Licence Entity
27.         In certain circumstances, a private health insurer may choose to hold assets in a Special Purpose Vehicle (SPV) or other related entity, rather than on its own balance sheet. Detailed information on the treatment of an 'Extended Licence Entity' (ELE) is set out in Attachment C.

Real interest rates stress
28.         This stress measures the impact on the capital base of a fund from changes in real interest rates.
29.         Real interest rates are the portion of the nominal risk-free interest rates that remain after deducting expected CPI inflation.
30.         All assets and liabilities whose values are dependent on real or nominal interest rates must be revalued using the stressed real or nominal rates.
31.         The stress adjustments to real interest rates are determined by multiplying the greater of three percent or the nominal risk-free interest rate, by 0.25 (upward stress) or by -0.20 (downward stress). The stress adjustments must be added to the nominal risk-free interest rates. The stress adjustments must also be added to real yields if these are used explicitly in the valuation of an asset or liability (e.g. inflation-indexed bonds). Post-stress real yields may be negative.
32.         The maximum stress adjustment is 200 basis points in either direction. The minimum upward stress is 75 basis points and the minimum downward stress is 60 basis points. Nominal risk-free interest rates and real yields may be negative after applying the downward stress adjustment.
33.         A private health insurer must calculate the impact on the capital base of a fund of an upward movement and a downward movement in real interest rates. The impact of each calculation must not be less than zero. Both impact calculations must be used for the purposes of the aggregation formula in paragraph 76.

Expected inflation stress
34.         This stress measures the impact on the capital base of changes to expected Consumer Price Index (CPI) inflation