Document ID: chunk:federal_register_of_legislation:F2023L00676:reg:7:p1
Version: federal_register_of_legislation:F2023L00676
Segment Type: reg
Provision Reference: reg 7 (pt 1/5)
Character Range: 28632–31409

7                   20

77.         For reinsurance assets, the default stress must be applied to the value of adjusted reinsurance assets. The value of adjusted reinsurance assets must be determined by calculating the adjusted policy liabilities gross of reinsurance, and deducting the corresponding net of reinsurance values. For other assets, the default factor must be applied to the amount of loss that would be incurred if the counterparty defaulted and no recovery was made.
78.         For unpaid premiums the factors are four per cent for premiums due less than six months previously and eight per cent for other premiums. These factors only apply if the unpaid premiums cannot be recovered by reducing the termination value of the policy.
79.         The following types of unsecured loans have a 100 per cent default factor applied:
(a)          loans to directors of the life company, or their spouses;
(b)          loans to directors of related bodies corporate, or their spouses;
(c)          loans to a parent or related company that are not on commercial terms; and
(d)         loans to employees exceeding $1,100.
80.         Assets that are exempt from being deducted from the capital base under Attachment B of LPS 112 must have a 100 per cent default factor applied to them.
81.         Assets guaranteed by an Australian state or territory government must be rated up one grade. For example, assets with counterparty grade 1 must be treated as grade 1 (government) and assets with counterparty grade 2 must be treated as grade 1 (other).

Aggregation formula
82.         The aggregated risk charge component is calculated as:
    where
(a)          Aₓ is the risk charge component for asset risk stress x;
(b)          Ay is the risk charge component for asset risk stress y;
(c)          ∑x,y  is the sum over all combinations of asset risk stresses, excluding the default stress;
(d)          Corrx,y is the correlation between asset risk stresses x and y;
(e)          sign (x) is 1 for the equity, property and credit spreads stresses. For the real interest rates and expected inflation stresses, sign (x) is 1 if the stress is a decrease in rates, otherwise it is -1. For the currency stress, sign (x) is 1 if the stress is a depreciation of the Australian dollar against foreign currencies, otherwise it is -1; and
(f)           sign (y) is defined in the same way as sign (x).

83.         The correlation matrix is:
    Table 3: Asset Risk Charge correlation matrix
      RIR  INF  CUR  EQY  PROP  CSP
RIR   1    0.2  0.2  0.2  0.2   0.2
INF   0.2  1    0.2  0.4  0.4   0.2
CUR   0.2  0.2  1    0.6  0.2   0.4
EQY   0.2  0.4  0.6  1    0.4   0.8
PROP  0.2  0.4  0.2  0.4  1     0.4
CSP   0.2  0.2  0.4  0.8  0.4   1

84.         The real interest