Document ID: chunk:federal_register_of_legislation:F2023L00676:front:0:p3
Version: federal_register_of_legislation:F2023L00676
Segment Type: other
Provision Reference: 
Character Range: 5449–8300

liabilities may be affected. Insurance policy receivables and payables may be affected. Off-balance sheet exposures may also be affected.

Asset Risk Charge calculation
10.         The Asset Risk Charge for a fund is calculated as the 'aggregated risk charge component' determined in accordance with paragraph 11.

Aggregated risk charge component
11.         A life company must calculate, for each of its funds, the 'risk charge components' defined in paragraph 12, by considering the impact on the capital base of the fund of a range of stresses. These risk charge components are then aggregated using the formula set out in paragraphs 82 to 84, which allows for the likelihood of the scenarios modelled by the stress tests occurring simultaneously. The result of applying the formula is defined as aggregated risk charge component.

Risk charge components
12.         The risk charge components are calculated by determining the fall in the capital base of the fund in seven stress tests:
(a)          'real interest rates' determined in accordance with paragraphs 37 to 42;
(b)          'expected inflation' determined in accordance with paragraphs 43 to 46;
(c)          'currency' determined in accordance with paragraphs 47 to 50;
(d)          'equity' determined in accordance with paragraphs 51 to 54;
(e)          'property' determined in accordance with paragraphs 55 to 59;
(f)           'credit spreads' determined in accordance with paragraphs 60 to 71; and
(g)          'default' determined in accordance with paragraphs 74 to 81.
    These stresses are applied either directly to asset values or by way of changes to economic variables that in turn affect the value of both assets and liabilities. Some assets and liabilities may be impacted by more than one of the seven stress tests and will need to be considered in each relevant stress test. For the stresses in (a), (b) and (c), the impact on the capital base will be two separate amounts and these need to be included in the aggregation formula.
13.         For the purposes of paragraph 12, no risk charge component may be negative and, therefore, if there is no fall in the capital base of the fund due to the application of the stresses, the risk charge component is assumed to be zero.

Tax benefits
14.         Any tax benefits that would arise from scenarios modelled by the asset risk stresses should be assumed to be realisable for the purpose of determining the Asset Risk Charge. An adjustment must be made to the prescribed capital amount when the capital charges are aggregated, if some or all of the tax benefits cannot be offset against deferred tax liabilities. This adjustment is specified in Prudential Standard LPS 110 Capital Adequacy (LPS 110).

Assets and liabilities to be stressed
15.         In determining each risk charge component, a life company must