Document ID: chunk:federal_register_of_legislation:F2023L00207:body:0:p5
Version: federal_register_of_legislation:F2023L00207
Segment Type: other
Provision Reference: 
Character Range: 11322–14302

the actual cost of claims will exceed the stressed estimate.
31.         For each type of stress, different margins may be applied to different types of policies. For example, there may be different morbidity random stresses for lump sum policies and disability income insurance policies. For disability income insurance policies, separate margins must be applied to the best estimate claim incidence and claim termination assumptions.

Random stresses for mortality and morbidity
32.         The 'random stress' margins, before the adjustment for diversification, must be determined by the Appointed Actuary, having regard to the nature of the mortality and morbidity risks to which the company is exposed. The margins for random stresses must be applied for 12 months from the reporting date. Each random stress must reflect the uncertainty arising due to adverse fluctuations in experience, but excluding the impact of single events such as pandemics, terrorist attacks and natural catastrophes that could cause large numbers of claims. The size of these margins will depend on factors such as the number of expected claims, the distribution of sums insured, and the impact of existing reinsurance arrangements.

Future stresses for mortality and morbidity
33.         The 'future stress' margins, before the adjustment for diversification, must be determined by the Appointed Actuary, having regard to the nature of the mortality and morbidity risks to which the company is exposed.
34.         The margins for future stress must be applied from the reporting date for the remaining term of the liabilities. They must allow for the possibility that the best estimate assumptions may need to be changed in 12 months time, either because they were misestimated at the reporting date or because adverse trends have been identified during this period. The size of the margin will depend on the adequacy of the investigations used to determine the best estimate assumptions, and the range of adverse factors that could affect trends in claims experience.

Event stress
35.         The 'event stress' allows for the impact of single events that could commence in the 12 months following the reporting date and cause multiple claims. These events could include pandemics, terrorist attacks and natural catastrophes and may affect either or both mortality and morbidity experience. The Appointed Actuary must determine an appropriate event stress that provides a 99.5 per cent probability of sufficiency with respect to single events that could potentially commence over the following 12 months.
36.         The event stress, before adjustment for diversification, must at a minimum include a pandemic scenario with the following impacts on mortality and morbidity claims experience:
       (a)          annual mortality rates at each age increase by 0.5 per thousand for the two years following the reporting date;
       (b)          an annual incidence rate of total disablement at