Document ID: chunk:federal_register_of_legislation:F2023L00673:body:0:p7
Version: federal_register_of_legislation:F2023L00673
Segment Type: other
Provision Reference: 
Character Range: 16169–19146

the Operational Risk Charge; less
(e)          an 'aggregation benefit' as defined in paragraph 36; plus
(f)           a combined stress scenario adjustment.
30.         The prescribed capital amount of a fund determined under the Standard Method is intended to be sufficient, such that if a fund was to start the year with a capital base equal to the prescribed capital amount, and losses occurred at the 99.5 per cent confidence level then the assets remaining would be at least sufficient to provide for the adjusted policy liabilities and 'other liabilities' of the fund at the end of the year. The other liabilities to be provided for exclude those liabilities that satisfy the criteria for inclusion in the capital base.

Insurance Risk Charge
31.         The Insurance Risk Charge relates to the risk of adverse impacts due to movements in future mortality, morbidity, longevity, servicing expenses, lapses and other insurance risks such as option take-up rates.
32.         The Insurance Risk Charge for a fund is determined by assessing the impact on the capital base of the fund of adverse changes in the variables in paragraph 31. The method for determining the Insurance Risk Charge is set out in Prudential Standard LPS 115 Capital Adequacy: Insurance Risk Charge (LPS 115).

Asset Risk Charge
33.         The Asset Risk Charge relates to the risk of adverse movements in the value of a fund's on-balance sheet and off-balance sheet exposures. The method for determining the Asset Risk Charge is set out in Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge (LPS 114). Asset risk can be derived from a number of sources, including market risk and credit risk.

Asset Concentration Risk Charge
34.         The Asset Concentration Risk Charge relates to the risk resulting from concentrations in individual assets or large exposures to individual counterparties or groups of related counterparties. The method for determining the Asset Concentration Risk Charge is set out in Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge.

Operational Risk Charge
35.         The Operational Risk Charge relates to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The method for determining the Operational Risk Charge is set out in Prudential Standard LPS 118 Capital Adequacy: Operational Risk Charge.

Aggregation benefit
36.         The aggregation benefit makes an explicit allowance for diversification between asset and insurance risks in the calculation of the prescribed capital amount.
37.         The aggregation benefit formula is:
where:
       (a)          'A' is the Asset Risk Charge;
       (b)          'I' is the Insurance Risk Charge; and
       (c)          'correlation' is 20 per cent.
38.         The Asset Concentration Risk Charge and the Operational Risk Charge are not included in the calculation of the aggregation benefit.

Combined stress