OIC RBC 2 · OIC RBC 2 Stage 3 – Parameters and ... In the current Stage 3, companies will be able to test the impact of the proposed changes to the RBC ... 1.5 The market testing

© 2014 Towers Watson. All rights reserved.

OIC RBC 2

Stage 3 – Parameters and overview of market testing (Non-Life

Insurance)

Date: 4 April 2014

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Table of Contents

Preface ............................................................................................................................................. iii

Section 1 : Introduction to market testing ....................................................................................... 1

Objectives and scope .................................................................................................................... 1

Submission requirements .............................................................................................................. 2

Materiality ..................................................................................................................................... 2

Questions and answers ................................................................................................................. 2

Section 2 : Framework changes to be tested .................................................................................. 3

Overview of framework ................................................................................................................. 3

Summary of changes .................................................................................................................... 5

Details of changes (Life and Non-life insurance) ............................................................................ 6

Section 3 : Parameters for testing .................................................................................................. 13

Market risk .................................................................................................................................. 13

Credit risk ................................................................................................................................... 16

Asset correlation ......................................................................................................................... 21

Non-Life insurance risk ............................................................................................................... 22

Operational risk ........................................................................................................................... 24

Section 4 : Market testing template ................................................................................................ 25

Overview .................................................................................................................................... 25

Input process .............................................................................................................................. 26

Details of RBC 2 additional input ................................................................................................. 31

Appendix A : Guidance notes for asset risk charge calculations................................................. 38

Market risk .................................................................................................................................. 38

Credit risk ................................................................................................................................... 40

Derivatives .................................................................................................................................. 40

Appendix B : Guidance notes for Long Term insurance calculations .......................................... 43

Contract recognition and boundaries ........................................................................................... 43

Liability discount rates for long-term contracts ............................................................................. 45

Appendix C : Guidance notes for operational risk charge testing ............................................... 50

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Preface

The implementation of risk-based capital (RBC) regulations on 1 September 2011 was the first time

the OIC introduced principles-based supervisory regulation. The OIC wants to continuously monitor

and develop its supervisory approach to the industry; since 2012 the OIC has sought feedback and

comments on the current RBC regime from related parties.

In line with its aim to pursue continuous improvement, the OIC has now launched Phase 2 of the RBC

framework development, and has engaged Towers Watson to work together with the OIC in further

developing and refining the RBC framework.

Project stages

There are five stages to this project, namely:

Stage 3 (current stage)

In the current Stage 3, companies will be able to test the impact of the proposed changes to the RBC

framework, to understand what the likely impact to the capital adequacy position will be from each

proposed change.

This document provides an overview of the items and parameters that will be market tested.

Current stage

Stage 4

Stage 1

Stage 2

Stage 3

Review and proposal

development

Stage 5

Market calibration /

Proposal refinement

Market

testing

Regulation / guidance

assessment

Finalisation

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Section 1: Introduction to market testing

Objectives and scope

1.1 The objectives of market testing are to enable:

companies to assess the impact of potential changes to the RBC framework, and

provide feedback;

the OIC to make informed decisions based on quantitative testing of possible changes;

and

an assessment of appropriate transition periods for proposals that will be adopted in

the RBC framework.

1.2 The market testing has two main parts:

Testing the impact of proposed changes to the RBC framework; and

Testing the impact of changes to the parameters

1.3 Details of the potential framework changes to be tested are provided in Section 2.

1.4 Details of the potential parameter changes to be tested are provided in Section 3. In

particular, the parameters will be tested at the following target sufficiency levels:

Potential changes to parameters

Market testing

Potential changes to framework

85% 1-year VaR

90% 1-year VaR

95% 1-year VaR

97.5% 1-year VaR

99.5% 1-year VaR

Target sufficiency levels to be tested. These target sufficiency levels will apply to both asset and liability risks.

2


Submission requirements

1.5 The market testing will be based on the 31 December 2013 financial position, using the 31

December 2013 RBC submissions as a base starting point.

1.6 The latest date for submission is 6 June 2014 (8 weeks starting from 9 April).

1.7 There is no requirement for the market testing submission to be certified by an auditor.

1.8 The submissions are to be sent directly to the OIC at the following email address:

Materiality

1.9 As the objective of the market testing is to understand the impact of the potential changes to

the RBC framework and parameters, it is not expected that the testing be performed to the

same degree of accuracy as the quarterly submissions. Examples are provided in the

guidance notes.

1.10 Companies are allowed to use judgement to determine if approximations for certain

calculations can be used, and should describe such approximations where used in their

submissions to the OIC.

Questions and answers

1.11 Questions may be submitted via the following email address:

1.12 Answers to frequently asked questions (“FAQs”) will be distributed once a week to the industry,

and will be available at the following website:

[email protected]

http://www.oic.or.th/th/rbcrbs/

[email protected]

3


Section 2: Framework changes to be tested

Overview of framework

2.1 Under the current Thai RBC framework, capital adequacy is measured based on the Capital

Adequacy Ratio (“CAR”):

2.2 The definitions of the “Total Capital Available” and “Total Capital Requirement” components

are shown in the diagram below.

CAR Total Capital Available ( TCA )

Total Capital Requirement ( TCR )

Fair value of assets

Best estimate liability

Liability risk margin (Value of

PADs@75%)

Total Capital

Requirement

Inadmissible assets

Total Capital

Available

Fair value of liabilities

4


Components of TCA

2.3 The proposed RBC 2 changes to components of the Tier 1, Tier 2 and Deductions (e.g.

goodwill, intangibles, etc.) are discussed in more detail in the following sub-sections.

Components of TCR

Tier 1 Capital

Tier 2 Capital

Total Capital

Available

Deductions

RBC 1 and RBC 2

Insurance risk

Market risk

Credit risk

Concentration risk

Current RBC 1 RBC 2 to be tested

Insurance risk

Market risk

Credit risk

Concentration risk

Operational risk

To be assessed in market testing first

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Summary of changes

2.4 The table below summarises the potential changes to the framework that are to be assessed in

market testing.

Summary of potential changes to framework to be market tested

ID Proposed potential change Affects

Non-life?

Affects

Life?

Comments on input / calculations

required by companies

1 Inclusion of investments in associates

and subsidiaries in TCA Yes Yes

Companies need to determine the

value of investments in associates /

subsidiaries

2 Calculation of exchange rate risk Yes Yes Automated in market test template

3 Reflecting risk mitigation

characteristics of derivatives Yes Yes

Companies will need to apply

judgement

4 Inclusion of an operational risk charge Yes Yes Automated in market test template

5

Inclusion of diversification between

asset, insurance and operational risk

charges

Yes Yes Automated in market test template

6 Contract recognition and boundaries Yes Yes Companies will need to apply

judgement

7 Calculation of premium and claims

reserves and risk charges Yes Yes Automated in market test template

8 Testing insurance (premium) risk

under two bases Yes No Automated in market test template

9 Commodity risk is to follow that of

equity risk Yes Yes Automated in market test template

10 Inclusion of a catastrophe risk charge Yes No Automated in market test template

2.5 Details of each of the changes are discussed in the following sub-sections below.

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Details of changes (Life and Non-life insurance)

ID 1 – Investments in associates and subsidiaries

2.6 It is proposed that the TCA recognises the value of investments in associates and subsidiaries.

2.7 For investments in associates and subsidiaries that are licensed to conduct insurance

business, these associates / subsidiaries must be subject to regulatory capital requirements by

the OIC, and the value of the investment will be subject to the following deductions:

Intangibles;

Minimum required regulatory capital.

2.8 “Intangibles” are to be defined as per the current RBC 1 regulations, i.e. the value of deductible

intangible assets is to be the same as the value of intangibles that the subsidiary / associate

deducts from its current RBC 1 TCA.

2.9 For market testing purposes, the “minimum required capital” is defined as 140% of an

insurance subsidiary’s current TCR (i.e. under the current RBC framework).

ID 2 – Exchange rate risk calculation

2.10 It is proposed that the calculation of exchange rate risk be changed to the following:

∑

Where

2.11 A numerical example is provided below:

Exposure Calculation

details

Curren

cy

Asset -

Long

position

Asset -

Short

position

Net

liability

Currency

Swap – swap

THB for

foreign

currency at

maturity

Currency

Swap –

swap

foreign

currency for

THB at

Net

exposure

7


maturiy

USD 1,000 -300 -200 -300 0 200

= abs{1,000 + (-

300) + (-200) + (-

300) }

SGD 200 -700 -100 0 500 100

= abs{ 200 + (-

700) + (-100) +

500 }

MYR 500 -500 -300 0 0 300 = abs{ 500 + (-

500) + (-300)}

Total 600 200 + 100 + 300

Risk charge applicable 10%

Risk charge amount 60 = 600 x 10%

2.12 The change in calculation method will be reflected in the market testing templates, and

companies will not need to modify the calculations themselves.

ID 3 – Reflecting risk mitigation effects of derivatives

2.13 Under the current RBC framework the “stresses” to assets are generally applied as “asset

value x risk charge”, and therefore full risk mitigation / hedging strategies are not captured

appropriately in the solvency assessment.

2.14 It is proposed that the risk mitigating effects of derivatives be allowed for by allowing

companies to reflect the change in the value of the “asset plus derivative” under the prescribed

stress. An illustration of this is shown below:

RBC 1 Proposed RBC 2

Original asset value

Stressed asset value

Risk charge

Original asset value

Derivative

Stressed asset value reflecting

risk mitigation effects of derivative

Risk charge

Base scenario

Prescribed stress

scenario

Base scenario

Prescribed stress

scenario

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ID 4 – Inclusion of an operational risk charge

2.15 It is proposed that the impact of including an operational risk charge be assessed. The

operational risk charge calculations to be tested are based on simplified versions of the

Solvency II and Australian approaches. The simplifications include:

excluding any overall cap that is linked to RBC results for other risks;

excluding elements that are associated with large movements in premiums or claims or

the excess of these over a percentage of liabilities; and

adopting the same formulae for both Life and Non-life companies.

2.16 The simplified operational risk formulae (parameterised at the 99.5% target sufficiency level for

illustration purposes) for market testing are summarised below:

Market test approach 1: Based on simplified Solvency II approach:

Where:

Market test approach 2: Based on simplified Australia approach:

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ID 5 – Diversification between asset, insurance and operational risks

2.17 The following correlation matrix between asset, insurance and operational risks is proposed for

market testing for all target sufficiency levels:

Correlation matrix for asset and insurance risks

Asset risk Insurance risk Operational risk

Asset risk 100% 25% 25%

Insurance risk 25% 100% 25%

Operational risk 25% 25% 100%

ID 6 – Contract recognition and boundaries

2.18 Some of the feedback provided by the industry regarding contract recognition and boundaries

is summarised below:

“A suggestion is to consider the definition ‘constructive obligations / constructive

options’”

“The definition should reflect the management practice of the company, for example

consideration of the voiding of the contract due to fraud.”

2.19 Taking industry feedback into consideration, it is proposed that the contract classification be

based on principles, and for consistency with the incoming implementation of IFRS, that these

principles be consistent with the IFRS principles. These will be provided in the guidance notes

for market testing.

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ID 7 – Calculation of premium and claims reserves and risk charges

2.20 It is proposed that the calculation of premium and claims reserves and risk charges be changed to the following:

Formula for short-term reserves and risk charges

Component Current RBC 1 Proposed RBC 2

Short-term reserve calculation

Premium Max{UPR, URR x (1 + PAD premium @75%)} Max{UPR, URR + UPR x PAD premium @75%}

Claims Unpaid claims x (1 + PAD claims @75%) (no change)

Short-term risk charge calculation(1)

Premium Max{ 0,

URR x (PAD premium @95% - PAD premium @75%) (2)

– Max{ 0, UPR – Premium reserve} }

Max{ 0,

UPR x (PAD premium @95% - PAD premium @75%)


Claims Unpaid claims x (PAD claims @95% - PAD claims @75%) (2)

(no change)

Notes:

1. This example shows the formulae that apply at the 95% 1-year VaR target sufficiency level. The PADs will change accordingly depending on the target sufficiency level.

2. This is a simplified representation of the formula for Non-life. The exact formulae in the Non-life RBC forms is actually:

Premium risk = URR x (1 + PAD@75%) x PAD@75% x 1.5

Claims risk = Unpaid claims x (1 + PAD@75%) x PAD@75% x 1.5

These formulae can be simplified into the formulae presented in the table above.

2.21 The market testing will include calculation of the premium reserves on the following approaches:

Current RBC 1 approach (i.e. using URR as the driver for risk charges); and

Proposed RBC 2 approach (i.e. using UPR as the driver for risk charges)

Proposed RBC 2 approach (i.e. using URR as the driver for risk charges)

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2.22 The changes to the calculation method for premium and claims reserves and risk charges will be reflected in the market testing template, and

companies will not need to modify the calculations by themselves.

ID 8 – Testing insurance (premium) risk under two bases

2.23 The formulae for proposed RBC 2 approach using URR as a measure are as follows:

Formula for short-term reserves and risk charges

Component Current RBC 1 Proposed RBC 2

Short-term reserve calculation

Premium Max{UPR, URR x (1 + PAD premium @75%)} Max{UPR, URR + URR x PAD premium @75%}

Claims Unpaid claims x (1 + PAD claims @75%) (no change)

Short-term risk charge calculation(1)

Premium Max{ 0,

URR x (PAD premium @95% - PAD premium @75%) (2)


Max{ 0,

URR x (PAD premium @95% - PAD premium @75%)


Claims Unpaid claims x (PAD claims @95% - PAD claims @75%) (2)

(no change)

2.24 As discussed above, the changes to the calculation method will be reflected in the market testing template.

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ID 9 – Commodities and other assets based on equity risk charge

2.25 For commodities and any other assets that not explicitly considered in any of the other stress

tests, the equity risk charge is to apply.

ID 10 – Inclusion of catastrophe risk charge

2.26 A catastrophe risk charge is proposed to be included for market testing.

2.27 The catastrophe risk charge will apply to the following lines of business:

Fire;

Industrial all risks;

Engineering; and

Property

2.28 Note that no catastrophe reserves are proposed, only risk charges, and the formula for the

catastrophe risk charge is shown below:

Catastrophe risk charge = Exposure x PAD Catastrophe @ target sufficiency level

Where “Exposure” = UPR or URR (i.e. both will be tested)

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Section 3: Parameters for testing

3.1 The parameters for market testing are specified at the following target sufficiency levels:

85% 1-year value-at-risk (“VaR”);

90% 1-year VaR;

95% 1-year VaR;

97.5% 1-year VaR; and

99.5% 1-year VaR.

3.2 These parameters are also contained within the market testing template, and the calculations

using these specified parameters have been automated, with the exception of the insurance

risk parameters which will require external actuarial model projections for long-term contracts.

3.3 Please note that these parameters are only for impact testing purposes in Stage 3 (market

testing). A roadmap for revisions to RBC parameters will only be decided by the OIC after

impact assessments have been performed and the results, along with any additional feedback

from the industry, have been considered.

Market risk

Equity risk parameters

Parameters for market testing (Equity risk)

Risk category RBC1

Proposed (at various sufficiency levels)

85% 90% 95% 97.5% 99.5%

(1) Listed on the Thai stock exchanges SET

and MAI 16% 20% 25% 35% 45% 50%

(2) Listed on the main board of other

approved stock exchanges 16% 20% 25% 35% 45% 50%

(3) Equity investments in subsidiaries and associates, except (4) below

(1)

0% 25% 30% 40% 50% 55%

(4) Investment in subsidiaries or associates licensed to conduct insurance business

(2)

20% 25% 30% 40% 50% 55%

(5) Other assets not explicitly considered in

any of the other stress tests 20% 25% 30% 40% 50% 55%

Notes:

1. Under the current RBC, no risk charges apply to equity investments in subsidiaries / associates because these are

excluded from TCA. As it is proposed to include these investments in TCA for RBC 2, a risk charge is applicable.

2. To be applied to the value of investments net of any deductions, as discussed in Section 2.

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Property risk parameters

3.4 Note that the stress for owner occupied property has been proposed to be the same as other

property assets, because owner occupied property is included in available capital at fair value,

and a market level stress should therefore be applied to assess this value for consistency.

Parameters for market testing (Property risk)

Risk category RBC1


85% 90% 95% 97.5% 99.5%

(1) Owner occupied 4% 14% 16% 19% 22% 25%

(2) Operating assets 16% 14% 16% 19% 22% 25%

(3) Other property not included in (1)-(2) 16% 14% 16% 19% 22% 25%

3.5 Note that for property funds that are listed on a stock exchange (e.g. SET), the equity risk

charge should be applied to these assets instead.

Exchange rate risk parameters

Parameters for market testing (Exchange rate risk)

RBC1


85% 90% 95% 97.5% 99.5%

Exchange rate risk charge 8% 8% 10% 14% 17% 22%

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Interest rate risk parameters (Non-Life insurance)

3.6 The table below shows the proposed interest rate parameters for market testing at selected

durations. The full set of proposed parameters at all durations is contained in the market

testing template.

Proposed interest rate charges (for Non-Life insurance only)

Term to maturity (TTM) RBC1 Proposed (at various sufficiency levels)

85% 90% 95% 97.5% 99.5%

TTM <= 1 month 0.00% 0.0% 0.0% 0.0% 0.0% 0.0%

1 month < TTM <= 6 months 0.25% 0.1% 0.1% 0.2% 0.2% 0.3%

6 months < TTM <= 1 year 0.50% 0.3% 0.3% 0.4% 0.5% 0.7%

1 year < TTM <= 2 years 1.00% 0.6% 0.7% 0.9% 1.0% 1.3%

2 years < TTM <= 3 years 1.85% 1.6% 1.8% 2.4% 2.9% 3.6%

3 years < TTM <= 5 years 3.00% 3.0% 3.5% 4.6% 5.6% 6.9%

5 years < TTM <= 10 years 4.50% 5.0% 6.0% 7.9% 9.8% 11.5%

10 years < TTM <= 15 years 6.00% 6.4% 8.0% 11.0% 13.3% 14.7%

15 years < TTM <= 20 years 7.00% 7.2% 8.7% 12.5% 14.3% 15.5%

TTM > 20 years 8.00% 7.7% 8.9% 13.9% 15.6% 17.7%

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Credit risk

Debt securities and “other” assets

3.7 It is proposed that debt securities issued by the following issuers be exempt from credit risk

charges:

Thai government or central bank;

Bank of Thailand;

State enterprise / government organisations that are backed by Ministry of Finance

(“MoF”) guarantees;

Recognised multilateral development banks (“MDBs”):

– Asian Development Bank;

– African Development Bank;

– The Bank for International Settlements;

– European Bank for Reconstruction and Development;

– European Investment Bank;

– European Investment Fund;

– Inter-American Development Bank;

– International Bank for Reconstruction and Development;

– International Finance Corporation; and

– International Monetary Fund.

3.8 In addition, a change is proposed for the credit risk charge on investment assets (i.e. debt

securities, deposits). Spread risk is proposed to be included:

3.9 The spread risk component of the risk charge aims to capture the risks associated with

changes in a bond’s credit spread, i.e. the potential decrease in market value of an asset due

to increases in credit spreads.


Default risk

Spread risk

+ Default risk

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3.10 As a result, the proposed credit risk charges need to vary by asset duration, and the proposed

duration buckets have been based on the current duration buckets required in the “Chor” /

“Wor” asset reports that insurance companies submit regularly to the OIC, namely:

Term to maturity is less than or equal to 1 year;

Term to maturity greater than 1 year, but less than or equal to 5 years;

Term to maturity greater than 5 years, but less than or equal to 10 years; and

Term to maturity is greater than 10 years

3.11 The table below summarises the proposed credit risk charges at the various target sufficiency

levels. These apply to all debt securities that are not exempt from credit risk charges.

Proposed credit risk charges (debt securities)

Bond term to maturity (T)

Risk level

1 2 3 4 5 6 Unrated

At 85% target sufficiency level

T ≤ 1 year 0.2% 0.2% 0.7% 1.6% 3.4% 23.0% 31.0%

1 year < T ≤ 5 years 1.2% 1.5% 2.5% 3.8% 6.1% 29.0% 38.0%

5 years < T ≤ 10 years 2.4% 3.0% 4.6% 6.5% 9.3% 36.0% 40.0%

T > 10 years 4.0% 5.0% 7.4% 10.0% 14.0% 40.0% 40.0%


T ≤ 1 year 0.2% 0.3% 1.0% 1.9% 3.8% 24.0% 32.0%

1 year < T ≤ 5 years 1.5% 1.8% 3.2% 4.8% 7.5% 31.0% 41.0%

5 years < T ≤ 10 years 3.0% 3.6% 5.9% 8.4% 12.0% 40.0% 45.0%

T > 10 years 5.0% 6.0% 9.5% 13.0% 18.0% 45.0% 45.0%


T ≤ 1 year 0.3% 0.4% 1.3% 2.4% 4.4% 25.0% 32.0%

1 year < T ≤ 5 years 1.8% 2.4% 4.3% 6.6% 9.2% 34.0% 44.0%

5 years < T ≤ 10 years 3.6% 4.8% 7.8% 12.0% 15.0% 46.0% 50.0%

T > 10 years 6.0% 8.0% 13.0% 18.0% 23.0% 50.0% 50.0%

At 97.5% target sufficiency level

T ≤ 1 year 0.4% 0.6% 1.6% 2.7% 4.9% 26.0% 33.0%

1 year < T ≤ 5 years 2.4% 2.8% 5.3% 7.6% 11.0% 37.0% 47.0%

5 years < T ≤ 10 years 4.8% 5.5% 9.8% 14.0% 18.0% 51.0% 55.0%

T > 10 years 8.0% 9.1% 16.0% 21.0% 28.0% 55.0% 55.0%

At 99.5% target sufficiency level

T ≤ 1 year 0.7% 1.2% 2.2% 4.4% 7.6% 27.0% 34.0%

1 year < T ≤ 5 years 3.5% 4.5% 7.4% 11.0% 16.0% 42.0% 54.0%

5 years < T ≤ 10 years 6.8% 8.4% 14.0% 20.0% 26.0% 60.0% 65.0%

T > 10 years 11.0% 14.0% 22.0% 31.0% 39.0% 65.0% 65.0%

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3.12 The credit ratings corresponding to the risk levels above are shown in the table below.

Rating Thai rating Offshore rating

TRIS Fitch (Thailand) S & P Moody’s Fitch A.M. Best

1 AAA AAA (THA) AAA Aaa AAA A++

2

AA+

AA

AA-

AA+ (THA)

AA (THA)

AA- (THA)

AA+

AA

AA-

Aa1

Aa2

Aa3

AA+

AA

AA-

A+

3

A+

A

A-

A+ (THA)

A (THA)

A- (THA)

A+

A

A-

A1

A2

A3

A+

A

A-

A

A-

4

BBB+

BBB

BBB-

BBB+

BBB

BBB-

BBB+

BBB

BBB-

Baa1

Baa2

Baa3

BBB+

BBB

BBB-

B++

B+

5 - -

BB+

BB

BB-

Ba1

Ba2

Ba3

BB+

BB

BB-

B

B-

6 BB+ or

below

B+ (THA) or

below B+ or below B1 or below

B+ or below C++ or

below

3.13 For unrated bonds issued by Thai or foreign state enterprises that are not backed by the MoF,

the following classification is proposed:

Rating classification for unrated bonds issued by state enterprises

Bond issuer Rating category

Thai state enterprise / government organisations that are established under the

special law (i.e. as per the investment regulations) 4

Others Unrated

Mortgage loans

3.14 No change is proposed, i.e. the same risk charges as RBC 1 will apply.

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Reinsurance credit risk

3.15 The table below shows the proposed reinsurance credit risk charges for reinsurers with credit

ratings.

Proposed reinsurance credit risk charges (for reinsurers with credit ratings)

Risk level Current Proposed (at various target sufficiency levels)

85% 90% 95% 97.5% 99.5%

1 1.6% 0.2% 0.2% 0.4% 0.5% 1%

2 2.8% 0.2% 0.3% 0.5% 0.7% 1.5%

3 4% 0.7% 1% 1.4% 1.8% 3%

4 8% 1.7% 2% 2.5% 3% 6%

5 12% 3.6% 4% 5% 6% 15%

6 12% 15.0% 17.5% 20% 22.5% 25%

3.16 The credit ratings corresponding to the risk levels above are shown in the table below.

Counterparty grade

Rating S & P Moody’s Fitch A.M. Best

1 AAA Aaa AAA A++

2

AA+

AA

AA-

Aa1

Aa2

Aa3

AA+

AA

AA-

A+

3

A+

A

A-

A1

A2

A3

A+

A

A-

A

A-

4

BBB+

BBB

BBB-

Baa1

Baa2

Baa3

BBB+

BBB

BBB-

B++

B+

5

BB+

BB

BB-

Ba1

Ba2

Ba3

BB+

BB

BB-

B

B-

6 B+ or below B1 or below B+ or below C++ or below

3.17 For Thai unrated reinsurers, the following risk charges are proposed for market testing. Note

that these risk charges reflect the CAR levels of the reinsurer under the current RBC

framework, and not the CAR levels of the reinsurer under the proposed framework.

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Proposed reinsurance credit risk charges (for reinsurers that have no credit ratings)

CAR ratio (X) Current

RBC1

Proposed (at various target sufficiency levels)

85% 90% 95% 97.5% 99.5%

X > 375% 1.6% 0.2% 0.2% 0.4% 0.5% 1%

350% < X ≤ 375% 1.6% 0.2% 0.3% 0.5% 0.7% 1.5%

300% < X ≤ 350% 1.6% 0.7% 1% 1.4% 1.8% 3%

250% < X ≤ 300% 2.8% 1.7% 2% 2.5% 3% 6%

150% < X ≤ 250% 4% 3.6% 4% 5% 6% 15%

X ≤ 150% 8% 15.0% 17.5% 20% 22.5% 25%

Other loans

3.18 It is proposed that the credit risk charges for other loans be consistent with the credit risk

charges adopted for the reinsurance assets. The following rating classification for loans that

are unrated is proposed:

Rating classification for unrated loans

Counterparty Rating category

Lease / hire purchase 4

Employee loans 3

Other individuals (except policy loans) 4

Other loans 4

3.19 The table below summarises the implied credit risk charges for other loans based on the rating

classification above.

Proposed credit risk charges (other loans that are unrated)

Current Proposed (at various target sufficiency levels)

85% 90% 95% 97.5% 99.5%

Lease / hire purchase 8% 1.7% 2% 2.5% 3% 6%

Employee loans 4% 0.7% 1% 1.4% 1.8% 3%

Other individuals (except policy loans) 8% 1.7% 2% 2.5% 3% 6%

Other loans 8% 1.7% 2% 2.5% 3% 6%

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Asset correlation

3.20 Changes to the market correlation matrix are proposed, to include all asset risks in the

correlation:

3.21 The proposed correlation matrix for asset risks is summarised below:

Proposed correlation matrix for market testing

Interest rate Equity Property Credit Concentration Currency

Interest rate 100% 0% 0% 0% 0% 25%

Equity 0% 100% 75% 75% 0% 25%

Property 0% 75% 100% 50% 0% 25%

Credit 0% 75% 50% 100% 0% 25%

Concentration 0% 0% 0% 0% 100% 0%

Currency 25% 25% 25% 25% 0% 100%


Interest

Equity

Property

Currency

Credit

+

Concentration

+

Correlation applies to market risks only

Interest

Equity

Property

Currency

Credit

Concentration

Correlation applies to all asset risks

22


Non-Life insurance risk

3.22 The non-life insurance PADs for market testing are summarised below (on the URR basis):

Business

class Risk

Current Proposed (at various sufficiency levels)

75% 95% 75% 85% 90% 95% 97.5% 99.5%

Fire

Premium 25% 72% 35% 58% 75% 104% 128% 174%

Claims 25% 72% 15% 25% 33% 45% 55% 75%

Catastrophe n/a n/a 21% 35% 46% 63% 77% 105%

Marine Hull Premium 30% 89% 21% 35% 46% 63% 77% 105%

Claims 30% 89% 12% 20% 26% 36% 44% 60%

Marine

Cargo

Premium 20% 56% 24% 40% 52% 72% 88% 120%

Claims 20% 56% 12% 20% 26% 36% 44% 60%

Compulsory

Motor

Premium 15% 41% 19% 31% 40% 56% 68% 93%

Claims 15% 41% 12% 20% 26% 36% 44% 60%

Compulsory

Motorcycle

Premium 8% 21% 8% 14% 18% 25% 31% 42%

Claims 8% 21% 8% 13% 17% 23% 29% 39%

Voluntary

Motor

Premium 8% 21% 10% 16% 21% 29% 35% 48%

Claims 8% 21% 8% 13% 17% 23% 29% 39%

Industrial

All Risks

Premium 25% 72% 27% 45% 59% 81% 99% 135%

Claims 25% 72% 21% 35% 46% 63% 77% 105%


Liability Premium 30% 89% 32% 53% 69% 95% 117% 159%

Claims 30% 89% 24% 40% 52% 72% 88% 120%

Engineering

Premium 20% 56% 32% 54% 70% 97% 119% 162%

Claims 20% 56% 21% 35% 46% 63% 77% 105%


Aviation Premium 30% 89% 24% 40% 52% 72% 88% 120%

Claims 30% 89% 12% 20% 26% 36% 44% 60%

PA and

Health

Premium 15% 41% 13% 21% 27% 38% 46% 63%

Claims 15% 41% 12% 20% 26% 36% 44% 60%

Property

Premium 20% 56% 22% 36% 47% 65% 79% 108%

Claims 20% 56% 21% 35% 46% 63% 77% 105%


Financial

Lines

Premium 30% 89% 16% 27% 35% 49% 59% 81%

Claims 30% 89% 21% 35% 46% 63% 77% 105%

Travel

Insurance

Premium 15% 41% 14% 23% 30% 41% 51% 69%

Claims 15% 41% 12% 20% 26% 36% 44% 60%

Other

Classes

Premium 30% 89% 22% 37% 48% 67% 81% 111%

Claims 30% 89% 21% 35% 46% 63% 77% 105%

23


3.23 The table below summarises the non-life insurance PADs on the UPR basis:

Business

class Risk

Current

(URR basis) Proposed (on UPR basis)

75% 95% 75% 85% 90% 95% 97.5% 99.5%

Fire Premium 25% 72% 15% 25% 33% 45% 55% 75%


Marine Hull Premium 30% 89% 12% 20% 26% 36% 44% 60%

Marine

Cargo Premium 20% 56% 12% 20% 26% 36% 44% 60%

Compulsory

Motor Premium 15% 41% 11% 18% 23% 32% 39% 53%

Compulsory

Motorcycle Premium 8% 21% 8% 14% 18% 24% 30% 41%

Voluntary

Motor Premium 8% 21% 8% 14% 18% 24% 30% 41%

Industrial

All Risks

Premium 25% 72% 24% 40% 52% 72% 88% 120%


Liability Premium 30% 89% 21% 35% 46% 63% 77% 105%

Engineering Premium 20% 56% 24% 40% 52% 72% 88% 120%


Aviation Premium 30% 89% 12% 20% 26% 36% 44% 60%

PA and

Health Premium 15% 41% 9% 15% 20% 27% 33% 45%

Property Premium 20% 56% 15% 25% 33% 45% 55% 75%


Financial

Lines Premium 30% 89% 21% 35% 46% 63% 77% 105%

Travel

Insurance Premium 15% 41% 9% 15% 20% 27% 33% 45%

Other

Classes Premium 30% 89% 18% 30% 39% 54% 66% 90%

24


Operational risk

3.24 The following parameters are proposed for market testing operational risk:

Parameters for market testing operational risk

Proposed (at various target sufficiency levels)

85% 90% 95% 97.5% 99.5%

Simplified Solvency II approach

Risk charge related to premiums 0.6% 0.8% 1.4% 2.4% 4.0%

Risk charge related to reserves 0.07% 0.09% 0.16% 0.27% 0.45%

Simplified Australia approach

Risk charge 0.45% 0.6% 1.05% 1.8% 3.0%

3.25 Note that these parameters are for market testing purposes only.

25


Section 4: Market testing template

Overview

4.1 The market testing template has been based on the existing RBC 1 annual submission form,

with minor modifications to reflect the proposed changes to be tested.

4.2 The market testing template contains the following key items:

Parameters for market testing;

RBC 2 market testing forms;

High-level descriptions of inputs required by companies

A macro to assist companies in copying data from the existing RBC1 forms;

Tabs containing RBC 1 results for comparison; and

A summary page containing key aspects of the market testing results.

4.3 Note that detailed instructions and guidance notes are not provided within the market testing

template, but are contained within this document.

26


Tabs contained within the market testing template

4.4 The table below provides an overview of the tabs contained within the market testing template:

Overview of tabs contained within the market testing template

No. Tab name Description of tab

Instructions related

1 Readme Provides an overview of the market testing template

2 Market testing details Details of the market testing for RBC Phase 2

3 Input instructions Contains instructions on how to fill in this market testing template. Also contains a macro to help copy data from the RBC 1 forms

RBC 2 market testing forms

4 Approximations Provide descriptions of any approximations adopted for market testing

5 Form1 Summary of the capital adequacy position under all scenarios

6 Form2 Calculation of the total capital available (TCA)

7 Form3 - 3.1 RBC balance sheet (assets only)

8 Form3 - 3.2, 3.3 RBC balance sheet (liabilities and shareholders' equity only)

9 Form4 - 4.1, 4.2 Calculation of the insurance risk charge

10 Form4 - 4.3 Summary of the long-term insurance liabilities

11 Form5 - 5.1 Summary of the market risk charges

12 Form5 - 5.2-5.6 Calculation of market risk charges (excluding unit trust assets)

13 Form5 - 5.7 Calculation of market risk charges for unit trust assets

14 Form6 - 6.1 Summary of the credit risk charges

15 Form6 - 6.2-6.7 Calculation of credit risk charges (excluding reinsurance credit)

16 Form7 Calculation of reinsurance credit risk charges

17 Form8 Calculation of concentration risk charges

18 Form9 Operational risk

19 Form10 Diversification effects

20 Data from RBC1 forms

21 Form1 (RBC1) Data copied from RBC1 Form1


23 Form3 - 3.1 (RBC1) Data copied from RBC1 Form3 - 3.1

24 Form3 - 3.2, 3.3 (RBC1) Data copied from RBC1 Form3 - 3.2, 3.3




28 Form5 - 5.2-5.6 (RBC1) Data copied from RBC1 Form5 - 5.2-5.6



31 Form6 - 6.2-6.7 (RBC1) Data copied from RBC1 Form6 - 6.2-6.7



Input process

4.5 A high-level overview of the input process is shown in the diagram below:

27


4.6 Details of each of the steps are in the sub-sections below:

Step 1: Input RBC 1 data

Step 1:

Input data from current RBC 1 forms

Step 2:

Make necessary modifications to RBC 1 data, and input

additional RBC 2 data

Input data from existing

RBC 1 forms

Data is copied to tabs at end of the template (e.g. "Form

3.2 (RBC1)")

Companies input data directly to RBC 2 market

testing forms

Use macro (optional)

Input data manually

OR

28


Macro for copying RBC 1 data

The macro for copying data from existing RBC 1 forms can be found in the [Input instructions] tab.

Note that for optimal use, the format of the RBC 1 forms should be as similar as possible to the standard format of the RBC 1 forms provided by the OIC.

Companies need to input the file path and file name of the RBC 1 forms to copy, and the tabs to copy from:

29


Step 2: Input additional RBC 2 data

4.7 The table below provides details of the RBC forms which will / may require additional input from companies.

Overview of additional input required for RBC 2 market testing

Form no. Needs additional / manual

input? Comments on additional / manual input

Approximations Yes Provide descriptions of any approximations adopted for market testing

1 No n/a

2 Yes Input the value of intangible assets and minimum capital requirement of subsidiaries and

associates that are recognised in Tier 1 capital

3.1 No additional RBC 2 input, but

may require manual RBC 1 input

Data in this form is linked to existing RBC 1 forms, but as the format of the form may differ

between companies, companies may need to manually re-link / or enter data from RBC1 forms

3.2 and 3.3 No additional RBC 2 input, but




4.1 and 4.2 No n/a

4.3 Yes

Input values for the GPV reserves calculated using the market testing parameters. Note that

companies may need to re-link some RBC1 data, as the format of the form can differ between

companies

5.1 No n/a

5.2 Yes

The value of investments in subsidiaries and associates needs to be included (net of intangibles

and minimum capital requirement). The risk mitigating effects of derivatives also needs to be

input.

5.3 and 5.4 No n/a

5.5 Yes Input the value of net liabilities for each currency and risk mitigating effect - Notional amount of

Cross Currency Swap for each currency (only for companies with derivatives).

5.6 No n/a

30


Overview of additional input required for RBC 2 market testing

Form no. Needs additional / manual

input? Comments on additional / manual input

5.7 Yes Due to changes in the credit risk charge, companies will need to input the average term / average

risk level of debt securities and deposits. (Columns O and P)

6.1 No n/a

6.2 Yes Due to changes in the credit risk charge, companies will need to split debt securities into

durational buckets.

6.3 to 6.6 No n/a

6.7 Yes Companies will need to input the counterparty risk level of derivative holdings.

7 Yes Companies will need to input the counterparty risk level of reinsurers, and the RBC 1 CAR ratio of

unrated reinsurers

8 No additional RBC 2 input, but




9 No n/a

10 No n/a

31


Details of RBC 2 additional input

4.8 In the market testing template, cells have been colour coded to aid companies identify which

cells require input or modification. The following colour code applies throughout the market

testing template:

Cell colour Description

Additional data / input required

Data in these cells are linked from the RBC 1 forms. Companies may need to

update these in some instances.

Approximations

4.9 Companies are required to provide descriptions of any approximations adopted in the market

testing calculations:

32


Form 2 (TCA)

4.10 To reflect the value of investments in subsidiaries and associates in the TCA, the following

input to the “deductions from TCA” should be included:

4.11 For simplicity, the intangible assets and minimum capital requirement of the subsidiary /

associate should be obtained from the subsidiary’s / associate’s RBC 1 submission as at 31

December 2013.

New input required

33


Forms 3.1-3.3 (RBC balance sheet)

4.12 The forms 3.1-3.3 contain details of the RBC balance sheet, and values in these tables are

linked to values in the RBC 1 forms (i.e. linked to tabs “'Form3 - 3.1 (RBC1)”, “'Form3 - 3.2, 3.3

(RBC1)”). However, as the format of the RBC 1 forms may differ between companies, the

links provided in the market testing template may need to be updated.

4.13 Companies should check the links in forms 3.1-3.3.

As companies can add rows, the format of the

form may differ

34


Form 4.3 (long-term insurance liabilities)

4.14 Companies will need to input the values of GPV reserves as calculated under the market

testing parameters.

Form 5.2 (Equity risk charge)

4.15 Companies will need to fill in two items:

The value of investments in subsidiaries and associates (net of intangibles and

minimum required capital). This value should be consistent with the value that is

recognised in the TCA; and

The impact of any risk mitigation from derivatives (e.g. put options) under the

prescribed equity stresses at the 85%, 90%, 95%, 97.5% and 99.5% levels.

4.16 Detailed guidance for assessing the impact of derivatives is discussed in the guidance notes

for derivatives.

35


Form 5.7 (Market risk charge for unit trusts)

4.17 Due to changes in the credit risk charge, companies will need to input the average term /

average risk level of debt securities and deposits. (Columns P and Q)

4.18 Note that the unit trust assets that are invested in property funds listed on a stock exchange

should be classified as equity assets. Companies may need to change the asset allocation of

“equity” and “property” accordingly where applicable:

Form 6.2 (Credit risk for debt securities)

4.19 Due to changes in the credit risk charge structure, companies will need to split debt securities

into maturity buckets.

May require modifications

36


37


Form 6.7 (Credit risk for derivatives)

4.20 Companies will need to input the counterparty risk level of derivative holdings.

Form 7 (Reinsurance credit risk charge)

4.21 Companies will need to input the counterparty risk level of reinsurers, and the RBC 1 CAR

ratio of unrated reinsurers. The risk charge factors and amounts will then be automatically

calculated based on these inputs.

38


Appendix A: Guidance notes for asset risk charge calculations

The guidance notes for asset risk charge calculations contain the following sections:

Market risk

Credit risk

Derivatives

Market risk

Equity risk

A direct position in equity which is matched by opposite positions in equity derivatives may be fully

offset and only the absolute net position subject to the equity risk charge. For example, a future in a

given equity may be offset against a direct position in the same equity.

More details are discussed in the section on derivatives.

Commodities and other assets

The equity risk charge should apply to any other assets not explicitly considered in any of the other

stress tests, for example commodities.

Property risk

For market testing, property funds and infrastructure funds that are listed on a stock exchange (e.g.

SET) should be treated as equity assets, and the equity risk charge should be applied to these assets.

Unit trust assets

For market testing, the “look through” approach adopted in RBC 1 should be used.

For clarity, the unit trust assets that are invested in property funds listed on a stock exchange should

be classified as equity assets. Companies may need to change the asset allocation of “equity” and

“property” accordingly where applicable.

The average term and average credit rating for debt security assets (or deposits) can be based on

annual reports from fund managers and strategic / target asset allocations of the funds.

39


Note that for unit trust assets denominated in foreign currency, the exchange rate risk charge should

also apply to these assets.

40


Credit risk

Credit ratings

There have been some changes proposed to the risk categories for the credit risk charge. The

application of credit ratings should follow the same principles as those described in RBC 1.

Bonds issued by Thai state enterprises, that are not backed by the MoF

For clarity, for bonds issued by Thai state enterprises which are not backed by the MoF the following

risk classification should apply:

Bond rating Rating category

Rated Based on table in paragraph 3.12, i.e. depends on actual rating of bond / issuer

Unrated 4

Derivatives

Some guidance notes and examples regarding the treatment of derivatives for the asset stress

scenarios are discussed here. However, noting that these may not cover the wide range of derivatives

available, companies are also advised to:

Apply judgement in estimating the risk-mitigating effects of derivatives;

Take into account likely materiality of including the effects of derivatives (i.e. if the impact is likely

to be immaterial (<1% impact on TCR), this can be excluded for market testing)

41


Equity risks

A direct position in equity which is matched by opposite positions in equity derivatives may be fully

offset and only the absolute net position subject to the equity risk charge. For example, a future in a

given equity may be offset against a direct position in the same equity.

Some examples are discussed below:

Example 1: Futures contracts

Shares owned: THB 10m in Stock A and THB 5m in Stock B

Futures contract: Short equity futures with market value of THB 5m in Stock A

The net equity exposure of the insurer would then be:

Stock A: THB 5m (THB 10m of shares minus THB 5m from equity futures on Stock A)

Stock B: THB 5m

Equity risk charge @ 90% level = THB 2.5m ([THB 5m + THB 5m] x 25%)

Example 2: Options

Shares owned: THB 15m in Stock C and THB 20m in Stock D

Option contract: Long put on Stock C with strike price market value of THB 14m

Under a prescribed equity stress of 25% at the 90% target sufficiency level, the net decrease in

equity values would be:

Stock C: THB 1m (= THB 15m – Max{THB 15m x (1 – 25%), THB 14m})

Stock D: THB 4m (= THB 20m x 25%)

Equity risk charge @ 90% level = THB 5m

42


Interest rate risks

Interest rate risk exposures can be reduced by interest rate derivative positions, such as futures,

forwards and options. Interest rate derivatives should be converted into exposures in the relevant

underlying assets and subjected to appropriate interest rate risk charge calculations. To determine the

capital charge, the amount reported should be the market value of the principal amount of the

underlying or of the notional underlying. In the case of options, the delta equivalent value of the option

positions is used.

Futures and forward contracts, including Forward Rate Agreements (FRAs):

– These instruments are treated as a combination of long and short positions in a notional zero-coupon government security. The maturity period of futures or FRAs will be the period until delivery or exercise of the contract, plus, where applicable, the life of the underlying instrument. For example, a long position in a June three month interest rate future (taken in April) is to be regarded as a long position in a government security with a maturity of five months and a short position in a government security with a maturity of two months.

– In the case of a future or forward on a corporate bond or corporate bond index, positions will be included at the market value of the notional underlying portfolio.

Swaps

– Swaps will be treated as two underlying positions in zero coupon government securities with relevant maturities. For example, a plain vanilla interest rate swap under which an insurer pays floating and receives fixed will be treated as a long position in a fixed rate instrument of maturity equivalent to the residual life of the swap and a short position in a floating-rate instrument of maturity equivalent to the period until the next interest fixing.

– Where one of the swap legs involves payment relating to some other reference price, for example a stock index, the leg should be captured in the equity component of the market risk charge calculation. Swaps are treated as two notional positions. For example, an equity swap in which the insurer receives an amount based on the change in value of one particular equity or stock index and pays a different index will be treated as a long position in the former and a short position in the latter.

43


Appendix B: Guidance notes for Long term insurance calculations

The guidance notes for long term insurance calculations contain the following sections:

Contract recognition and boundaries

Liability discount rates for long-term contracts

Contract recognition and boundaries

Definition from IFRS exposure draft

Cash flows are within the boundary of an insurance contract when the entity can compel the

policyholder to pay the premiums or has a substantive obligation to provide the policyholder with

coverage or other services.

A substantive obligation to provide coverage or other services ends when:

the entity has the right or the practical ability to reassess the risks of the particular policyholder

and, as a result, can set a price or level of benefits that fully reflects those risks; or

both of the following criteria are satisfied:

– the entity has the right or the practical ability to reassess the risk of the portfolio of insurance contracts that contains the contract and, as a result, can set a price or level of benefits that fully reflects the risk of that portfolio; and

– the pricing of the premiums for coverage up to the date when the risks are reassessed does not take into account the risks that relate to future periods.

An entity shall determine the boundary of an insurance contract by considering all of the substantive

rights that are held by the policyholder, whether they arise from a contract, law or regulation. However,

an entity shall ignore restrictions that have no commercial substance (i.e. no discernible effect on the

economics of the contract).

Guidance from IFRS exposure draft

The paragraph above refers to an entity’s right or practical ability to set a price at a future date (a

renewal date) that fully reflects the risks in the contract or portfolio from that date. An entity has that

right or practical ability when there are no constraints to prevent it from setting the same price as it

would for a new contract that is issued on that date, or if it can amend the benefits to be consistent

with those that it would provide for the price that it will charge.

44


Similarly, an entity has that right or practical ability when it can re-price an existing contract so that the

price reflects overall changes in the risks in the portfolio, even if the price set for each individual

policyholder does not reflect the change in risk for that specific policyholder. When assessing whether

the entity has the right or practical ability to set a price that fully reflects the risks in the contract or

portfolio, it should consider all the risks that it would consider when underwriting equivalent contracts

on the renewal date for the remaining coverage.

Examples for companies

Example 1:

A company sells accident riders that are yearly renewable, but are not guaranteed renewable.

These accident riders are sold together with a base plan that has a premium term that is greater

than one year, and the company manages these riders as ‘long-term” contracts on the basis that

these riders are likely to renew as long as the base policy is still in the premium payment period.

In this case, although the contractual policy term is less than one year, and the contract does not

state that it is guaranteed renewable, because the company manages these contracts as long-

term business and actual historical experience shows that these contracts behave like long-term

contracts, these policies may be classified as “long-term” contracts instead of “short-term”

contracts.

Example 2:

A company sells hospitalisation policies that are yearly renewable, where premium rates are not

contractually guaranteed, i.e. the company has the contractual right to increase premium rates

for policies if experience is poorer than expected.

However, due to competitive pressures, the insurer will not increase premium rates in practice.

In this case, the contract would also be treated as a “long-term” contract for valuation purposes.

45


Liability discount rates for long-term contracts

The liability discount rates to be adopted for market testing are shown in the table below:

T Spot rate for market testing as at 31 December 2013

1 2.37%

2 2.64%

3 2.97%

4 3.21%

5 3.50%

6 3.67%

7 3.85%

8 3.90%

9 3.97%

10 4.11%

11 4.19%

12 4.23%

13 4.26%

14 4.30%

15 4.40%

16 4.49%

17 4.52%

18 4.52%

19 4.52%

20 4.54%

21 4.58%

22 4.62%

23 4.66%

24 4.71%

25 4.75%

26 4.78%

27 4.77%

28 4.76%

29 4.79%

30 4.83%

31 4.88%

32 4.92%

33 4.95%

34 4.97%

35 4.99%

36 5.00%

37 5.01%

38 5.02%

39 5.02%

40 5.01%

41 5.01%

42 5.00%

43 4.98%

44 4.97%

45 4.95%

46 4.94%

47 4.92%

48 4.92%

49 4.92%

50+ 4.92%

46


Optional additional testing

In addition to the prescribed liability discount rates for market testing, it is strongly recommended that companies perform additional testing to assess the volatility of the CAR position under different liability discount rate methods:

Discount rate method 1: Using the risk-free rate at the valuation date;

Discount rate method 2: Using the risk-free rate at the valuation date up to a “last liquid point”

at T = 20, and using the spot rate at T = 20 for T ≥ 21;

Discount rate method 3: Using the risk-free rate at the valuation date up to a “last liquid point”

at T = 20, and using weighted-average rates for T ≥ 21

Suggested test parameters

The following test parameters are recommended:

Multiple valuation dates: The testing should be performed at multiple valuation dates, so as to

capture the behaviour of the CAR ratio under different interest rate environments.

Note that the assets and liabilities should be consistent for a particular valuation date. For

example, if testing at the 30 June 2013 valuation date is performed, the risk charges and CAR

ratio should be determined based on the asset risk charges as at 30 June 2013, and the

insurance liabilities and insurance risk charges (also at 30 June 2013) should be re-calculated

under the discount rate that is to be tested.

Interest risk charge under RBC 2 method: it is recommended that when testing the effect of

different discount rates, that the proposed RBC 2 market testing method for the calculation of

interest risk charges be adopted, i.e. the liability cash flows should be determined at the 75%

level, and non-guaranteed liabilities should be included.

This is to ensure that the volatility of the CAR position is assessed while taking the proposed

changes to the framework into account.

Target sufficiency level: For simplicity, it is recommended that the additional testing only be

performed at a single target sufficiency level (for example the 95% target sufficiency level).

47


Discount rates for additional testing

The discount rates for testing under the methods outlined above are shown below:

Discount rate method 1: Risk-free rates at valuation date

T 30 Sept

2011

31 Dec

2011

31 Mar

2012

30 Jun

2012

30 Sept

2012

31 Dec

2012

31 Mar

2013

30 Jun

2013

30 Sept

2013

31 Dec

2013

1 3.60% 3.12% 3.15% 3.17% 3.04% 2.78% 2.75% 2.58% 2.62% 2.37% 2 3.64% 3.12% 3.37% 3.23% 3.20% 2.90% 2.85% 2.91% 2.99% 2.64% 3 3.57% 3.12% 3.49% 3.27% 3.20% 2.94% 2.90% 3.03% 3.21% 2.97% 4 3.63% 3.12% 3.61% 3.30% 3.31% 3.09% 3.07% 3.29% 3.43% 3.21% 5 3.63% 3.19% 3.69% 3.37% 3.32% 3.18% 3.24% 3.52% 3.63% 3.50% 6 3.72% 3.27% 3.80% 3.51% 3.56% 3.30% 3.34% 3.52% 3.71% 3.67% 7 3.81% 3.27% 3.81% 3.54% 3.63% 3.42% 3.51% 3.78% 3.87% 3.85% 8 3.83% 3.34% 3.85% 3.60% 3.63% 3.53% 3.51% 3.72% 3.96% 3.90% 9 3.87% 3.36% 3.86% 3.59% 3.59% 3.51% 3.50% 3.72% 3.98% 3.97%

10 3.78% 3.40% 3.89% 3.62% 3.66% 3.55% 3.57% 3.83% 4.04% 4.11% 11 3.84% 3.49% 3.95% 3.79% 3.77% 3.70% 3.74% 4.04% 4.15% 4.19% 12 3.95% 3.54% 4.02% 3.85% 3.81% 3.80% 3.81% 4.09% 4.22% 4.23% 13 3.96% 3.62% 4.03% 3.90% 3.88% 3.88% 3.89% 4.12% 4.26% 4.26% 14 3.99% 3.67% 4.07% 3.91% 3.91% 3.93% 3.91% 4.17% 4.30% 4.30% 15 4.04% 3.72% 4.11% 3.92% 3.92% 4.00% 3.99% 4.31% 4.42% 4.40% 16 4.09% 3.78% 4.16% 4.02% 4.01% 4.15% 4.18% 4.51% 4.55% 4.49% 17 4.14% 3.85% 4.20% 4.18% 4.13% 4.27% 4.29% 4.63% 4.62% 4.52% 18 4.18% 3.91% 4.23% 4.25% 4.18% 4.32% 4.30% 4.67% 4.64% 4.52% 19 4.22% 3.95% 4.27% 4.26% 4.18% 4.33% 4.26% 4.68% 4.63% 4.52% 20 4.25% 3.99% 4.29% 4.23% 4.18% 4.32% 4.24% 4.68% 4.63% 4.54% 21 4.27% 4.02% 4.31% 4.23% 4.18% 4.33% 4.25% 4.68% 4.63% 4.58% 22 4.29% 4.04% 4.32% 4.25% 4.19% 4.35% 4.29% 4.70% 4.65% 4.62% 23 4.31% 4.07% 4.33% 4.28% 4.22% 4.38% 4.35% 4.73% 4.70% 4.66% 24 4.33% 4.09% 4.34% 4.32% 4.25% 4.42% 4.42% 4.79% 4.77% 4.71% 25 4.34% 4.12% 4.36% 4.38% 4.28% 4.47% 4.51% 4.89% 4.89% 4.75% 26 4.37% 4.15% 4.40% 4.43% 4.31% 4.54% 4.60% 5.00% 4.99% 4.78% 27 4.39% 4.20% 4.46% 4.49% 4.35% 4.59% 4.64% 5.04% 5.01% 4.77% 28 4.46% 4.31% 4.52% 4.53% 4.41% 4.60% 4.62% 4.97% 4.94% 4.76% 29 4.56% 4.45% 4.57% 4.55% 4.47% 4.57% 4.58% 4.89% 4.87% 4.79% 30 4.67% 4.57% 4.61% 4.57% 4.53% 4.55% 4.54% 4.83% 4.82% 4.83% 31 4.77% 4.68% 4.65% 4.59% 4.58% 4.54% 4.51% 4.78% 4.77% 4.88% 32 4.86% 4.78% 4.68% 4.61% 4.63% 4.53% 4.49% 4.75% 4.75% 4.92% 33 4.96% 4.86% 4.71% 4.63% 4.66% 4.52% 4.48% 4.73% 4.73% 4.95% 34 5.04% 4.93% 4.74% 4.65% 4.69% 4.52% 4.47% 4.72% 4.72% 4.97% 35 5.12% 4.99% 4.77% 4.66% 4.71% 4.52% 4.47% 4.72% 4.73% 4.99% 36 5.20% 5.03% 4.79% 4.68% 4.73% 4.53% 4.48% 4.73% 4.74% 5.00% 37 5.27% 5.07% 4.81% 4.70% 4.73% 4.53% 4.49% 4.75% 4.76% 5.01% 38 5.34% 5.10% 4.83% 4.71% 4.74% 4.54% 4.51% 4.78% 4.79% 5.02% 39 5.40% 5.11% 4.85% 4.73% 4.74% 4.56% 4.53% 4.82% 4.83% 5.02% 40 5.47% 5.12% 4.86% 4.74% 4.73% 4.57% 4.56% 4.87% 4.87% 5.01% 41 5.53% 5.12% 4.88% 4.76% 4.72% 4.59% 4.58% 4.92% 4.92% 5.01% 42 5.58% 5.12% 4.89% 4.77% 4.71% 4.61% 4.62% 4.98% 4.98% 5.00% 43 5.64% 5.10% 4.90% 4.78% 4.70% 4.64% 4.65% 5.04% 5.04% 4.98% 44 5.69% 5.09% 4.91% 4.80% 4.68% 4.66% 4.69% 5.11% 5.10% 4.97% 45 5.74% 5.07% 4.92% 4.81% 4.66% 4.68% 4.73% 5.18% 5.16% 4.95% 46 5.79% 5.04% 4.93% 4.82% 4.63% 4.71% 4.77% 5.25% 5.23% 4.94% 47 5.84% 5.01% 4.94% 4.84% 4.61% 4.74% 4.81% 5.32% 5.30% 4.92% 48 5.89% 4.98% 4.95% 4.85% 4.59% 4.76% 4.86% 5.40% 5.30% 4.92% 49 5.93% 4.95% 4.95% 4.86% 4.59% 4.76% 4.86% 5.40% 5.30% 4.92%

50+ 5.93% 4.95% 4.95% 4.86% 4.59% 4.76% 4.86% 5.40% 5.30% 4.92%

48


Discount rate method 2: Using the risk-free rate at the valuation date up to a “last liquid point” at T = 20, and using the spot rate at T = 20 for T ≥ 21

Discount rate method 2: Risk-free rates at valuation date, with last liquid point at T = 20

T 30 Sept

2011 31 Dec 2011

31 Mar 2012

30 Jun 2012

30 Sept 2012

31 Dec 2012

31 Mar 2013

30 Jun 2013

30 Sept 2013

31 Dec 2013

1 3.60% 3.12% 3.15% 3.17% 3.04% 2.78% 2.75% 2.58% 2.62% 2.37%

2 3.64% 3.12% 3.37% 3.23% 3.20% 2.90% 2.85% 2.91% 2.99% 2.64%

3 3.57% 3.12% 3.49% 3.27% 3.20% 2.94% 2.90% 3.03% 3.21% 2.97%

4 3.63% 3.12% 3.61% 3.30% 3.31% 3.09% 3.07% 3.29% 3.43% 3.21%

5 3.63% 3.19% 3.69% 3.37% 3.32% 3.18% 3.24% 3.52% 3.63% 3.50%

6 3.72% 3.27% 3.80% 3.51% 3.56% 3.30% 3.34% 3.52% 3.71% 3.67%

7 3.81% 3.27% 3.81% 3.54% 3.63% 3.42% 3.51% 3.78% 3.87% 3.85%

8 3.83% 3.34% 3.85% 3.60% 3.63% 3.53% 3.51% 3.72% 3.96% 3.90%

9 3.87% 3.36% 3.86% 3.59% 3.59% 3.51% 3.50% 3.72% 3.98% 3.97%

10 3.78% 3.40% 3.89% 3.62% 3.66% 3.55% 3.57% 3.83% 4.04% 4.11%

11 3.84% 3.49% 3.95% 3.79% 3.77% 3.70% 3.74% 4.04% 4.15% 4.19%

12 3.95% 3.54% 4.02% 3.85% 3.81% 3.80% 3.81% 4.09% 4.22% 4.23%

13 3.96% 3.62% 4.03% 3.90% 3.88% 3.88% 3.89% 4.12% 4.26% 4.26%

14 3.99% 3.67% 4.07% 3.91% 3.91% 3.93% 3.91% 4.17% 4.30% 4.30%

15 4.04% 3.72% 4.11% 3.92% 3.92% 4.00% 3.99% 4.31% 4.42% 4.40%

16 4.09% 3.78% 4.16% 4.02% 4.01% 4.15% 4.18% 4.51% 4.55% 4.49%

17 4.14% 3.85% 4.20% 4.18% 4.13% 4.27% 4.29% 4.63% 4.62% 4.52%

18 4.18% 3.91% 4.23% 4.25% 4.18% 4.32% 4.30% 4.67% 4.64% 4.52%

19 4.22% 3.95% 4.27% 4.26% 4.18% 4.33% 4.26% 4.68% 4.63% 4.52%

20+ 4.25% 3.99% 4.29% 4.23% 4.18% 4.32% 4.24% 4.68% 4.63% 4.54%

49


Discount rate method 3: Using the risk-free rate at the valuation date up to a “last liquid point” at T = 20, and using weighted-average rates for T ≥ 21

Discount rate method 3: Rates at valuation date, with weighted average rates for T > 20

T 30 Sept

2011

31 Dec

2011

31 Mar

2012

30 Jun

2012

30 Sept

2012

31 Dec

2012

31 Mar

2013

30 Jun

2013

30 Sept

2013

31 Dec

2013

1 3.60% 3.12% 3.15% 3.17% 3.04% 2.78% 2.75% 2.58% 2.62% 2.37% 2 3.64% 3.12% 3.37% 3.23% 3.20% 2.90% 2.85% 2.91% 2.99% 2.64%

3 3.57% 3.12% 3.49% 3.27% 3.20% 2.94% 2.90% 3.03% 3.21% 2.97% 4 3.63% 3.12% 3.61% 3.30% 3.31% 3.09% 3.07% 3.29% 3.43% 3.21% 5 3.63% 3.19% 3.69% 3.37% 3.32% 3.18% 3.24% 3.52% 3.63% 3.50%

6 3.72% 3.27% 3.80% 3.51% 3.56% 3.30% 3.34% 3.52% 3.71% 3.67% 7 3.81% 3.27% 3.81% 3.54% 3.63% 3.42% 3.51% 3.78% 3.87% 3.85% 8 3.83% 3.34% 3.85% 3.60% 3.63% 3.53% 3.51% 3.72% 3.96% 3.90%

9 3.87% 3.36% 3.86% 3.59% 3.59% 3.51% 3.50% 3.72% 3.98% 3.97% 10 3.78% 3.40% 3.89% 3.62% 3.66% 3.55% 3.57% 3.83% 4.04% 4.11% 11 3.84% 3.49% 3.95% 3.79% 3.77% 3.70% 3.74% 4.04% 4.15% 4.19%

12 3.95% 3.54% 4.02% 3.85% 3.81% 3.80% 3.81% 4.09% 4.22% 4.23% 13 3.96% 3.62% 4.03% 3.90% 3.88% 3.88% 3.89% 4.12% 4.26% 4.26% 14 3.99% 3.67% 4.07% 3.91% 3.91% 3.93% 3.91% 4.17% 4.30% 4.30% 15 4.04% 3.72% 4.11% 3.92% 3.92% 4.00% 3.99% 4.31% 4.42% 4.40%

16 4.09% 3.78% 4.16% 4.02% 4.01% 4.15% 4.18% 4.51% 4.55% 4.49% 17 4.14% 3.85% 4.20% 4.18% 4.13% 4.27% 4.29% 4.63% 4.62% 4.52% 18 4.18% 3.91% 4.23% 4.25% 4.18% 4.32% 4.30% 4.67% 4.64% 4.52%

19 4.22% 3.95% 4.27% 4.26% 4.18% 4.33% 4.26% 4.68% 4.63% 4.52% 20 4.25% 3.99% 4.29% 4.23% 4.18% 4.32% 4.24% 4.68% 4.63% 4.54% 21 4.32% 4.23% 4.20% 4.21% 4.18% 4.26% 4.25% 4.36% 4.47% 4.53%

22 4.33% 4.24% 4.22% 4.22% 4.20% 4.28% 4.27% 4.38% 4.50% 4.56% 23 4.34% 4.26% 4.23% 4.25% 4.22% 4.30% 4.31% 4.42% 4.54% 4.61% 24 4.35% 4.27% 4.24% 4.27% 4.25% 4.33% 4.35% 4.47% 4.60% 4.67%

25 4.35% 4.28% 4.26% 4.30% 4.28% 4.37% 4.41% 4.54% 4.69% 4.76% 26 4.36% 4.30% 4.29% 4.34% 4.32% 4.42% 4.47% 4.61% 4.78% 4.84% 27 4.38% 4.33% 4.33% 4.39% 4.37% 4.47% 4.52% 4.66% 4.82% 4.87%

28 4.42% 4.39% 4.40% 4.45% 4.44% 4.51% 4.54% 4.65% 4.78% 4.82% 29 4.51% 4.50% 4.50% 4.53% 4.51% 4.54% 4.54% 4.63% 4.73% 4.78% 30 4.60% 4.62% 4.60% 4.61% 4.57% 4.57% 4.55% 4.61% 4.69% 4.76% 31 4.68% 4.74% 4.68% 4.67% 4.63% 4.59% 4.56% 4.60% 4.65% 4.74%

32 4.76% 4.84% 4.77% 4.73% 4.67% 4.61% 4.56% 4.60% 4.63% 4.73% 33 4.84% 4.94% 4.84% 4.79% 4.72% 4.63% 4.57% 4.60% 4.61% 4.72% 34 4.91% 5.03% 4.91% 4.84% 4.75% 4.65% 4.58% 4.60% 4.61% 4.72%

35 4.98% 5.11% 4.98% 4.89% 4.78% 4.67% 4.59% 4.61% 4.61% 4.73% 36 5.05% 5.19% 5.03% 4.93% 4.81% 4.68% 4.60% 4.62% 4.62% 4.74% 37 5.11% 5.26% 5.09% 4.96% 4.83% 4.69% 4.61% 4.63% 4.63% 4.75%

38 5.17% 5.33% 5.14% 4.99% 4.84% 4.71% 4.63% 4.64% 4.66% 4.77% 39 5.23% 5.39% 5.19% 5.02% 4.86% 4.72% 4.64% 4.66% 4.68% 4.80% 40 5.29% 5.45% 5.23% 5.05% 4.86% 4.73% 4.65% 4.68% 4.72% 4.83%

41 5.34% 5.50% 5.27% 5.07% 4.87% 4.74% 4.66% 4.71% 4.75% 4.86% 42 5.39% 5.55% 5.30% 5.09% 4.87% 4.75% 4.68% 4.73% 4.80% 4.89% 43 5.44% 5.60% 5.34% 5.11% 4.87% 4.75% 4.69% 4.76% 4.84% 4.93% 44 5.49% 5.64% 5.37% 5.12% 4.87% 4.76% 4.71% 4.78% 4.89% 4.97%

45 5.54% 5.68% 5.40% 5.14% 4.86% 4.77% 4.72% 4.81% 4.94% 5.01% 46 5.58% 5.72% 5.43% 5.15% 4.86% 4.77% 4.73% 4.84% 4.99% 5.05% 47 5.63% 5.76% 5.45% 5.16% 4.85% 4.78% 4.75% 4.87% 5.04% 5.09%

48 5.67% 5.80% 5.48% 5.17% 4.84% 4.79% 4.76% 4.90% 5.08% 5.12% 49 5.72% 5.84% 5.51% 5.18% 4.84% 4.79% 4.77% 4.90% 5.08% 5.12%

50+ 5.75% 5.87% 5.52% 5.18% 4.84% 4.79% 4.77% 4.90% 5.08% 5.12%

50


Appendix C: Guidance notes for operational risk charge testing

It has been proposed that the following definitions of the operational risk charge be tested in market

testing. The formulae below are shown at the 99.5% level.

Definition of “earned premium”

For market testing, the definition of “earned premium” refers to the gross premium earned over the

previous 12 months prior to the valuation date, without any deductions for reinsurance premiums

ceded.

Definition of reserves

For market testing, the reserves to be applied in the calculation of the operational risk charge should

be on the best estimate basis excluding PADs (i.e. Best estimate reserves).

Market test approach 1: Based on simplified Solvency II approach:

Where:

Market test approach 2: Based on simplified Australia approach:

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