• PIN APP4 PIN APP4 CALCULATION OF MINIMUM CAPITAL REQUIREMENT

    • PIN A4.1 PIN A4.1 Purpose and general provisions

      • PIN A4.1.1 PIN A4.1.1

        This appendix applies to all Insurers to which Rule 4.3 applies.

        • Guidance

          1. This appendix sets out the manner in which an Insurer that is not a Cell Company is required to calculate its Minimum Capital Requirement. The equivalent provisions for Insurers that are Cell Companies are set out in APP6.
          2. The Minimum Capital Requirement is calculated by determining individual components in respect of various specific risks that the Insurer is exposed to, and adding those components together to arrive at the Minimum Capital Requirement.

    • PIN A4.2 PIN A4.2 Minimum Capital Requirement

      • PIN A4.2.1

        Subject to Rule A4.2.2, an Insurer must calculate its Minimum Capital Requirement according to the formula:

        MCR = DRC + IVRC + OARC + OLRC + CRC + SFAC + URC + RRC + LIRC + AMRC

        Where the following definitions apply:

        Term Definition
        MCR Insurer's Minimum Capital Requirement;
        DRC Insurer's default risk component;
        IVRC Insurer's investment volatility risk component;
        OARC Insurer's off-balance sheet asset risk component;
        OLRC Insurer's off-balance sheet liability risk component;
        CRC Insurer's concentration risk component;
        SFAC Insurer's size factor adjustment component;
        URC Insurer's underwriting risk component;
        RRC Insurer's reserving risk component;
        LIRC Insurer's Long-Term Insurance risk component; and
        AMRC Insurer's asset management risk component.

      • PIN A4.2.3

        Captive Insurer Minimum Capital Requirements are set out in the CIB rulebook.

    • PIN A4.3 PIN A4.3 Applicability of components to assets of the Insurer

      • PIN A4.3.1

        Subject to Rule A4.3.2, an Insurer must calculate those components of its Minimum Capital Requirement that are relevant to assets, in respect of every asset that is owned by the Insurer and that is available to meet the liabilities of the Insurer.

      • PIN A4.3.2 PIN A4.3.2

        Where an Insurer arranges its affairs such that its Invested Assets are held in a Related entity, the Insurer may, with the written approval of the Regulator, calculate components of its Minimum Capital Requirement by reference to the Insurer's interest in the assets that are held by the Related entity, instead of by reference to the interest that the Insurer has in that Related entity. In that case this appendix shall be interpreted as though the assets (representing the Insurer's interest) held by the Related entity were held directly by the Insurer.

        • Guidance

          The effect of Rule A4.3.2 is to provide flexibility for Insurers whose investments are managed on a pooled basis within a Group, or which establish specialist Subsidiaries to manage their investments. While the Insurer's asset in such cases is a balance with, or investment in, a Related entity, this Rule permits the Insurer to 'look through' the corporate arrangement and apply this appendix to the assets of the Related entity as though they were the Insurer's own.

    • PIN A4.4 PIN A4.4 Default risk component

      • Guidance

        The purpose of the default risk component is to require an Insurer to set aside capital to cover the risk that amounts receivable from counterparties will not be received. The basic calculation model for this component, set out in A4.4.1, is modified by additional provisions that permit an Insurer to take account of the reduced default risk where an asset is covered by guarantees or collateral, and impose additional capital charges on assets that are encumbered. In addition, certain assets that are left out of account in calculating an Insurer's Adjusted Capital Resources are exempt from the default risk component calculation. Excluding these assets from Adjusted Capital Resources already effectively imposes a 100% capital requirement.

      • PIN A4.4.1

        An Insurer must calculate its default risk component as the sum of the amounts obtained by multiplying the value of each asset of the Insurer with the percentage applicable to that asset, as set out in the tables contained in this Rule and subject to the provisions of Rules A4.4.2,A4.4.5, A4.4.6 and A4.4.7.

        (a) Assets that are Invested Assets

        Asset %
        (a) Bonds Rated 'AAA', issued by a Government or Government agency 0.0
        (b) Bonds not included in (a), Rated 'A' or better 0.4
        (c) Bonds Rated 'BBB' 3.3
        (d) Bonds Rated 'BB' 7.5
        (e) Bonds Rated 'B' 13.7
        (f) Bonds Rated 'CCC' 20.2
        (g) Other Rated bonds 30.0
        (h) Secured loans — performing 2.0
        (i) Secured loans — Non-Performing 14.0
        (j) Loans to directors of the Insurer or to directors of Related parties, or to the dependent relatives of such directors 100.0
        (k) Unsecured loans to employees (except loans of less than $1,000) 100.0
        (l) Other bonds and loans 50.0
        (b) Assets that are not Invested Assets

        Asset %
        Reinsurance recoverable from:  
        (a) reinsurers Rated 'AAA' 0.5
        (b) reinsurers Rated 'AA' 1.2
        (c) reinsurers Rated 'A' 1.9
        (d) reinsurers Rated 'BBB' 4.7
        (e) reinsurers Rated 'BB' 9.6
        (f) reinsurers Rated 'B' 23.8
        (g) reinsurers Rated 'CCC' 49.7
        (h) reinsurers Rated 'R' 50.0
        (i) other reinsurers 25.0
        (j) Other assets 3.0

      • PIN A4.4.2

        Reinsurance recoverable includes amounts recoverable in respect of outstanding claims and in respect of Premium Liabilities. Insurers may make reasonable approximations where it is not possible to identify exactly the reinsurers to which amounts recoverable relate (for example, in the case of recoveries in respect of Premium Liabilities and in respect of claims incurred but not reported).

      • PIN A4.4.3

        Where an asset falls within more than one category in the table in Rules A4.4.1(a) or A4.4.1(b), the highest of the percentages applicable to that asset must be applied.

      • PIN A4.4.4

        Where an asset has been explicitly, unconditionally and irrevocably guaranteed for its remaining term, by a guarantor with a rating of 'A' or better who is not Related to the Insurer, the Insurer may at its option use, in place of the relevant percentage in the table in Rules A4.4.1(a) or A4.4.1(b), the percentage in those tables that would apply to a debt due from the guarantor.

      • PIN A4.4.5

        Where an Insurer holds collateral against an asset, and the collateral consists of a charge, mortgage or other security interest in cash or in debt securities whose issuer has a rating of 'A' or above, the Insurer may at its option use, in place of the relevant percentage in the table A4.4.1(a) or in Rule A4.4.1(b), the percentage in those tables that would apply to the collateral.

      • PIN A4.4.6

        The provisions of Rules A4.4.4 and A4.4.5 apply only to the extent that the asset is covered by the guarantee or the collateral.

      • PIN A4.4.7

        Notwithstanding anything else in this section:

        (a) the amount included in the default risk component in respect of any asset that is subject to a fixed or floating charge, mortgage or other encumbrance must be 100% of the value of the asset to the extent of that charge, mortgage or encumbrance. In the case of such assets, the percentages set out in the tables above must be applied only to the amount, if any, by which the value of the asset exceeds the amount of the charge, mortgage or encumbrance; and
        (b) no amount must be included in the default risk component in respect of assets excluded from Adjusted Capital Resources in accordance with Rules A3.4.3(e), A3.4.3(f), A3.4.3(g), A3.4.3(h), A3.4.3(j) or A3.4.3(k).

    • PIN A4.5 PIN A4.5 Investment volatility risk component

      • Guidance

        The purpose of the investment volatility risk component is to require an Insurer to set aside capital to cover the risk of deterioration in the values of Invested Assets. Invested Assets that are linked to liabilities of Investment-Linked Insurance contracts are exempted from the calculation, since there is a direct correlation between the values of the assets and the values of the liabilities to which they are linked.

      • PIN A4.5.1

        Subject to Rule A4.5.2, an Insurer must calculate its investment volatility risk component as the sum of the amounts obtained by multiplying the value of each Invested Asset with the relevant percentage applicable to that asset as set out in the following table.

        Asset %
        (a) All bonds up to 1 year to maturity 1.0
        (c) Bonds between 1 and 2 years to maturity 2.0
        (d) Bonds between 2 and 5 years to maturity 4.0
        (a) Bonds between 5 and 10 years to maturity 6.0
        (e) All other bonds 8.0
        (f) Equity investments* 15.0
        (g) Preference shares 6.0
        *Note: Item (f) includes equity shares, participations in collective investment schemes (whether or not the underlying investments are themselves equity investments), participations in joint ventures, and certificates of Mudaraba and Musharaka.

      • PIN A4.5.2

        No amount must be included in the calculation of the investment volatility risk component in respect of:

        (a) investments that are linked to liabilities of Investment-Linked Insurance contracts; or
        (b) assets referred to in Rule A4.4.7(b).

    • PIN A4.6 PIN A4.6 Off-balance sheet asset risk component

      • Guidance

        The purpose of the off-balance sheet asset risk component is to require an Insurer to set aside capital to cover the risk of default and deterioration in value in respect of exposures that the Insurer has because it is a party to a derivative contract.

      • PIN A4.6.1

        An Insurer is required to calculate an off-balance sheet asset risk component, if the Insurer is, as at the Solvency Reference Date, a party to a derivative contract, including a forward, future, swap, option or other similar contract, but not including:

        (a) a put option serving as a guarantee;
        (b) a foreign exchange contract having an original maturity of fourteen days or less; or
        (c) an instrument traded on a futures or options exchange, which is subject to daily mark-to-market and margin payments.

      • PIN A4.6.2

        An Insurer must calculate its off-balance sheet asset risk component as the sum of the amounts obtained by applying the calculations set out in Rule A4.6.3 in respect of each derivative contract entered into by the Insurer that meets the description in Rule A4.6.1.

      • PIN A4.6.3

        The amount in respect of a derivative contract is obtained by calculating, for an asset equivalent amount as determined in Rule A4.6.4, a default risk component as set out in Rule A4.4 and an investment volatility risk component as set out in Rule A4.5, as though the asset equivalent amount were a debt obligation due from the derivative counterparty.

      • PIN A4.6.4

        The asset equivalent amount in respect of a derivative is calculated as the sum of the current mark-to-market exposure of the derivative (where this is positive) and the amount obtained by multiplying the notional principal amount of the derivative by the factors specified in the following table, according to the nature and residual maturity of the derivative.

        Residual maturity A B C D E
        (a) Less than 1 year NIL 1.0% 6.0% 7.0% 10.0%
        (b) 1 year or more, but less than 5 years 0.5% 5.0% 8.0% 7.0% 12.0%
        (c) 5 years or more 1.5% 7.0% 10.0% 8.0% 15.0%

        Where:

        A means interest rate contracts;

        B means foreign exchange and gold contracts;

        C means equity contracts;

        D means precious metal contracts (other than gold); and

        E means other contracts.

    • PIN A4.7 PIN A4.7 Off-balance sheet liability risk component

      • Guidance

        The purpose of the off-balance sheet liability risk component is to require an Insurer to set aside capital to cover the risk that it will be required to perform on a guarantee, letter of credit or other credit substitute that it has entered into. Although such items are not liabilities of the Insurer as at the Solvency Reference Date, they have the capacity to crystallise as liabilities at a subsequent date and therefore to affect the Insurer's capital position.

      • PIN A4.7.1

        An Insurer must calculate an off-balance sheet liability risk component if the Insurer has issued guarantees, including put options serving as guarantees, letters of credit or any other credit substitute (other than an insurance contract) in favour of another party, so that the Insurer is exposed to the risk of having to make payment on those instruments should the guaranteed party default.

      • PIN A4.7.2

        An Insurer must calculate its off-balance sheet liability risk component as the sum of the amounts obtained by applying the calculations set out in Rule A4.7.3 in respect of each guarantee, letter of credit or other credit substitute.

      • PIN A4.7.3

        The amount in respect of a guarantee, letter of credit or other credit substitute (other than an insurance contract) is obtained by calculating, for the nominal amount of the guarantee, letter of credit or other credit substitute, a default risk component as set out in Rule A4.4 and an investment volatility risk component as set out in Rule A4.5, in respect of the obligation or asset over which the guarantee, letter of credit or other credit substitute is written, as though that obligation or asset were an obligation or asset of the Insurer.

    • PIN A4.8 PIN A4.8 Concentration risk component

      • Guidance

        The purpose of the concentration risk component is to require an Insurer to set aside capital to cover the sensitivity that it has to default or volatility in respect of assets and exposures to single counterparties or groupings of connected counterparties, or single properties. The additional capital requirement applies to investment exposures, including off-balance sheet exposures, and amounts outstanding under finite risk reinsurance contracts in respect of Long-Term Insurance. It is calculated on the basis of the Insurer's total exposure to the counterparty, grouping of connected counterparties or property, and operates on a sliding scale depending on the size of that exposure relative to the Insurer's Adjusted Capital Resources. The total amount of the concentration risk component in respect of any asset is limited to 100% of the value of the asset, and certain assets that are left out of account in calculating an Insurer's Adjusted Capital Resources are excluded from the calculation.

      • PIN A4.8.1

        An Insurer must calculate a concentration risk component if the Insurer has, as at the Solvency Reference Date, an investment exposure to a single counterparty or (taken in the aggregate) to a grouping of two or more counterparties who are Related to each other, or to a single property, that exceeds 10% of the Insurer's Adjusted Capital Resources.

      • PIN A4.8.2

        For the purposes of the calculation referred to in Rule A4.8.1:

        (a) 'investment exposure' means the aggregate value of all equity, bond or other investments in or in respect of the counterparty or grouping of Related counterparties or property in question, together with off-balance sheet exposures to the same counterparty or grouping of Related counterparties or property that the Insurer has because it has issued guarantees, letters of credit or other credit substitutes (other than insurance contracts), or because it has entered into derivative contracts, and any amounts referred to in Rule A4.12.6 in respect of that counterparty or grouping of Related counterparties, but excluding any assets excluded from base capital by reason of any of the Rules referred to in Rule A4.4.7(b); and
        (b) 'AAA'-Rated Governments and 'AAA'-Rated Government agencies are not counterparties.

      • PIN A4.8.3

        An Insurer must calculate its concentration risk component as the sum of the amounts obtained by applying to each investment exposure that exceeds 10% of the Insurer's Adjusted Capital Resources the relevant formula set out in the following table, subject to Rule A4.8.4.

        Exposure expressed as a percentage of adjusted capital resources Formula to determine concentration risk component
        (a) Over 10 up to 25 20% of the amount by which the investment exposure exceeds 10% of Adjusted Capital Resources, up to a limit equivalent to 3% of Adjusted Capital Resources.
        (b) Over 25 up to 50 3% of the amount of Adjusted Capital Resources, plus 40% of the amount by which the investment exposure exceeds 25% of Adjusted Capital Resources, up to a limit in total equivalent to 13% of Adjusted Capital Resources.
        (c) Over 50 up to 75 13% of the amount of Adjusted Capital Resources, plus 60% of the amount by which the investment exposure exceeds 50% of Adjusted Capital Resources, up to a limit in total equivalent to 28% of Adjusted Capital Resources.
        (d) Over 75 up to 100 28% of the amount of Adjusted Capital Resources, plus 80% of the amount by which the investment exposure exceeds 75% of Adjusted Capital Resources, up to a limit in total equivalent to 48% of Adjusted Capital Resources.
        (e) Over 100 48% of the amount of Adjusted Capital Resources, plus 100% of the amount by which the investment exposure exceeds 100% of Adjusted Capital Resources.

      • PIN A4.8.4

        If the amount included in the concentration risk component in respect of an investment exposure, aggregated with the sum of the amounts included in the default risk component, investment volatility risk component and off-balance sheet asset risk component in respect of the assets and off-balance sheet exposures comprising that investment exposure, exceeds 100% of that investment exposure, the concentration risk component in respect of that investment exposure must be reduced so that the total of the four components in respect of that investment exposure is equal to 100% of that investment exposure.

    • PIN A4.9 PIN A4.9 Size factor component

      • Guidance

        The effect of the size factor component is to provide a relatively higher capital requirement in respect of Insurers with smaller portfolios of Invested Assets. The calculation adjusts the aggregate of the default risk component, investment volatility risk component and concentration risk component in respect of Invested Assets, by a factor that varies according to the total size of Invested Assets.

      • PIN A4.9.1

        The base figure for the size factor component is determined by aggregating the following components:

        (a) the default risk component determined in accordance with Rule A4.4, so far only as concerns the Insurer's Invested Assets;
        (b) the investment volatility risk component determined in accordance with Rule A4.5; and
        (c) the concentration risk component determined in accordance with Rule A4.8, so far only as concerns the Insurer's Invested Assets.

      • PIN A4.9.2

        An Insurer must calculate its size factor component by multiplying the base figure determined in accordance with Rule A4.9.1 by the factor derived by applying the following formula, where x represents the total Invested Assets expressed in millions of dollars:

        (a) If x ≤ 100, the factor is 1.5.
        (b) If 100 < x ≤ 200, the factor is (150 + 0.5(x-100))/x.
        (c) If 200 < x ≤ 1,200, the factor is (200 - 0.2(x-200))/x.
        (d) If x > 1,200, the factor is zero.

    • PIN A4.10 PIN A4.10 Underwriting risk component

      • Guidance

        The purpose of the underwriting risk component of the Minimum Capital Requirement is to require an Insurer to set aside capital to address the risk that the cost of claims in respect of General Insurance Business will vary from the cost implicit in the premiums being charged. The basic calculation model set out in Rule A4.10.2 applies different factors to the premium in respect of different Classes of Business, based on the different perceived risk of variability associated with each. The model is modified by additional provisions dealing with certain Classes of Business. This section also restricts the extent to which reinsurance may be taken into account when calculating the underwriting risk component.

      • PIN A4.10.1

        Subject to the other provisions of this section, an Insurer must calculate its underwriting risk component as the sum of the amounts obtained by multiplying the Insurer's base premium, for each Class of Business, by the percentage factors set out in the following table.

        Class of Business Percentage factor
          Direct insurance Proportional reinsurance Non-proportional and facultative reinsurance
        (a) Classes 1 and 2 18 18 27
        (b) Class 3 12 12 18
        (c) Class 4 17 17 26
        (d) Class 5 19 19 30
        (e) Class 6 27 27 29
        (f) Classes 7 and 8 90 90 140
        (g) Class 9 18 18 27
        Amended on (3 February, 2020).

      • PIN A4.10.2

        Where an Insurer underwrites Contracts of Insurance in Class 1 or Class 2, and those contracts constitute Long-Term Insurance contracts, the Insurer must not calculate an underwriting risk component in respect of those contracts but must instead calculate a Long-Term Insurance risk component as set out in A4.12.

      • PIN A4.10.3

        The Regulator may, on written application by an Insurer undertaking business in Class 2, give consent in writing to the use of percentages other than those stated in item A4.10.1(a), if the Regulator is satisfied that adequate mortality and morbidity information exists in respect of that business, to provide a reasonable basis for reliance on actuarial principles. The percentages that may be used must be those stated in the notice giving consent, but may not be lower than 12% in the case of direct insurance and proportional reinsurance, and 18% in the case of non-proportional or facultative reinsurance.

      • PIN A4.10.4

        Where the Insurer's estimated net retention as at the Solvency Reference Date in respect of a property catastrophe exceeds the sum of the amounts calculated in accordance with Rule A4.10.1 in respect of Class 5, before taking account of this Rule, the sum of those amounts must be replaced by the Insurer's estimated net retention in respect of a property catastrophe when calculating the underwriting risk component.

      • PIN A4.10.5

        For the purposes of Rule A4.10.4, the Insurer's net retention means the sum of claims expected to be paid, associated direct and indirect settlement costs and reinstatement premiums expected to be paid in respect of reinsurance recoveries resulting from those claims, less the sum of reinstatement premiums expected to be received and reinsurance and other recoveries expected to be received resulting from those claims, in the event of a property catastrophe representing a return period of not less than one hundred years.

      • PIN A4.10.6

        For the purposes of this section, and subject to Rule A4.10.8, the Insurer's base premium means the higher of the two following amounts:

        (a) the amount of the Insurer's Net Written Premium during the reference period; and
        (b) 50% of the amount of the Insurer's Gross Written Premium during the reference period.

      • PIN A4.10.7

        In Rule A4.10.6, the reference period means the reporting period ending next before the Solvency Reference Date, except where the Insurer's forecast Net Written Premium, according to its business plan, for the reporting period next after that reporting period, is higher, in which case the reference period will be the second of the two reporting periods and the Net Written Premium and Gross Written Premium used for the purposes of Rule A4.10.6 must be the forecast Net Written Premium and Gross Written Premium for that second reporting period.

      • PIN A4.10.8

        Where an Insurer enters, as Insurer or cedant, into a General Insurance contract of longer than twelve months' duration, the premium or reinsurance premium on that contract must not be included fully in the calculation of base premium in the reporting period in which the contract was effected, but must be apportioned over the duration of the contract by allocating to each reporting period a fraction of the premium proportionate to the fraction of the contract period that falls into that reporting period, or on a different basis approved in writing by the Regulator.

      • PIN A4.10.9

        Where an Insurer enters as reinsurer into a finite risk reinsurance contract in respect of General Insurance Business, the underwriting risk component in respect of that contract, regardless of the Class of Business it relates to, must be 4% of the base premium on the contract.

    • PIN A4.11 PIN A4.11 Reserving risk component

      • Guidance

        The purpose of the reserving risk component of the Minimum Capital Requirement is to require an Insurer to set aside capital to address the risk that the cost of claims in respect of General Insurance Business will vary from the amounts recorded as liabilities in the Insurer's balance sheet. This calculation applies only to liabilities in respect of outstanding claims (the risk of deterioration in Premium Liability is addressed in the underwriting risk component in Rule A4.10). The principles of the calculation are similar to those in Rule A4.10.

      • PIN A4.11.1

        Subject to the other provisions of this section, an Insurer must calculate its reserving risk component as the sum of the amounts obtained by multiplying the Insurer's base claims reserve under Contracts of Insurance and reinsurance effected by it, for each Class of Business, by the percentage factors set out in the following table.

        Class of Business Percentage factor
          Direct insurance Proportional reinsurance Non-proportional and facultative reinsurance
        (a) Classes 1 and 2 28 28 28
        (b) Class 3 12 12 12
        (c) Class 4 16 16 16
        (d) Class 5 22 22 22
        (e) Class 6 10 10 10
        (f) Classes 7 and 8 31.25 31.25 31.25
        (g) Class 9 28 28 28
        Amended on (3 February, 2020).

      • PIN A4.11.2

        Where an Insurer underwrites Contracts of Insurance in Class 1 or Class 2, and those contracts constitute Long-Term Insurance contracts, the Insurer must not calculate a reserving risk component in respect of those contracts but must instead calculate a Long-Term Insurance risk component as set out in Rule A4.12.

      • PIN A4.11.3

        The Regulator may, on written application by an Insurer undertaking Insurance Business in Class 2, give consent in writing to the use of percentages other than those stated in Rule A4.11.1(a), if the Regulator is satisfied that adequate mortality and morbidity information exists in respect of that business, to provide a reasonable basis for reliance on actuarial principles. The percentages that may be used must be those stated in the notice giving consent, but may not be lower than 5%.

      • PIN A4.11.4

        For the purposes of Rule A4.11.1, the Insurer's base claims reserve means the higher of the following two amounts:

        (a) the amount of the Insurer's provision for Gross Outstanding Claims, less the amount of reinsurance and other recoveries expected to be received in respect of that liability; and
        (b) 50% of the amount of the Insurer's provision for Gross Outstanding Claims.

      • PIN A4.11.5

        Where an Insurer has entered as reinsurer into a finite risk reinsurance contract, the reserving risk component in respect of that contract, regardless of the Class of Business it relates to, must be 6% of the base claims reserve on the contract.

    • PIN A4.12 PIN A4.12 Long-term insurance risk component

      • Guidance

        1. The purpose of the Long-Term Insurance risk component of the Minimum Capital Requirement is to require an Insurer to set aside capital to address the risk that the net present value of future Policy Benefits will vary from the amounts recorded as Long-Term Insurance Liabilities in the Insurer's balance sheet.
        2. The calculation model set out in Rule A4.12.1 deals separately with Direct Long-Term Insurance Business, with proportional and non-proportional reinsurance of Long-Term Insurance Business, and with finite risk reinsurance of Long-Term Insurance Business.
        3. To determine the amount for proportional reinsurance business, the calculation model applies ratios to the Insurer's premium, to its liability and to the capital at risk in respect of such business. To determine the amount for non-proportional reinsurance, a ratio is applied to the Insurer's non-proportional reinsurance premium. To determine the amount for finite risk reinsurance, ratios are applied to the balance outstanding on contracts, depending on the rating of the Insurer and the term to completion. To determine the amount for Direct Long-Term Insurance Business, the calculation model applies ratios to the Insurer's liability and to its capital at risk in respect of such business. Additional or alternative charges are made in respect of particular Classes of Business.

      • PIN A4.12.1

        An Insurer must calculate its Long-Term Insurance risk component as the sum of the proportional reinsurance element determined in accordance with Rule A4.12.3, the non-proportional reinsurance element determined in accordance with Rule A4.12.4, the finite risk reinsurance element determined in accordance with Rule A4.12.5 and the Direct Long-Term Insurance element determined in accordance with Rule A4.12.8.

      • PIN A4.12.2

        In Rules A4.12.3, A4.12.4 and A4.12.8:

        (a) contracts of finite risk reinsurance must be excluded from the calculation of the proportional reinsurance element and the non-proportional reinsurance element;
        (b) 'provisions in respect of Long-Term Insurance Business' means the amount of Long-Term Insurance Liability in respect of the contracts concerned, except that the amount may not be less than 85% of the liability determined without taking reinsurance into account; and
        (c) 'capital at risk' means the aggregate amount of sums assured on contracts of Long-Term Insurance issued by an Insurer, minus the aggregate amount of provisions in respect of those contracts. Where the contract is an annuity, the sum assured must be taken to be the present value of the annuity payments. The capital at risk must be determined separately for each contract, and where the capital at risk calculated for a contract is less than zero, the capital at risk for that contract must be taken as zero.

      • PIN A4.12.3

        The proportional reinsurance element is calculated as the sum of the following six amounts, so far only as they relate to proportional reinsurance business of the Insurer:

        (a) 2% of the amount of the Insurer's Net Written Premium;
        (b) 3% of the amount of provisions in respect of Long-Term Insurance Business that is annuity and pensions business and is not Investment-Linked Insurance;
        (c) 1.25% of the amount of provisions in respect of Long-Term Insurance Business that is Investment-Linked Insurance, where the contracts are subject to a capital guarantee;
        (d) 0.5% of the amount of provisions in respect of Long-Term Insurance Business that is Investment-Linked Insurance, where the contracts are not subject to a capital guarantee;
        (e) 0.5% of the amount of provisions in respect of Long-Term Insurance Business other than business described in Rules (b), (c), and (d); and
        (f) the amount obtained by applying to the aggregate amount of capital at risk in respect of Long-Term Insurance contracts the formulae set out in the following table:

        Amount of capital at risk expressed in dollars Formula to determine the amount referred to in Rule (5)
        (a) less than $500 million 0.20% of the amount of capital at risk
        (b) over $500 million up to $5 billion 0.13% of the amount of capital at risk, plus $350,000
        (c) over $5 billion up to $25 billion 0.10% of the amount of capital at risk, plus $1,850,000
        (d) over $25 billion 0.08% of the amount of capital at risk, plus $6,850,000.

      • PIN A4.12.4

        The non-proportional reinsurance element is calculated as 52% of the Insurer's Net Written Premium.

      • PIN A4.12.5

        The finite risk reinsurance element is determined as the sum of the following three amounts:

        (a) subject to Rule A4.12.7, the sum of the amounts obtained by applying, to the amount outstanding in respect of each cedant, the percentages set out in Rule A4.4.1(a)(i) as though the cedant were a reinsurer and the amount outstanding were reinsurance recoverable;
        (b) the sum of the amounts obtained by applying, to the amount outstanding under each contract, the percentages set out in Rule A4.5.1, as though the amount outstanding were a bond; and
        (c) 2.25% of the amount outstanding.

      • PIN A4.12.6

        In Rule A4.12.5, the amount outstanding means the amount of any experience account or advance, however called or described, that, under the terms of the contract, will be paid to the Insurer on or before the termination of the contract.

      • PIN A4.12.8

        An Insurer who carries on Direct Long-Term Insurance Business through a branch located outside ADGM must calculate the Direct Long-Term Insurance Business element of its Long-Term Insurance risk component as the aggregate of the following, in respect of those contracts:

        (a) the following proportions of provisions in respect of Long-Term Insurance Business:
        (i) in the case of Class I, Class II, and Class VI, 4%;
        (ii) in the case of Class III and Class VII, where the Insurer bears investment risk, 4%; and
        (iii) in the case of Class III, where the Insurer bears no investment risk but the allocation to cover management expenses is fixed for more than five years, 1%;
        (b) in the case of all contracts where the Insurer bears a death risk under the contract, the following percentage of capital at risk, subject to a maximum reduction for reinsurance of 50%:
        (i) where the contract is term assurance of not more than three years, 0.1%;
        (ii) where the contract is term assurance of between three and five years, 0.15%; and
        (iii) in all other cases, 0.3%;
        (c) in the case of Class III, where the Insurer bears no investment risk and the allocation to cover management expenses is not fixed for more than five years, 25% of the Insurer's net administrative expenses in the past financial year pertaining to such business;
        (d) in the case of Class IV, the higher of:
        (i) 18% of Gross Written Premium, reducing to 16% for the amount of Gross Written Premium in excess of $50 million, and subject to a maximum reduction for reinsurance of 50%; and
        (ii) 26% of the average gross claims incurred over the three preceding financial years, reducing to 23% for the amount of that average in excess of $35 million, and subject to a maximum reduction for reinsurance of 50%; and
        (e) in the case of Class V, 1% of the assets of the tontine.

    • PIN A4.13 PIN A4.13 Asset management risk component

      • Guidance

        This section requires an Insurer to set aside capital in respect of assets that it manages. The circumstances under which an Insurer may conduct asset management activities are restricted by COBS.

      • PIN A4.13.1

        An Insurer must calculate its asset management risk component as 0.5% of the market value of assets managed by it.

      • PIN A4.13.2

        Assets that are recognised as assets of the Insurer in accordance with generally accepted accounting principles are not assets managed by it.