3.4 Real estate risk

3.4.1 Definition

141. Real Estate risk is defined as the risk of adverse changes in the value of capital resources due to unexpected changes in the level or volatility of market prices of real estate or from the amount and timing of cash flows from investments in real estate.

3.4.2 ICS methodology

142. The ICS Real Estate risk charge is determined by applying a shock of a 25% simultaneous decrease in the value of all direct or indirect property exposures. Mortgages are excluded from Real Estate risk and included as part of Credit risk. When aggregated with other Market risks, the Non-Life risk charge for mortgage insurance is added to Real Estate risk.

3.4.3 Calibration

143. The calibration of the shock scenario for Real Estate risk has remained simple and stable throughout the ICS development.
144. Based on expert judgement, the stress factor was set to 25% in 2017 – consistent with the Solvency II real estate stress, also calibrated at a 99.5% level over a 1-year time horizon. Note that the Solvency II calibration for real estate is based on analysis of monthly UK Investment Property Data Bank Index total return indices from 1987 to 2008. This calibration has been confirmed in the recent 2020 Solvency II review$^{14)}$

145. In their response to the 2018 ICS public consultation, stakeholders generally supported the proposed calibration, resulting in no change.