5.2. Insurance Risks

5.2.2 Calculation of Life risk charges

• L1-86. Life risk charges are applicable to life business and similar to life health business (refer to paragraph L1-95).
• L1-87. The life risk charge is calculated by aggregating, using the life risks correlation matrix specified in the Level 2 text, the following five sub-risk charges.
  • • Mortality risk;
  • • Longevity risk;
  • • Morbidity/Disability risk;
  • • Lapse risk; and
  • • Expense risk.
• L1-88. Life risk charges are calculated based on the geographical segmentation specified in the Level 2 text.
• L1-89. For each of the five sub-risks, the risk charge is calculated both with and without the impact of management actions.
• L2-143. The correlation matrix used for aggregating the life risk charges is the following:

5.2.2.1 Mortality risk

• L1-90. The Mortality risk charge is calculated as the change in net asset value after applying the prescribed stress to the level of mortality rates. The prescribed stresses, based on the geographical segmentation, are specified in the Level 2 text.

• L1-91. The Mortality risk charge only applies to those policies that are negatively affected by an increase in mortality rates.

• L2-144. The prescribed stress for the calculation of the Mortality risk charge consists of an increase of x% in mortality rates at all ages for all policies where an increase in mortality rates leads to a decrease in the NAV.

• L2-145. The stress factors for Mortality risk are given in Table 7:

  Region	x%
  EEA and Switzerland	12.50%
  US and Canada	12.50%
  China	15.00%
  Japan	10.00%
  Other developed markets	12.50%
  Other emerging markets	12.50%

  〈 Table 7: Mortality risk stress factors 〉

5.2.2.2 Longevity risk

• L1-92. The Longevity risk charge is calculated as the change in net asset value after applying the prescribed stress to the level of mortality rates. The prescribed stresses, based on the geographical segmentation, are specified in the Level 2 text.

• L1-93. The Longevity risk charge only applies to those policies that are negatively affected by a decrease in mortality rates.

• L2-146. The prescribed stress for the calculation of the longevity risk charge consists of a decrease of x% in mortality rates at all ages for all policies where a decrease in mortality rates leads to a decrease in the NAV.

• L2-147. The stress factors for Longevity risk are given in Table 8:

  Region	x%
  EEA and Switzerland	17.50%
  US and Canada	17.50%
  China	17.50%
  Japan	17.50%
  Other developed markets	17.50%
  Other emerging markets	17.50%

  〈 Table 8: Longevity risk stress factors 〉

5.2.2.3 Morbidity and Disability risk

• L1-94. The Morbidity/Disability risk charge is calculated as the change in net asset value after applying the prescribed stresses to the four specified mutually exclusive benefit segments. The prescribed stresses, based on the geographical segmentation, benefit segments and contract length, are specified in the Level 2 text.
• L1-95. Similar Morbidity/Disability benefits may be classified as life or non-life; however, the Morbidity/Disability risk charge only applies to those policies with benefits classified as similar to life. Examples of policies with benefits similar to life are provided in the Level 2 text. For those classified as similar to non-life, the non-life risk charges (Premium and Claims Reserve risk) apply.

5.2.2.3.1 Segmentation

• L2-148. The Morbidity and disability risk is applied to benefits evaluated on a similar to life technical basis. Irrespective of the legal or contractual classification of insurance obligations, the assignment to life or non-life activities is based on the type of techniques used to calculate insurance obligations .

5.2.2.3.2 Sub-risks to be covered

• L2-149. For the purpose of the calculation of the Morbidity and disability risk charge, similar to life insurance obligations are split in the following four mutually exclusive benefit segments:
  • a) Category 1: Medical expenses
    • • Products providing any kind of compensation (either fixed or based on real costs) for medical expenses, in-patient or not. The compensation depends directly on the treatment or expenses incurred by the policyholder, and is not directly dependent on the time spent in a given health status.
  • b) Category 2: Lump sum in case of a health event
    • • Products providing a single payment at the occurrence of a specified health event or the occurrence of an accident resulting in a certain level of disability.
  • c) Category 3: Short-term recurring payments
    • • Products providing a recurring amount of compensation for a period depending on the time spent in a given temporary health status, such as inability to work or hospitalisation.
  • d) Category 4: Long-term recurring payments
    • • Products providing a fixed annuity in case of long-term/permanently deteriorated health status.
• L2-150. The distinction between Category 3 and Category 4 is made according to the temporary versus permanent characteristics of the recurring benefit. A benefit that is contractually limited to a given period, common to all policyholders, is classified as short-term recurring. A benefit that is to be paid life-long, or for a period depending on individual policyholder circumstances, without any upfront short-term limitations, is considered as long-term recurring.
• L2-151. Each benefit category is divided into two segments by original contract term:
  • a) Short-term: Includes contracts with an original term of up to five years.
  • b) Long-term: Includes contracts with an original term longer than five years.
• L2-152. When a policy includes coverage belonging to several of the above benefit categories, each of the different components of such a policy is subject to the relevant stress. When a policy provides a combination of benefits between medical expenses and short-term recurring payments (Categories 1 and 3), it may either be split into both categories, or considered under Category 3 altogether.

5.2.2.3.3 Calculation

• L2-153. The prescribed stresses for the calculation of the Morbidity/Disability risk charge depend on the benefit category:

  • a) For benefit categories i = 1, 2 and 3, the stress is defined as a relative increase in inception rates, as specified in Table 9 and Table 10.
    • The inception rate stress is applied differently depending on the underlying type of benefits:
    • • For benefits where claim costs are explicitly modelled using inception rates and/or recovery rates, the stress is only applied to inception rates. If only recovery rates are modelled, the stress is applied as a decrease in recovery rates.
    • • For other benefits in categories 1-3, with no explicit inception rates and/or recovery rates, the stress factors are directly applied to medical claim payment amounts.
  • b) For the benefit category 4, the risk charge is calculated for both contract term segments as the maximum of the Inception Rate risk charge and the Recovery Rate risk charge, where:
    • • The Inception Rate risk charge is calculated as the change in NAV following the increase in inception rates as specified in Table 9 and Table 10; and
    • • The Recovery Rate risk charge is calculated as the change in NAV following the decrease in recovery rates of 20% (same stress for both short-term and long-term contracts).

  Category (i)	Short-term	Long-term
  1	20%	8%
  2	25%	15%
  3	20%	10%
  4	inception rate stress = 25%, recovery rate stress = 20%	inception rate stress = 20%, recovery rate stress = 20%

  〈 Morbidity/Disability risk stress factors – Location of risk Japan 〉

  Category (i)	Short-term	Long-term
  1	20%	8%
  2	25%	20%
  3	20%	12%
  4	inception rate stress= 25%, recovery rate stress=20%	inception rate stress= 20%, recovery rate stress = 20%

  〈 Morbidity/Disability risk stress factors – All other locations of risk 〉

5.2.2.4 Lapse risk

• L1-96. The Lapse risk charge is calculated as the maximum of the Lapse risk charge for the level and trend component and the Lapse risk charge for the mass lapse component.
• L1-97. The Lapse risk charges for the level and trend component and the mass lapse component are calculated as the change in net asset value after applying the prescribed stresses to the two components. The prescribed stresses, based on the geographical segmentation, are specified in the Level 2 text.
• L1-98. The Lapse risk charge takes into account all legal or contractual options that can change the value of future cash flows.
• L2-154. The calculation of the maximum of the level and trend component and mass lapse component is performed at the level of each region listed in section 5.1.2.
• L2-155. The Lapse risk charge for the IAIG is then obtained as the sum of Lapse risk charges over all regions.

5.2.2.4.1 Level and Trend component

• L2-156. For each region listed in section 5.1.2, the prescribed stress for the calculation of the Level and Trend component is the most adverse of an upward stress and a downward stress.

• L2-157. The upward stress consists of an increase of x% in the assumed option take-up rates, subject to a maximum of 100%, in all future years for all homogeneous risk groups adversely affected by such risk.

• L2-158. The downward stress consists of a decrease of x% in the assumed option take-up rates in all future years for all homogeneous risk groups adversely affected by such risk.

• L2-159. The stress factors are specified in Table 11:

  Region	x%
  EEA and Switzerland	40%
  US and Canada	40%
  China	40%
  Japan	20%
  Other developed markets	40%
  Other emerging markets	40%

  〈 Table 11: Level & Trend Lapse risk stress factors 〉

• L2-160. All options that can affect the amount of insurance coverage, including options that allow for partial or full termination, or increase in the insurance cover, are affected by the lapse stress factors.

• L2-161. For each region listed in section 5.1.2, the Level and Trend component is first determined for each homogeneous risk group before aggregating across all homogeneous risk groups.

• L2-162. When the calculation of the current estimate involves the use of a dynamic lapse function , the Level and Trend component stress is applied to the base rate of the dynamic lapse function.

5.2.2.4.2 Mass Lapse component

• L2-163. For each region listed in section 5.1.2, the prescribed stress for the calculation of the Mass Lapse component consists of:
• • an immediate surrender of 30% of retail policies; and
• • an immediate surrender of 50% of non-retail policies.
• L2-164. The Mass Lapse component for each homogeneous risk group is subject to a floor of zero.
• L2-165. For each region listed in section 5.1.2, the Mass Lapse component is first determined for each homogeneous risk group before aggregating across all homogeneous risk groups.

5.2.2.5 Expense risk

• L1-99. The Expense risk charge is calculated as the change in net asset value after simultaneously applying the prescribed stresses to the unit expense and expense inflation assumptions. The prescribed stresses, based on the geographical segmentation, are specified in the Level 2 text.

• L2-166. The prescribed stresses for the calculation of the expense risk charge consist of a relative increase of x% in unit expense assumptions and an absolute increase of y% per annum in expense inflation, with x and y specified in Table 12.

  Region	x% (unit expense)	y% (expense inflation)
  EEA and Switzerland	6%	1%
  US and Canada	6%	1%
  China	8%	Year 1–10: 3%; Year 11–20: 2%; Year 21+: 1%
  Japan	6%	1%
  Other developed markets	8%	Year 1–10: 2%; Year 11+: 1%
  Other emerging markets	8%	Year 1–10: 3%; Year 11–20: 2%; Year 21+: 1%

• L2-167. The stresses to the unit expense and expense inflation assumptions are applied simultaneously.