5.2. Insurance Risks

5.2.3 Calculation of Non-life risk charges

• L1-100. Non-life risk charges are applicable to non-life business and similar to non-life health business.
• L1-101. The non-life risk charge comprises both Premium risk and Claims Reserve risk, which are captured by a factor-based approach with factors applied to ICS segments within defined regions, as specified in the Level 2 text. The Claims Reserve risk factors include the effects of Latent Liability risk.
• L1-102. The non-life insurance risk charge is calculated using an aggregation approach that recognises diversification across lines of business and regions. The correlation factors are specified in the Level 2 text. The aggregation approach recognises the following sources of diversification:
  • • Between Premium risk and Claims Reserve risk;
  • • Within ICS categories, which is a high-level grouping of the type of business;
  • • Within a region; and
  • • Across regions.
• L1-103. Premium and Claims Reserve risk charges are calculated based on the geographical segmentation specified in the Level 2 text. The geographical segmentation is further segmented into lines of business based on statutory reporting in certain regions.

5.2.3.1 Segments / Lines of business

• L2-168. Each exposure for Premium risk and Claims Reserve risk is mapped to a line of business based on the location of risk. Each line of business has a corresponding ICS segment, as specified in Table 14. Any jurisdiction not explicitly listed in Table 14 is allocated to either Other developed markets or Other emerging markets according to Table 5.

5.2.3.2 Definition of ICS segments and risk charges

• L2-169. Each ICS segment is assigned:
  • a. An ICS category: a high level grouping of the type of business (property-like, liability-like, motor-like, other, mortgage and credit); and
  • b. A risk factor for the purpose of calculating the risk charge.
• L2-170. Premium risk factors do not include the impact of catastrophe events since catastrophe risk is a separate risk within the ICS.
• L2-171. Some of the Claims Reserve risk factors take into account latent liability risk. The purpose of the latent liability risk charge is to capture risk from liability exposures that is not adequately captured by historical claims experience.
• L2-172. Table 14 provides the list of ICS segments, the associated ICS category, as well as the risk charges for Premium and Claims Reserve risks. The definitions of ICS segments are provided in 0.

5.2.3.3 Aggregation

• L2-173. The calculation of non-life risk charges for each ICS segment takes into account diversification effects.
• L2-174. The first step of aggregation combines each ICS segment’s Premium risk and Claims Reserve risk charges, applying a 25% correlation factor between the Premium and Claims Reserve risk charges for all segments (with the exception of mortgage and credit as outlined below).
• L2-175. Mortgage business and credit business are added across all regions and then aggregated with Real Estate risk and Credit risk, respectively.
• L2-176. The second step of aggregation is within ICS categories, where a correlation matrix is applied across segments of a given category. The correlation factors are specified in Table 13 below:

• L2-177. The third step of aggregation is within each region listed in section 5.1.2, using a 50% correlation factor between each of the four ICS categories.
• L2-178. The fourth step of aggregation is across regions, using a 25% correlation factor between each region’s total risk charge.

5.2.3.4 Input data required

• L2-179. The Premium risk charge for each ICS segment is calculated as the relevant risk factor multiplied by the greater of the net premium earned and net premium to be earned.
• L2-180. The Claims Reserve risk charge for each ICS segment is calculated as the relevant risk factor multiplied by the net current estimate.