Get a plain-English read of 1.9. Solvency Resilience Reserve
Turn the raw legal text into a practical explanation grounded in Financial Sector (Collection of Data) (reporting standard) determination No. 3 of 2009 - LRS 100.0 - Solvency.
Details used in calculation of the Resilience Reserve are included under Section 4 of the form, Resilience Requirements. The results of those calculations are to be reported in Item 1.9 and should follow the requirements set out under LPS 2.04, Section 11.
1.9.1. Credit Risk component of Resilience Reserve
This item is expected to be calculated as:
RRCR = (L’ / A”) x (ΔACRY + ΔACRD)
Where:
RRCR = Credit Risk component of the Resilience Reserve;
L’ = Liabilities after prescribed change (per Section 4);
A” = Adjusted value of admissible assets (per Section 4);
ΔACRY = Credit Risk Yield Adjustment, per Column 2 of Section 4.1; and
ΔACRD = Credit Risk Default Adjustment, per Column 6 of Section 4.1.
1.9.2. Balance of Resilience Reserve
This item is expected to be calculated as:
RRB = RR - RRCR
Where:
RRB = Balance of the Resilience Reserve;
RR = Resilience Reserve = L’ x [A / A”] – L;
A = Assets prior to prescribed change (per Section 4); and
L = Liabilities prior to prescribed change (per Section 4).
1.10. Other Significant Item - Solvency
This item is for any reserves established by the Actuary in relation to additional risks or costs that are not otherwise reflected in the prescribed requirements of LPS 2.04. Include any transitional adjustment required to the Solvency Requirement.
This part of the form requires the input of Total Assets from LRF 300.1 and uses it to derive the excess (or shortfall, if applicable) of Total Assets over the Total Solvency Requirement for the fund.
2.1.1. Life Insurance Act Total Assets
This is Item 12 on LRF 300.1.
Item 2.1.2 [a derived item] is then calculated automatically by the form, as the difference between Item 2.1.1 and Item 1.11.
2.2. Solvency Reserve
Solvency Reserve (at Item 2.2.5, which is a derived item) represents the excess of Total Solvency Requirement over the total minimum liabilities for the fund. Note that while other sections of this form are on a gross of reinsurance basis, the Solvency Reserve and related metrics are effectively net of reinsurance. This achieves consistency and continuity with the old series as established under the former prudential rules.
2.2.2. Less: Total Gross Policy Liabilities Ceded under Reinsurance
This is to be entered as a subtracted item, where the amount to be subtracted is the sum of Items 11.2 and 11.5 on LRF 300.1.
2.2.3. Less: Net Minimum Termination Value (MTV) excluding IL risk margin [derived item]
This is derived as a subtracted item, where the amount being subtracted is calculated automatically by the form as the difference between Item 1.1.2 [Net Amount, per Column 3] and Item 1.1.6.
2.2.4. Less: Other Liabilities adjusted for Subordinated Debt and Seed Capital
This is to be entered as a subtracted item, where the amount to be subtracted is one that corresponds with Item 1.6.4 above, except that for Item 2.2.4 it is to be calculated on the basis used for preparation of LRF 300.1. Therefore this amount may differ from the result at Item 1.6.4.
2.3. Solvency Reserve Ratio (%) [derived item]
This is calculated automatically by the form, as:
Solvency Reserve (Item 2.2.5)
divided by
[ The sum of Total Solvency Requirement (Item 1.11) and
Less: Total Gross Policy Liabilities Ceded under Reinsurance (Item 2.2.2),
minus
Solvency Reserve (Item 2.2.5) ]
{This denominator equates to Net MTV (Item 1.1.2) + Other liabilities (Item 2.2.4).}
2.4. Amounts Available for Solvency Reserve
This is the amount that will be compared with the Solvency Reserve at Item 2.2.5 to establish ‘Solvency Coverage’. The following components reconcile with items in LRF 300.1 and are summed to obtain Item 2.4.6 (which is a derived item):
2.4.1. Life Insurance Act Net Assets
This is Item 28 (or, equally, Item 23) on LRF 300.1. Note that it includes the amount of Unallocated Benefit Fund reserves (Item 25.1 on LRF 300.1).
2.4.2. Policy Owner Retained Profits at end of period
This is Item 18 on LRF 300.1.
2.4.3. Eligible Amount of Approved Subordinated Debt [derived item]
This is Item 1.6.2.
2.4.4. Seed Capital [derived item]
This is Item 1.6.3.
2.4.5. Surplus or Deficit (if any) of Net Policy Liability relative to Net MTV
This item is to be calculated Net of outwards reinsurance (for both parts of the calculation: Policy Liability, and MTV).
2.5. Solvency Reserve Coverage [derived item]
This is calculated automatically by the form, as:
Total Amounts Available for Solvency Reserve (Item 2.4.6)
divided by
Solvency Reserve (Item 2.2.5)
Inadmissible Assets
In completing this section, life companies should refer to LPS 2.04 Section 10.
Amounts entered in the Value column are the full value of any asset which is wholly or partly inadmissible, and should be consistent with what is reported in LRF 300.1. A Value entry is not required for Item 3.6.
Amounts entered in the Inadmissible Amounts column represent the inadmissible portion of the assets reported in the Value column. These amounts add up to the Inadmissible Assets Reserve.
Resilience Requirements
In completing this section, life companies should refer to LPS 2.04 Section 11.
While the first ‘Adjustment’ column relates solely to the Yield change element of Credit Risk, the second ‘Adjustment’ column reflects the prescribed yield change and the application of the Diversification benefit. The insertion of this further column assists in making the logical flow of this part of the form align more closely with the methodology in LPS 2.04.
4.1. Resilience Requirements
4.1.12. Assets with non-standard resilience factors
This asset class should only be used in rare cases. It is intended to cover situations where assets are disaggregated into (1) an identifiable sub-asset and (2) a residual that does not fit into any of the asset sectors specified by LPS 2.04 for resilience purposes, or where a non-standard resilience risk has been modelled in accordance with paragraph 11.10 of LPS 2.04.
4.2. Assets with no Resilience Requirement
This is for assets that are admissible but do not have resilience requirements, as specified in LPS 2.04, subsections 11.3 and 11.5.2.
Paragraph 11.5.2 of LPS 2.04 states: “Where the policy owner liabilities of the statutory fund move in harmony with the assets supporting them, the Resilience Reserve in respect of those liabilities can be zero. A Resilience Reserve may be required, however, in respect of the Other Liabilities of the fund.” For statutory funds where this applies, the assets supporting policy liabilities should be entered at Item 4.2 Assets with no resilience requirement, while the assets other than those supporting policy liabilities should be entered in Section 4.1, across Items 4.1.1 to 4.1.13 as appropriate.
4.3. Total Admissible Assets
The sum of Total Admissible Assets and Total Inadmissible Amounts (from Item 3.7) should be equal to Total Assets in LRF 300.1.
4.4. Liabilities for Resilience
4.4.2. Solvency liabilities, excluding other liabilities
While the amount at Item 4.4.1 Solvency liabilities, excluding other liabilities for the amount ‘Prior to Prescribed Change’ (L) is derived within the form, this amount may not be the amount that has been used for resilience purposes, e.g.in the situation of an investment linked fund, where policy owner liabilities move in harmony with the assets supporting them. The amount to be entered at this item for the amount ‘After Prescribed Change’ (L’) may be equal to (or very similar to) L. For an investment linked fund, the difference that is implied in the amount reported at this item may be limited to the impact of the prescribed change on the risk margin for investment linked policies, as described in Paragraph 4.9.1 of LPS 2.04.
4.4.3. Effective borrowings
These are to be calculated on a look through basis.
4.4.4. Other liabilities, apart from borrowings and tax liabilities
Only exclude the items specified in the title. Therefore this item includes approved subordinated debt.