Future Exposure Risk Charge

1. The Future Exposure Risk Charge (FER) relates to the risk that financial performance of the HIB and HRIB may be materially worse than expected and may require capital to meet policyholder obligations. The FER is calculated as:

FER subscript HIB plus FER subscript HRIB

Where:

1. FERHIB is the charge for the health insurance business, related to the Adverse Event Stress combined with the Prescribed Benefit Stress.

2. FERHRIB is the charge for health-related insurance business, related to the Prescribed Benefit Stress only.

3. Both components have a minimum value of zero, so any forecast profits after the stresses cannot be used to offset the charge of any other component.

4. The FER, for each of HIB and HRIB, is calculated by stressing:

   1. Benefits incurred; plus
   2. Other business expenses; less
   3. Accrued premium.

This is to be calculated for the 12 months from the reporting date using stressed assumptions as described in paragraphs 22 to 27. This is to be calculated net of any reinsurance arrangements. There is no allowance for investment income or other parts of the business other than discounting as described in paragraphs 34 and 35.

1. The stressed assumptions may be adjusted for Management Actions as defined in paragraphs 28 to 33.