Asset Risk ChargeAsset Risk Charge

Asset Risk Charge

33. The Asset Risk Charge relates to the risk of adverse movements in the value of a fund’s on-balance sheet and off-balance sheet exposures. The method for determining the Asset Risk Charge is set out in Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge (LPS 114). Asset risk can be derived from a number of sources, including market risk and credit risk.

Asset Concentration Risk Charge

34. The Asset Concentration Risk Charge relates to the risk resulting from concentrations in individual assets or large exposures to individual counterparties or groups of related counterparties. The method for determining the Asset Concentration Risk Charge is set out in Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge.

Operational Risk Charge

35. The Operational Risk Charge relates to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The method for determining the Operational Risk Charge is set out in Prudential Standard LPS 118 Capital Adequacy: Operational Risk Charge.

Aggregation benefit

36. The aggregation benefit makes an explicit allowance for diversification between asset and insurance risks in the calculation of the prescribed capital amount.
37. The aggregation benefit formula is:

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where:

(a) ‘A’ is the Asset Risk Charge;
(b) ‘I’ is the Insurance Risk Charge; and
(c) ‘correlation’ is 20 per cent.
38. The Asset Concentration Risk Charge and the Operational Risk Charge are not included in the calculation of the aggregation benefit.

Combined stress scenario adjustment

39. Future shareholder tax benefits arising in the stressed scenarios are recognised in determining the Insurance Risk Charge and Asset Risk Charge. A life company must increase the prescribed capital amount by the aggregate amount of any tax benefits that cannot be netted against deferred tax liabilities as specified in LPS 112.
40. In the calculation of the Insurance Risk Charge and Asset Risk Charge, an allowance may be made for any anticipated management actions that would reduce future policy benefits, for example, increasing fees and premium rates, reducing surrender values and reducing bonuses and other discretionary additions to policy owner benefits. However, there are limits to the extent to which policy benefits can be reduced. A life company must increase the prescribed capital amount if the aggregated management actions would reduce policy benefits below these limits.
41. The method for calculating the combined stress scenario adjustment is specified in Attachment B.