Combined stress scenario adjustmentCombined stress scenario adjustment

Combined stress scenario adjustment

The combined stress scenario adjustment must be calculated from a single scenario in which all of the asset risk and insurance risk stresses are applied. The stresses must be modified by multiplying them by diversification factors.

2. The combined stress scenario adjustment must be calculated as:
(a) the capital charge for the single scenario;
(b) less the Insurance Risk Charge;
(c) less the Asset Risk Charge;
(d) plus the aggregation benefit.

The combined stress scenario adjustment cannot be less than zero.

3. The capital charge for the single scenario is the reduction in the capital base in this scenario.
4. The stressed policy liabilities for the single scenario are defined in the same way as for the Insurance Risk Charge.
5. The insurance risk stresses for the single scenario must be the adjusted stress margins[\[8\]](#_ftn8) used in determining the Insurance Risk Charge, multiplied by the ‘aggregation diversification factor’ between insurance risks and asset risks.
6. The aggregation diversification factor must be calculated as the sum of:
(a) the Insurance Risk Charge;
(b) plus the Asset Risk Charge;
(c) less the aggregation benefit

divided by the sum of the Insurance Risk Charge and the Asset Risk Charge.

7. The asset risk stresses for the single scenario must be the stresses used in determining the Asset Risk Charge, multiplied by both the aggregation diversification factor and an ‘asset risk diversification factor’. The asset risk diversification factor is calculated as the Asset Risk Charge divided by the sum of the capital charges for the seven asset risk stresses. For the stresses that apply in two directions, the capital charge for the direction that determines the overall amount of the Asset Risk Charge must be used.
8. For the purpose of deducting deferred tax assets net of deferred tax liabilities from the capital base, these amounts must be adjusted to include all additional tax assets and liabilities accruing over the 12 months following the reporting date.
9. The taking of discretionary management actions in the single scenario can only be assumed to the extent that they are appropriate, justifiable and equitable in the adverse conditions assumed.
10. For a statutory fund that has liabilities for life policies that provide participating benefits or discretionary additions to benefits, the life company must use a single scenario where the direction of the asset risk stresses for real interest rates and expected inflation are both down, if this scenario would result in a higher capital charge.