Stress marginsStress margins

Stress margins

26. The stressed assumptions must be determined by a life company, by applying ‘stress margins’ to the best estimate assumptions. The stress margins must reflect the risk that outcomes may be worse than the best estimate assumptions.
27. The following stress margins are required:
(a) mortality random stress;
(b) morbidity random stress;
(c) mortality future stress;
(d) morbidity future stress;
(e) event stress;
(f) longevity stress;
(g) lapse stress;
(h) servicing expense stress; and
(i) other insurance contingencies.
28. The stress margins for random, future, event and longevity risks must be adjusted to allow for diversification between these risks as described in the section starting at paragraph 40.
29. The mortality random and future stresses must only be applied to life policies where an increase in future mortality rates would increase net cash outflows from the life company. The longevity stress must only be applied to life policies where an increase in future mortality rates would reduce net cash outflows from the life company.
30. The stress margins, before the adjustment for diversification, must be determined at a 99.5 per cent probability of sufficiency over a 12 month period. This means that, in the assessment of the Appointed Actuary, there is no more than a 0.5 per cent probability that the actual cost of claims will exceed the stressed estimate.
31. For each type of stress, different margins may be applied to different types of policies. For example, there may be different morbidity random stresses for lump sum policies and disability income insurance policies. For disability income insurance policies, separate margins must be applied to the best estimate claim incidence and claim termination assumptions.