Asset Concentration Risk ChargeAsset Concentration Risk Charge

Asset Concentration Risk Charge

8. This Prudential Standard sets out the method for calculating the Asset Concentration Risk Charge for a life company’s statutory funds and its general fund.

9. The method for calculating Asset Risk Charge is set out in Prudential Standard LPS 114 Asset Risk Charge (LPS 114). It is calibrated for funds whose investments in each asset class are well diversified. Additional capital is therefore required if there are excessive concentrations of investments in individual assets or in exposures to single counterparties (or groups of related counterparties).

10. The Asset Concentration Risk Charge is the amount by which the values of individual asset and credit exposures (or groups of related exposures) exceed certain limits. The limits, by type of asset exposure, are set out in Attachment A. Modifications to the limits that apply to specialist reinsurers are set out in paragraph 29.

11. Individual assets that are exposed to common risks (e.g. strata titles in the same property, or exposures to a single creditor) must be aggregated.

12. The prescribed limits are expressed as percentages of the value of the assets of the statutory fund or general fund (VAF), as percentages of the capital base of the fund, or as fixed dollar limits.

13. For the purpose of determining the asset concentration risk charge, liabilities ceded under reinsurance (reinsurance assets) are to be treated as an asset of the fund.

14. For the purpose of determining the asset concentration limits for non-reinsurance assets, VAF is the total assets of the fund as per the life company’s statutory accounts.

15. For the purpose of determining the asset concentration limits for reinsurance assets:

(a) these assets must be valued on a stressed basis. The stressed value of reinsurance assets is the amount by which the stressed policy liabilities determined under Prudential Standard LPS 115 Insurance Risk Charge would increase, if the stressed policy liabilities were determined gross of reinsurance; and

(b) VAF includes the stressed value of reinsurance assets instead of the amounts included in the life company’s statutory accounts.

16. All exposures to a reinsurer or reinsurance group are to be considered a single counterparty exposure (for the purposes of applying the relevant limits in Attachment A).

17. Where arrangements with a reinsurer involve both liability and asset components, these may be taken as a single net exposure to the extent they are subject to a legally enforceable right of offset (including in a winding up of the reinsurer).