PIN A4.6 PIN A4.6 Off-balance sheet asset risk component
PIN A4.6 Guidance
The purpose of the off-balance sheet asset risk component is to require an
Insurerto set aside capital to cover the risk of default and deterioration in value in respect of exposures that the Insurerhas because it is a party to a derivative contract.
Insureris required to calculate an off-balance sheet asset risk component, if the Insureris, as at the Solvency Reference Date, a party to a derivative contract, including a forward, future, swap, option or other similar contract, but not including:(a) a put option serving as a guarantee;(b) a foreign exchange contract having an original maturity of 14 days or less; or(c) an instrument traded on a futures or options exchange, which is subject to daily mark-to-market and margin payments.
Insurermust calculate its off-balance sheet asset risk component as the sum of the amounts obtained by applying the calculations set out in PIN Rule A4.6.3 in respect of each derivative contract entered into by the Insurerthat meets the description in PIN Rule A4.6.1.
The amount in respect of a derivative contract is obtained by calculating, for an asset equivalent amount as determined in PIN Rule A4.6.4, a default risk component as set out in PIN section A4.4 and an investment volatility risk component as set out in PIN section A4.5, as though the asset equivalent amount were a debt obligation due from the derivative counterparty.
The asset equivalent amount in respect of a derivative is calculated as the sum of the current mark-to-market exposure of the derivative (where this is positive) and the amount obtained by multiplying the notional principal amount of the derivative by the factors specified in the following table, according to the nature and residual maturity of the derivative.
Residual maturity A B C D E (a) Less than 1 year NIL 1.0% 6.0% 7.0% 10.0% (b) 1 year or more, but less than 5 years 0.5% 5.0% 8.0% 7.0% 12.0% (c) 5 years or more 1.5% 7.0% 10.0% 8.0% 15.0%
A means interest rate contracts;
B means foreign exchange and gold contracts;
C means equity contracts;
D means precious metal contracts (other than gold); and
E means other contracts.