PIN A4.7 PIN A4.7 Off-balance sheet liability risk component
PIN A4.7 Guidance1. The purpose of the off-balance sheet liability risk component is to require an
Insurerto set aside capital to cover the risk that it will be required to perform on a guarantee, letter of credit or other credit substitute that it has entered into. Although such items are not liabilities of the Insureras at the Solvency Reference Date, they have the capacity to crystallise as liabilities at a subsequent date and therefore to affect the Insurer'scapital position.2. Credit substitutes that are Contracts of Insuranceare excluded from the calculation of this component, as they are subject to a separate capital requirement under PIN section 4.5.
Insurermust calculate an off-balance sheet liability risk component if the Insurerhas issued guarantees, including put options serving as guarantees, letters of credit or any other credit substitute (other than an insurance contract) in favour of another party, so that the Insureris exposed to the risk of having to make payment on those instruments should the guaranteed party default.
Insurermust calculate its off-balance sheet liability risk component as the sum of the amounts obtained by applying the calculations set out in PIN Rule A4.7.3 in respect of each guarantee, letter of credit or other credit substitute.
The amount in respect of a guarantee, letter of credit or other credit substitute (other than an insurance contract) is obtained by calculating, for the nominal amount of the guarantee, letter of credit or other credit substitute, 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, in respect of the obligation or asset over which the guarantee, letter of credit or other credit substitute is written, as though that obligation or asset were an obligation or asset of the