PIN A8.6 PIN A8.6 Off-balance sheet asset risk component
PIN A8.6 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. The provisions in this section apply the relevant provisions of PIN section A4.6 to each Long-Term Insurance Fundthat an Insurermaintains.
Insureris required to calculate an off-balance sheet asset risk component in respect of a Long-Term Insurance Fund, if the Insureris, as at the Solvency Reference Date, a party to a derivative contract attributable to that fund, 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 the off-balance sheet asset risk component in respect of a Long-Term Insurance Fundas the sum of the amounts obtained by applying the calculations set out in PIN Rule A8.6.3 in respect of each derivative contract entered into by the Insurerand attributable to that fund, that meets the description in PIN Rule A8.6.1.
The amount in respect of a derivative contract is obtained by calculating, for an asset equivalent amount as determined in PIN Rule A8.6.4, a default risk component as set out in PIN section A8.4 and an investment volatility risk component as set out in PIN section A8.5, 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 table set out in PIN Rule A4.6.4 according to the nature and residual maturity of the derivative.