PIN A8.7 PIN A8.7 Off-balance sheet liability risk component
PIN A8.7 Guidance
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's capital position. The provisions in this section apply the relevant provisions of PIN section A4.7 to each Long-Term Insurance Fundthat an Insurermaintains.
Insurermust calculate an off-balance sheet liability risk component in respect of a Long-Term Insurance Fundif the Insurerhas issued guarantees, including put options serving as guarantees, letters of credit or any other credit substitute in favour of another party, so that the Long-Term Insurance Fundis exposed to the risk of having to make payment on those instruments should the guaranteed party default.
Insurermust calculate its off-balance sheet risk component as the sum of the amounts obtained by applying the calculations set out in PIN Rule A8.7.3 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 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 A8.4 and an investment volatility risk component as set out in PIN section A8.5 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