The purpose of the default risk component is to require an Insurer to set aside capital to cover the risk that amounts receivable from counterparties will not be received. The basic calculation model for this component, set out in
[PIN A4.4.1], is modified by additional provisions that permit an Insurer to take account of the reduced default risk where an asset is covered by guarantees or collateral, and impose additional capital charges on assets that are encumbered. In addition, certain assets that are left out of account in calculating an Insurer'sAdjusted Capital Resources are exempt from the default risk component calculation. Excluding these assets from Adjusted Capital Resources already effectively imposes a 100% capital requirement.