ICS - life insurance risk charges - Executive Summary

FSI Executive Summaries  | 
30 April 2020

The Insurance Capital Standard (ICS) is a consolidated group-wide capital standard that applies to internationally active insurance groups (IAIGs). During the monitoring period from 2020 to 2024, IAIGs are expected to report their ICS solvency ratio, which is calculated as qualifying capital resources divided by the standard method ICS capital requirement. Life insurance risk charges are components of the standard method ICS capital requirement.

General methodology and scope

The standard method ICS life insurance risk charges cover mortality risk, longevity risk, morbidity/disability risk, lapse risk and expense risk. Those risk charges are calculated using a stress-based approach that considers the impact of adverse scenarios on an IAIG's capital resources over a one-year time horizon. In practice, this means revaluing an IAIG's insurance assets and liabilities using stressed valuation assumptions as prescribed under the ICS. As shown in the diagram below, the value of insurance liabilities increases after the stress, leading to a reduction in capital resources that represent the capital requirement for life insurance risks.

The calculation is undertaken for each portfolio of life insurance contracts with similar risk characteristics, also known as a homogenous risk group. Characteristics that determine each group include a common underwriting policy, a similar claims settlement pattern, product features and the risk profile of policyholders.

To recognise diversification effects between the different life insurance risks, an IAIG can reduce the calculated capital requirement by applying a prescribed set of correlation factors when summing up the components of life insurance risks. In addition, risk mitigation techniques that satisfy certain criteria - for example, legal enforceability - can further reduce the risk charge.

Components of life insurance risk charges

The table below provides a high-level overview of the main components of the standard method life insurance risk charges:

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