Cap. 41R 《保險業(估值及資本)規則》Insurance (Valuation and Capital) Rules

investment holdings in any subsidiary or affiliate, except investment holdings in and amounts due from a non-consolidated subsidiary; and

leases.

the values of the assets and liabilities of the applicable insurer as determined in accordance with these Rules; and

the values of such assets and liabilities for tax purposes.

determining risk capital amounts for its risk exposures to—

determining a risk capital amount for operational risk, in accordance with rule 86;

aggregating the risk capital amounts determined for paragraph (a) and adding the risk capital amount determined for paragraph (b), using the following formula—

adding the amount, if any, as calculated in accordance with rule 43, by which the insurer’s adjustment for the loss absorbing capacity of future discretionary benefits exceeds the cap on such adjustment; and

deducting the amount, if any, calculated in accordance with rule 44 to reflect the loss absorbing capacity of any change in the deferred tax impact after applying the steps in paragraphs (a), (b), (c) and (d).

margin over current estimates; or

deferred tax assets and liabilities.

for the part of its long term business that is long term reinsurance business with offshore risk, in accordance with section 21B(5)(e) of the Ordinance; and

for the part of its general business that is general reinsurance business with offshore risk, in accordance with section 25AA(4)(a) of the Ordinance.

determine a separate prescribed capital amount based on the assets and liabilities in respect of the restricted capital component of each sub-fund of participating business, using the approach in subrule (1);

determine a separate prescribed capital amount based on all its assets and liabilities, other than those in respect of the restricted capital component, using the approach in subrule (1); and

determine its prescribed capital amount as the sum of the separate prescribed capital amounts in paragraphs (a) and (b).

identify the underlying assets or liabilities of the portfolio investment, using the approaches mentioned in subrules (2), (3), (4) and (5); and

in determining each relevant risk capital amount, use the underlying assets or liabilities identified in accordance with paragraph (a) in proportion to the insurer’s holding in the portfolio investment.

subject to paragraph (b), an applicable insurer must identify all the underlying assets or liabilities of the portfolio investment, to the extent of the granularity required to determine each relevant risk capital amount in accordance with these Rules (full look-through approach);

subject to paragraph (c), if the insurer cannot identify some or all of the underlying assets or liabilities of the portfolio investment after applying the full look-through approach, the insurer must use the approach in subrule (3) (actual allocation-based look-through approach);

subject to paragraph (d), if the insurer cannot identify some or all of the underlying assets or liabilities of the portfolio investment after applying the full look-through approach and actual allocation-based look-through approach (if applicable), the insurer must use the approach referred to in subrule (4) to determine the unidentified underlying assets or liabilities (mandate-based look-through approach); and

if, after applying the full look-through approach, actual allocation-based look-through approach (if applicable) and mandate-based look-through approach, there remains an amount of underlying assets or liabilities of the portfolio investment which the insurer cannot identify, the insurer must classify such amount as a portfolio investment of no look-through.

subject to paragraph (b), in relation to the amount of underlying assets and liabilities of the portfolio investment which cannot be identified, an applicable insurer must assume that these are assets and liabilities that result from the amount being invested, to the maximum extent allowed, in the class of assets under the investment mandate or governing instrument of the portfolio investment that would result in the highest prescribed capital amount for the insurer;

subject to paragraph (c), if there is any amount of unidentified underlying assets or liabilities of the portfolio investment remaining after the application of the approach in paragraph (a), the insurer must assume that this remaining amount is invested, to the maximum extent allowed, in the class of assets under the investment mandate or governing instrument, other than the class mentioned in paragraph (a), that would result in the next highest prescribed capital amount for the insurer; and

if there continues to be any amount of unidentified assets or liabilities of the portfolio investment remaining after the application of the approaches in paragraphs (a) and (b), the insurer must continue to use the approach in paragraph (b) until either the entire amount of underlying assets or liabilities of the portfolio investment has been identified by reference to the classes of assets under the investment mandate or governance instrument of the investment, or it is impractical for the insurer to continue to use the approach in paragraph (b) to identify the remaining underlying assets or liabilities.

any underlying asset of a portfolio investment held by an applicable insurer is in turn a portfolio investment (underlying portfolio investment); or

any underlying asset held by an underlying portfolio investment mentioned in paragraph (a) in turn is a portfolio investment, such that there are 3 or more layers of underlying portfolio investments between the portfolio investment held by the insurer and the ultimate underlying assets and liabilities from which the profit, income and other returns of the portfolio investment held by the insurer derive,

subject to paragraph (b), an applicable insurer must apply the full look-through approach in subrule (2)(a), to identify the underlying assets or liabilities ultimately held through all the layers of the portfolio investments;

subject to paragraph (c), if the insurer cannot identify some or all of the ultimate underlying assets or liabilities after applying the approach in paragraph (a), the insurer must apply the actual allocation-based look-through approach in subrule (2)(b);

subject to paragraph (d), if the insurer cannot identify some or all of the ultimate underlying assets or liabilities after applying the approaches in paragraphs (a) and (b) (if applicable), the insurer must, for the purpose of identifying such unidentified underlying assets and liabilities, apply the mandate-based look-through approach in subrule (2)(c) by reference to the investment mandate or governing instrument of the portfolio investment in the layer at which the insurer ceased being able to identify the underlying assets or liabilities held by such portfolio investment in applying the full look-through approach or actual allocation-based look-through approach (if applicable); or

if, after applying the approaches in paragraphs (a), (b) and (c), there remains an amount of such ultimate underlying assets or liabilities which the insurer has not identified, the insurer must classify such amount as a portfolio investment of no look-through.

the applicable insurer, as the ceding insurer under the contract of reinsurance, transfers insurance risk to a reinsurer;

the transfer of risk to the reinsurer under the contract of reinsurance is effective and is clearly defined in the contract;

the contract of reinsurance is binding on the parties, legally effective and enforceable in all relevant jurisdictions;

the insurer has taken all appropriate steps to ensure the effectiveness of the arrangement and operation of the contract of reinsurance and to address the risks related to the contract, including any risk that may result in a discontinuation of the transfer of risk under the contract;

in the event of a default, insolvency or bankruptcy of the reinsurer, or other credit event adversely impacting the reinsurer set out in the contract of reinsurance, the insurer has a direct legally enforceable claim on the reinsurer under the contract of reinsurance;

there is no double counting by the insurer of the insurance risk mitigating effect of the contract of reinsurance in valuing its assets or liabilities for the purposes of these Rules and in determining the relevant risk capital amounts mentioned in rule 37(1);

if the contract of reinsurance results in the insurer being materially exposed to basis risk resulting from a potential mismatch between the coverage under the contract of reinsurance and the insurance risk to which the insurer is exposed, the insurer allows for such basis risk in deriving the insurance risk mitigation effect of the contract of reinsurance;

the derivation of the insurance risk mitigation effect of the contract of reinsurance by the insurer does not result in creating other risks or adding material basis risk to the insurer, unless such risk is well addressed;

the insurer is able to demonstrate that the contract of reinsurance adequately mitigates its insurance risk under a range of gross loss scenarios; and

the reinsurer which is a party to the contract of reinsurance has adequate credit quality to guarantee, with appropriate certainty, that the insurer will receive the protection in the cases specified by the contracting parties in the contract.

the insurer takes into account the costs of renewing the contract in its assumptions and reflects such costs in the valuation of assets and liabilities; and

the insurer—

the contractual arrangement has a risk mitigating effect on a specific exposure, specific exposures or a pool of specific exposures of the insurer;

the transfer of risk to the counterparty under the contractual arrangement is effective and is clearly defined in the contract;

the contractual arrangement is binding on the parties, legally effective and enforceable in all relevant jurisdictions;

the insurer has taken all appropriate steps to ensure the effectiveness of the arrangement (such as clear documentation on the undertaking of the counterparty to pay the protection in specified circumstances), and to address the risks related to that arrangement, including any risk that may result in a discontinuation of the transfer of risk under the arrangement;

in the event of a default, insolvency or bankruptcy of a counterparty, or other credit event adversely impacting the counterparty set out in the relevant contractual arrangement, the insurer has a direct legally enforceable claim on the counterparty under the contractual arrangement;

there is no double counting by the insurer of the market risk mitigation effect of the arrangement in valuing its assets or liabilities for the purposes of these Rules and in determining the relevant risk capital amounts mentioned in rule 37(1);

the derivation of the financial risk mitigation effect does not result in material basis risk or in the creation of other risks, unless such risk is well addressed;

the insurer is able to demonstrate that the arrangement adequately mitigates its financial risk under a range of loss scenarios; and

the counterparty of the contractual arrangement has adequate credit quality to guarantee, with appropriate certainty, that the insurer will receive the protection in the cases specified by the contracting parties in the contract.

the insurer takes into account the costs of the roll over in its assumptions and reflect such costs in the valuation of assets and liabilities; and

the insurer—

calculating the difference in the present value of future discretionary benefits before and after additional management actions based on the same stressed assumptions;

multiplying the difference calculated in paragraph (a) by—

(PV FDB_{without add mgmt action}@stressed assumptions –

PV FDB_{with add mgmt action}@stressed assumptions) × adjustment ratio

where—

LAC usage means the amount of usage of the loss absorbing capacity of future discretionary benefits;

where—

PV FDB_{without add mgmt action}@stressed assumptions means the present value of future discretionary benefits before additional management actions based on stressed assumptions;

PV FDB_{with add mgmt action}@stressed assumptions means the present value of future discretionary benefits after additional management actions based on stressed assumptions; and

PV FDB_{without add mgmt action}@base assumptions means the present value of future discretionary benefits before additional management actions based on the base assumptions.

where—

LAC cap means the cap on the total amount of adjustment for the loss absorbing capacity of future discretionary benefits the insurer may make in calculating its prescribed capital amount;

PV FDB_base means the present value of future discretionary benefits under the base scenario, net of reinsurance, based on the base assumptions; and

PV FDB_min means the present value of the lowest allowed future discretionary benefits in accordance with the insurer’s board-approved policy, net of reinsurance, based on the base assumptions.

where—

PCA_{without add mgmt action} means the prescribed capital amount as aggregated using the formula in rule 37(1)(c) with each risk capital amount before applying the additional management actions on future discretionary benefits; and

PCA_{with add mgmt action} means the prescribed capital amount as aggregated using the formula in rule 37(1)(c) with each risk capital amount after applying the additional management actions on future discretionary benefits.

risk capital amount_{with add mgmt action} + LAC usage

the pre-tax prescribed capital amount of the insurer is the amount calculated in accordance with rule 37(1)(a) to (d); and

the effective tax rate is the amount calculated as follows and capped at 16.5%—

if the latest financial year end of the applicable insurer is earlier than the commencement date—the period between the commencement date and the valuation date;

if the period between the commencement date and the latest financial year end of the applicable insurer covers less than 3 consecutive financial years before the valuation date—the period between the commencement date and the latest financial year end date; or

if the period between the commencement date and the latest financial year end of the applicable insurer covers at least 3 consecutive financial years before the valuation date—the period of 3 consecutive financial years ending on the latest financial year end date.

in respect of its assets and liabilities that are sensitive to market risk, determine the risk capital amount for each of the following sub-risks—

aggregate the risk capital amounts for the sub-risks mentioned in paragraph (a)(i), (ii), (iii), (iv) and (v) according to the formula mentioned in subrule (2).

where—

correlation matrix refers to the correlation matrix set out in—

Table 3A of Schedule 7, if interest rate upward stress is applied in determining the risk capital amount of interest rate risk under rule 47(1); and

Table 3B of Schedule 7, if interest rate downward stress is applied in determining the risk capital amount of interest rate risk under rule 47(1); and

s and t represent the corresponding sub-risks in each subparagraph in subrule (1)(a).

where—

each component is determined in accordance with Schedule 5; but

application ratio_stressed, asset dollar duration_stressed, liability dollar duration_stressed are recalculated under interest rate risk stress, credit spread risk stress and equity risk stress, and adjusted spread_stressed is recalculated under credit spread risk stress.

recalculate the application ratio in section 6 of Schedule 5 using a duration factor which is recalculated in accordance with section 8 of Schedule 5 under stress, but with the predictability factor unchanged; and

recalculate the constant prescribed spread component in section 9(1) of Schedule 5 by recalculating and applying the asset dollar duration and liability dollar duration under stress, but with no change to the constant prescribed spread, predictability factor and eligible asset percentage.

where—

ω_i means weight assigned to the eligible assets calculated in accordance with section 5 of Schedule 5;

credit spread stress factor means the credit spread stress factor under rule 48; and

reduction factor means the factor set out in Table 1 (according to the whether the eligible asset is rated, and if so, credit rating band of eligible assets).

applying the upward stressed risk-free yield curve and upward stressed prime rate (if applicable) under subrules (2) and (5) to all assets and liabilities sensitive to interest rate risk; or

applying the downward stressed risk-free yield curve and downward stressed prime rate (if applicable) under subrules (2) and (5) to all assets and liabilities sensitive to interest rate risk.

multiplying each observable market rate of the respective risk-free yield curve by X, where X is calculated as 1 plus—

for each relevant term in column 1 of Table 2 until the last liquid point (as prescribed in Schedule 4) for the specified currency; and

Table 2 Upward and Downward Stress Factors—Risk-free Yield Curve

multiplying the ultimate forward rate of the respective risk-free yield curve (as prescribed in Schedule 4) by—

the additive upward stress to the prime rate associated with the contract of insurance that the insurer must also apply to its onshore reverse mortgage insurance for the purposes of subrule (1)(a) is the stress factor determined in accordance with column 2 of Table 3; and

the additive downward stress to the prime rate associated with the contract of insurance that the insurer must also apply to its onshore reverse mortgage insurance for the purposes of subrule (1)(b) is the stress factor determined in accordance with column 3 of Table 3.

Table 3

Upward and Downward Stress Factors—Prime Rate

despite the stress factors in Table 4, a sovereign bond may be assigned a credit spread stress factor of 0 basis point only if—

to avoid doubt, an asset which is issued by a recognized multilateral development bank or supranational organization is treated as a sovereign bond and paragraph (a)(i) applies to it;

in the case of a recognized green bond, a factor of 0.9 is multiplied to the stress factor in Table 4;

in the case of an asset, under which a portion of the obligations of the issuer is guaranteed by an eligible guarantee, the portion of the asset which is guaranteed maybe assigned with a credit spread stress factor based on the credit rating band of the guarantee provider rather than the issuer; and

to avoid doubt, an asset which is issued by a public sector entity without an eligible guarantee from a sovereign, must be assigned with a credit rating stress factor based on the credit rating band of the entity as a corporate.

the adjusted equity downward stress factor for developed market listed equities, emerging market listed equities, portfolio investments of no look-through and other equities is determined pursuant to Table 5 as the sum of—

the adjusted equity downward stress factor for non-regulated investments in affiliates (if not consolidated) and strategic investments, is the equity downward stress factor in column 2 of Table 5 corresponding to the type of equities in column 1 of Table 5.

Table 5

Equity Downward Stress Factors

be made in writing;

contain or be accompanied by particulars of—

be served on the Authority.

the period for which the approval is to remain in effect; and

a limit on the amount or value of the investment classified as a strategic investment.

the relevant currency risk factor in column 2 of Table 6 corresponding to the relevant currency in column 1 of Table 6; and

the value of the net long or net short position in the relevant currency exposure determined for the insurer’s assets and liabilities as a whole, after adjusting the impact of any financial risk mitigation arrangement pursuant to rule 42.

Table 6

Currency Risk Factors for Currencies against Hong Kong Dollars

in respect of its assets and liabilities that are sensitive to life insurance risk, determine the risk capital amount for each of the following sub-risks—

aggregate the risk capital amounts for the sub-risks mentioned in paragraphs (a)(i) to (vi) in accordance with the formula in subrule (2).

where—

correlation matrix refers to the correlation matrix set out in Table 4 of Schedule 7; and

m and n represent the corresponding sub-risks in each subparagraph in subrule (1)(a).

applying the mortality stress factor in subrule (2) to the best estimate mortality rates for each homogenous risk group and determining the resulting reduction to its net asset value; and

determining the total sum of the reductions to its net asset value for each homogenous risk group determined in paragraph (a) in accordance with the formula in subrule (3).

applying a multiplicative permanent increase of 12.5% to the best estimate mortality rates for a homogenous risk group; and

capping the stressed mortality rates resulting from the application of the permanent increase mentioned in paragraph (a) at 100%.

where—

i refers to each homogeneous risk group; and

NAV_stressed refers to the reduction in the net asset value resulting from the application of the mortality stress factor in subrule (2) to the homogenous risk group.

applying the longevity stress factor in subrule (2) to the best estimate mortality rates for each homogenous risk group and determining the resulting reduction to its net asset value; and

determining the total sum of the reductions to its net asset value for each homogenous risk group determined in paragraph (a) in accordance with the formula in subrule (3).

where—

i refers to each homogeneous risk group; and

NAV_stressed refers to the reduction in net asset value resulting from the application of the longevity stress factor in subrule (2) to the homogenous risk group.

adding an absolute increase of 1.5 per mille to its best estimate mortality rates for all its contracts of insurance with exposure to life insurance risk in the first 12 months from the valuation date; and

capping the stressed mortality rates resulting from the application of the additive amount mentioned in paragraph (a) at 100%.

assigning each disability benefit and morbidity benefit under its contracts of insurance with exposure to life insurance risk to categories 1, 2, 3, or 4 as mentioned in subrule (2), based on the category which most appropriately describes the benefit;

in the case of each homogenous risk group with disability benefits and morbidity benefits assigned to categories 1, 2 and 3 mentioned in subrule (2)—

in the case of each homogenous risk group with disability benefits and morbidity benefits assigned to category 4 mentioned in subrule (2)—

determining the total sum of the reductions in its net asset value for disability or morbidity benefits from paragraphs (b) and (c).

Category 1: Medical expenses—benefits under contracts of insurance that provide compensation for medical expenses, based on the treatment or expenses incurred by the policy holders, and not on the time spent in a given health status;

Category 2: Lump sum in case of a health event—benefits under contracts of insurance that provide for one or more lump sum compensation upon the occurrence of a specified, and usually severe, health event, such as the diagnosis of cancer or another type of dread disease, or the occurrence of an accident resulting in a certain level of disability;

Category 3: Short-term recurring payments—benefits under contracts of insurance that provide for recurring amounts of compensation for a period that depends on the time spent in a temporary health status, such as inability to work, hospitalization, or similar status; and

Category 4: Long-term recurring payments—benefits under contracts of insurance that provide for a fixed annuity in case of a long-term or permanently deteriorated health status.

if the applicable insurer has used disability and morbidity inception rates to model its claim costs, the insurer applies the morbidity stress factor by—

if the insurer has not used inception rates to model its claim costs, but modelled recovery rates, the insurer applies the morbidity stress factor by applying a multiplicative permanent decrease to its modelled recovery rates for each homogenous risk group, with such permanent decrease being the percentage in Table 7 corresponding to the relevant benefit category and contract term; and

if the insurer has not modelled inception rates or recovery rates, the insurer applies the morbidity stress factor by applying a multiplicative increase to the medical claim payment amounts for each homogenous risk group, with such increase being the percentage in Table 7 corresponding to the relevant benefit category and contract term.

Table 7

Morbidity Stress Factors

for each homogeneous risk group—

determining the sum of the reductions in its net asset value for each homogenous risk group mentioned in paragraph (a) using the formula in subrule (5);

applying a multiplicative 20% permanent decrease to the best estimate recovery rates for each same homogenous risk group mentioned in paragraph (a), and determining the resulting reduction in its net asset value for each homogenous risk group;

determining the sum of the reductions in its net asset value for each homogenous risk group mentioned in paragraph (c) using the formula in subrule (5); and

taking the greater of the reductions in its net asset value determined in paragraphs (b) and (d) as the reduction in its net asset value for purposes of subrule (1)(c).

where—

i refers to each homogeneous risk group; and

NAV_stressed refers to the reduction in the net asset value resulting from the application of the morbidity stress factors determined in accordance with subrule (1)(b) or (c), as the case may be.

applying a multiplicative increase of x% to its best estimate expense assumptions for all homogeneous risk groups for all years, with x% being the percentage set out in column 2 of Table 8 for the applicable geographical region in column 1 of Table 8, based on the location of expense risk, or the location where the business is written; and

adding y% to its best estimate expense inflation assumptions for all homogeneous risk groups for all years, with y% being the percentage set out in column 3 of Table 8 for the applicable geographical region in column 1 of Table 8, based on the location of expense risk or the location where the business is written.

Table 8

Expense Stress Factors

the level and trend lapse component determined in accordance with subrules (2) and (3) for the insurer as a whole; and

the mass lapse component determined in accordance with subrule (4) for the insurer as a whole.

for each homogenous risk group—

taking the greater of the reductions in its net asset value determined in paragraph (a)(i) and (ii), as the reduction in its net asset value for the homogeneous risk group for the level and trend lapse component and determining the sum of the reductions in its net asset value for all homogenous risk groups in accordance with the following formula (to avoid doubt, with the amount in respect of any homogenous risk group being zero if there is no resulting reduction in the net asset value)—

an applicable insurer must apply the stresses to all legal or contractual options which can significantly change the value of the future cash flows, including but not limited to—

the stresses which the insurer must apply are, subject to paragraph (c)—

the upward stress mentioned in paragraph (b)(i) must only be applied in a manner that increases policy lapses or reduces insurance cover, while the downward stress mentioned in paragraph (b)(ii) must only be applied in a manner that decreases policy lapses or increases insurance cover, as the case may be.

applying the following one-off instantaneous stresses to each homogeneous risk group, and determining the resulting reduction in its net asset value from the application of such stresses—

in accordance with the following formula, determining the sum of the reductions in its net asset value for all homogenous risk groups determined in paragraph (a) (to avoid doubt, with the amount in respect of any homogenous risk group being zero if there is no resulting reduction in the net asset value)—

determining, in accordance with subrules (3) to (5), the individual risk capital amount for each of its risk exposures arising from the balance sheet items mentioned in subrule (2);

if rule 85(2) applies, determining the individual risk capital amount in accordance with rule 85; and

determining the sum of the individual risk capital amounts derived from paragraphs (a) and (b).

deposits with a bank or deposit taking institution;

loans for non-investment purpose and receivables;

outstanding premiums;

reinsurance recoverables;

reinsurance receivables;

derivative contracts that are not traded at an exchange platform; and

assets recognized on the balance sheet other than—

determining the amount of the relevant risk exposure in accordance with subrule (4) or (5); and

subject to subrules (6), (7), (8) and (9), multiplying the amount of the relevant risk exposure determined in accordance with paragraph (a) by the risk factor corresponding to the credit rating band in Table 19 of the counterparty to the risk exposure.

Table 19

Counterparty Default and Other Risk Factors

the value of the relevant asset determined in accordance with Part 4;

in the case of any risk exposure covered by an eligible bilateral netting agreement or eligible collateral, subject to paragraph (c), the value of the relevant asset determined in accordance with Part 4, after the adjustment made in accordance with rule 82 (in the case of an eligible bilateral netting agreement), or rule 83 (in the case of eligible collateral), as the case may be; or

zero, if the valuation of the risk exposure in accordance with paragraph (b) would result in a negative amount.

the total replacement cost or market value of the contract if the contract is of positive fair value; and

the potential future credit exposure, calculated by multiplying the notional amount of the contract by the credit exposure factor corresponding to the residual maturity and type of contract as set out in Table 20.

Table 20

Credit Exposure Factors for Derivative Contract

a loan for non-investment purpose and receivables as mentioned in subrule (2)(b), that are past due for more than one year; and

outstanding premiums as mentioned in subrule (2)(c), that are past due for more than one year.

applying a haircut to the liabilities of the insurer to the counterparty to the eligible bilateral netting agreement, using the formulae in subrule (2), if there is a mismatch in denominated currency between the insurer’s risk exposures to the counterparty and the insurer’s liabilities to the counterparty which are subject to the eligible bilateral netting agreement; and

reducing the value of its risk exposures to the counterparty to the eligible bilateral netting agreement, by the amount of its liabilities to the counterparty under the eligible bilateral netting agreement after the haircut mentioned in paragraph (a).

where H_FX is the haircut for currency mismatch if the risk exposures of the applicable insurer to the counterparty are denominated in a currency different from that in which the liabilities of the insurer to the counterparty are denominated, as mentioned in subrule (1)(a), with such haircut being calculated using the following formula—

where for the purpose of the adjustment in subrule (1)(a)—

RF_{FX of risk exposure} is the risk factor for the currency of risk exposure of the insurer to the counterparty set out in Table 6 in rule 51;

i refers to each relevant currency of liabilities of the insurer to the counterparty;

RF_{FX of liabilityi} is the risk factor for each relevant currency of liabilities of the insurer to the counterparty set out in Table 6 in rule 51; and

ω_i is the weighting of the liabilities of the insurer to the counterparty denominated in each relevant currency over the total liabilities of the insurer to the counterparty.

the insurer must perform such adjustment in respect of the risk exposures by each eligible bilateral netting agreement; and

the total amount of the adjustment must not exceed the valuation of the liabilities recognized in the insurer’s balance sheet in relation to the eligible bilateral netting agreement.

applying a haircut to the value of the eligible collateral, using the formulae in subrule (2), to take account of the counterparty default risk and equity risk for the eligible collateral and any currency mismatch between the currency in which the eligible collateral is denominated and the currency in which the risk exposure it covers is denominated; and

deducting from the value of the risk exposure, the value of the eligible collateral after the haircut mentioned in paragraph (a).

value of eligible collateral × (1 – H_CPD) × (1 – H_E) × (1 – H_FX)

where—

H_CPD is the haircut for counterparty default risk for eligible collateral which is collateral mentioned in subrule (4)(e)(i), (ii), (iii) and (iv) determined in accordance with the risk factor corresponding to the credit rating band of the counterparty in Table 19 in rule 81;

H_E is the haircut for equity risk for eligible collateral which is collateral mentioned in subrule (4)(e)(v) determined in accordance with the stress factor in Table 5 in rule 49; and

H_FX is the haircut for currency mismatch if the eligible collateral is denominated in a currency different from that in which the risk exposure covered by the eligible collateral is denominated, which is calculated using the following formula—

where—

RF_{FX of risk exposure} is the risk factor for the currency of the risk exposure set out in Table 6 in rule 51; and

RF_{FX of eligible collateral} is the risk factor for the currency of the eligible collateral set out in Table 6 in rule 51.

must not double count the risk mitigation impact of any eligible collateral in determining the risk capital amounts mentioned in rule 37(1); and

without limiting paragraph (a), must ensure that no more than the total amount of the eligible collateral, before any haircut in accordance with subrule (1)(b), is used as risk mitigation impact in determining all risk capital amounts under rule 37(1)(a).

for the portion of the risk exposure covered by the eligible guarantee or eligible credit derivative contract, after applying a haircut in accordance with subrule (2) or (3), as the case may be, apply the risk factor corresponding to the credit rating band of the guarantor or protection seller; and

for the uncovered portion of the risk exposure (if any), apply the risk factor corresponding to the credit rating band of the counterparty to the relevant exposure.

where H_FX is the haircut for the currency mismatch if the covered portion of the risk exposure is denominated in a currency different from that in which the eligible guarantee is denominated, which is calculated using the following formula—

where—

RF_{FX of covered portion} is the risk factor for the currency of the covered portion of the risk exposure set out in Table 6 in rule 51; and

RF_{FX of eligible guarantee} is the risk factor for the currency of the eligible guarantee set out in Table 6 in rule 51.

where H_FX is the haircut for the currency mismatch if the covered portion of the risk exposure is denominated in a currency different from that in which the eligible credit derivative contract is denominated, which is calculated using the following formula—

where—

RF_{FX of covered portion} is the risk factor for the currency of the covered portion of the risk exposure set out in Table 6 in rule 51; and

RF_{FX of eligible credit derivative contract} is the risk factor for the currency of the eligible credit derivative contract set out in Table 6 in rule 51.

A is the sum of—

B is 30% of the insurer’s prescribed capital amount before operational risk.

the amount that is the higher of C and D, where—

4% of the portion of the premium growth for the applicable insurer’s specified long term business as a whole that exceeds 20% of such premium growth, floored at zero.

the amount that is the higher of E and F, where—

2.75% of the portion of the premium growth for the applicable insurer’s general business as a whole that exceeds 20% of such premium growth, floored at zero.