Prudential Regulation Authority Rulebook

1.

A firm must calculate the capital requirement for flood risk in accordance with the following formula:

$${SCR}_{flood}=\sqrt{(\sum {}_{(r,s)}{CorrFL}_{(r,s)}\cdot {SCR}_{(flood,r)}\cdot {SCR}_{(flood,s)})+{{SCR}^2}_{(flood,other)}}$$

where:

1. (1) the sum includes all possible combinations (r, s) of the regions set out in Annex VII;
2. (2) CorrFL_{(r, s)} denotes the correlation coefficient for flood risk for region r and region s as set out in Annex VII;
3. (3) SCR_{(flood, r)} and SCR_{(flood, s)} denote the capital requirements for flood risk in region r and s respectively; and
4. (4) SCR_{(flood, other)} denotes the capital requirement for flood risk in regions other than those set out in 3A10.

2.

For all regions set out in Annex VII, the capital requirement for flood risk in a particular region r must be the higher of the following capital requirements:

1. (1) the capital requirement for flood risk in region r according to scenario A as set out in 3A12.3; and
2. (2) the capital requirement for flood risk in region r according to scenario B as set out in 3A12.4.

3.

For all regions set out in Annex VII, a firm must calculate the capital requirement for flood risk in a particular region r according to scenario A as equal to the loss in its basic own funds that would result from the following sequence of events:

1. (1) an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 65% of the specified flood loss in region r; and
2. (2) a loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 45% of the specified flood loss in region r.

4.

For all regions set out in Annex VII, a firm must calculate the capital requirement for flood risk in a particular region r according to scenario B as equal to the loss in its basic own funds that would result from the following sequence of events:

1. (1) an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 100% of the specified flood loss in region r; and
2. (2) a loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 10% of the specified flood loss in region r.

5.

For all regions set out in Annex VII, a firm must calculate the specified flood loss in a particular region r in accordance with the following formula:

$$L_{(flood,r)}=\sqrt{\sum {}_{(i,j)}{Corr}_{(flood,r,i,j)}\cdot {WSI}_{(flood,r,i)}\cdot {WSI}_{(flood,r,j)}}$$

where:

1. (1) the sum includes all possible combinations of risk zones (i, j) of region r set out in Annex IX;
2. (2) Corr_{(flood, r, i, j)} denotes the correlation coefficient for flood risk in flood zones i and j of region r set out in Annex XXIV; and
3. (3) WSI_{(flood, r, i)} and WSI_{(flood, r, j)} denote the weighted sums insured for flood risk in risk zones i and j of region r set out in Annex IX.

6.

For all regions set out in Annex VII and all risk zones of those regions set out in Annex IX, a firm must calculate the weighted sum insured for flood risk in a particular flood zone i of a particular region r in accordance with the following formula:

$${WSI}_{(flood,r,i)}=Q_{(flood,r)}\cdot W_{(flood,r,i)}\cdot {SI}_{(flood,r,i)}$$

where:

1. (1) W_{(flood, r, i)} denotes the risk weight for flood risk in risk zone i of region r set out in Annex X;
2. (2) SI_{(flood, r, i)} denotes the sum insured for flood risk in flood zone i of region r; and
3. (3) Q _{(flood, r)} denotes the flood risk factor for region r as set out in Annex VII.

7.

Where the amount determined for a particular risk zone in accordance with 3A12.6 exceeds an amount (referred to for these purposes as ‘the lower amount’) equal to the sum of the potential losses, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that the firm could suffer for flood risk in that risk zone, taking into account the terms and conditions of its specific policies, including any contractual payment limits, the firm may, as an alternative calculation, determine the weighted sum insured for flood risk in that risk zone as the lower amount.

8.

For all regions set out in Annex VII and all risk zones of those regions set out in Annex IX, a firm must calculate the sum insured for flood risk for a particular risk zone i of a particular region r in accordance with the following formula:

$${SI}_{(flood,r,i)}={SI}_{(property,r,i)}+{SI}_{(onshore-property,r,i)}+1.5\cdot {SI}_{(motor,r,i)}$$

where:

1. (1) SI_{(property, r, i)} denotes the sum insured by the firm for lines of business 7 and 19 in relation to contracts of insurance that cover flood risk, where the risk is situated in risk zone i of region r;
2. (2) SI_{(onshore-property, r, i)} denotes the sum insured by the firm for lines of business 6 and 18 in relation to contracts of insurance that cover onshore property damage by flood and where the risk is situated in risk zone i of region r; and
3. (3) SI_{(motor, r, i)} denotes the sum insured by the firm for lines of business 5 and 17 in relation to contracts of insurance that cover flood risk, where the risk is situated in risk zone i of region r.

9.

A firm must calculate the capital requirement for flood risk in regions other than those set out in 3A10, as equal to the loss in its basic own funds that would result from an instantaneous loss in relation to each contract of insurance that covers any of the following insurance or reinsurance obligations:

1. (1) obligations of lines of business 7 or 19 that cover flood risk, where the risk is not situated in one of the regions set out in 3A10;
2. (2) obligations of lines of business 6 or 18 in relation to onshore property damage by flood, where the risk is not situated in one of the regions set out in 3A10; and
3. (3) obligations of lines of business 5 or 17 that cover flood risk, where the risk is not situated in one of the regions set out in 3A10.

10.

A firm must calculate the amount of the instantaneous loss, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, referred to in 3A12.9, in accordance with the following formula:

$$L_{(flood,other)}=1.1\cdot (0.5\cdot {DIV}_{flood}+0.5)\cdot P_{flood}$$

where:

1. (1) DIV_flood is calculated in accordance with 3A5, but based on the premiums in respect of the obligations referred to in 3A12.9(1), (2) and (3) and restricted to the regions 5 to 18 set out in 3A5.8; and
2. (2) P_flood is an estimate of the premiums to be earned by the firm for each contract of insurance that covers the obligations referred to in 3A12.9(1), (2) and (3) during the following 12 months provided that, for this purpose, premiums must be gross, without deduction of premiums for reinsurance contracts.