Prudential Regulation Authority Rulebook

1.

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

$${SCR}_{liability}=\sqrt{\sum _{(i,j)}{Corr}_{(liability,i,j)}\cdot {SCR}_{(liability,i)}\cdot {SCR}_{(liability,j)}}$$

where:

1. (1) the sum includes all possible combinations of liability risk groups (i, j) as set out in Annex XI;
2. (2) Corr_{(liability, i, j)} denotes the correlation coefficient for liability risk of liability risk groups i and j as set out in Annex XI; and
3. (3) SCR_{(liability, i)} denotes the capital requirement for liability risk of liability risk group i.

2.

For all liability risk groups set out in Annex XI, a firm must calculate the capital requirement for liability risk of a particular liability risk group i as equal to the loss in its basic own funds that would result from an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is calculated in accordance with the following formula:

$$L_{(liability,i)}=f_{(liability,i)}\cdot P_{(liability,i)}$$

where:

1. (1) f_{(liability, i)} denotes the risk factor for liability risk group i as set out in Annex XI; and
2. (2) P_{(liability, i)} denotes the premiums earned by the firm during the following 12 months in relation to insurance and reinsurance obligations in liability risk group i; for this purpose premiums must be gross, without deduction of premiums for reinsurance contracts.

3.

The calculation of the loss in basic own funds referred to in 3A22.2 must be based on the following assumptions:

1. (1) the loss of liability risk group i is caused by ni claims and the losses caused by these claims are representative for the business of the firm in liability risk group i and sum up to the loss of liability risk group i; and
2. (2) the number of claims ni is equal to the lowest integer that exceeds the following amount:

$$\frac{f_{(liability,i)}\cdot P_{(liability,i)}}{1.15\cdot {Lim}_{(i,1)}}$$

where:

1. (a) f_{(liability, i)} and P_{(liability, i)} are defined as in 3A22.2; and
2. (b) Lim_{(i, 1)} denotes the highest liability limit of indemnity provided by the firm in liability risk group i;

1. (3) where the firm provides unlimited cover in liability risk group i, the number of claims ni is equal to one.