Prudential Regulation Authority Rulebook

1

A firm must calculate the standard deviation for non-life premium and reserve risk in accordance with the following formula:

$${\sigma }_{nl}=\frac{1}{V_{nl}}\cdot \sqrt{{\sum }_{s,t}Corr{S}_{(s,t)}\cdot {\sigma }_s\cdot V_s\cdot {\sigma }_t\cdot V_t}$$

where:

1. (1) V_nl denotes the volume measure for non-life premium and reserve risk;
2. (2) the sum covers all possible combinations (s, t) of the segments set out in 3A3;
3. (3) CorrS_{(s, t)} denotes the correlation coefficient for non-life premium and reserve risk for segment s and segment t set out in Annex IV;
4. (4) σ_s and σ_t denote standard deviations for non-life premium and reserve risk of segments s and t respectively; and
5. (5) V_s and V_t denote volume measures for premium and reserve risk of segments s and t, referred to in 3A2, respectively.

2.

For all segments set out in 3A3, a firm must calculate the standard deviation for non-life premium and reserve risk of a particular segment s in accordance with the following formula:

$${\sigma }_s=\frac{\sqrt{{{\sigma }^2}_{(prem,s)}\cdot {V^2}_{(prem,s)}+{\sigma }_{(prem,s)}\cdot V_{(prem,s)}\cdot {\sigma }_{(res,s)}\cdot V_{(res,s)}+{{\sigma }^2}_{(res,s)}\cdot {V^2}_{(res,s)}}}{V_{(prem,s)}+V_{(res,s)}}$$

where:

1. (1) σ_{(prem, s)} denotes the standard deviation for non-life premium risk of segment s determined in accordance with 3A4.3;
2. (2) σ_{(res, s)} denotes the standard deviation for non-life reserve risk of segment s as set out in 3A3;
3. (3) V_{(prem, s)} denotes the volume measure for premium risk of segment s referred to in 3A2; and
4. (4) V_{(res, s)} denotes the volume measure for reserve risk of segment s referred to in 3A2.

3.

For all segments set out in 3A3, a firm must calculate the standard deviation for non-life premium risk of a particular segment as equal to the product of the standard deviation for non-life gross premium risk of the segment set out in 3A3 and the adjustment factor for non-proportional reinsurance.

4.

For segments 1, 4 and 5 set out in 3A3 the adjustment factor for non-proportional reinsurance must be equal to 80%. For all other segments set out in 3A3 the adjustment factor for non-proportional reinsurance must be equal to 100%.