Prudential Regulation Authority Rulebook

24.1

Adjustments to take account of expected losses due to default of a counterparty referred to in 11.1(3) of the Technical Provisions Part must be calculated separately from the rest of the amounts recoverable.

24.2

The adjustment to take account of expected losses due to default of a counterparty must be calculated as the expected present value of the change in cash-flows underlying the amounts recoverable from that counterparty, that would arise if the counterparty defaults, including as a result of insolvency or dispute, at a certain point in time. For that purpose, the change in cash-flows must not take into account the effect of any risk-mitigation techniques that mitigates the credit risk of the counterparty, other than risk-mitigation techniques based on collateral holdings. The risk-mitigation techniques that are not taken into account are to be separately recognised without increasing the amount recoverable from reinsurance contracts and special purpose vehicles.

24.3

The calculation referred to in 24.2 must take into account possible default events over the lifetime of the reinsurance contract or arrangement with the special purpose vehicle and whether and how the probability of default varies over time. It must be carried out separately by each counterparty and for each line of business. In general insurance business, it is also to be carried out separately for premium provisions and provisions for claims outstanding.

24.4

The average loss resulting from a default of a counterparty, referred to in 11.1(3) of the Technical Provisions Part, must not be assessed at lower than 50% of the amounts recoverable excluding the adjustment referred to in 24.1, unless there is a reliable basis for another assessment.

24.5

The probability of default of a special purpose vehicle is to be calculated on the basis of the credit risk inherent in the assets held by the special purpose vehicle.