Prudential Regulation Authority Rulebook

27.1

A firm must use methods to calculate technical provisions which are proportionate to the nature, scale and complexity of the risks underlying their insurance and reinsurance obligations.

27.2

In determining whether a method of calculating technical provisions is proportionate, a firm must carry out an assessment which includes:

1. (1) an assessment of the nature, scale and complexity of the risks underlying its insurance and reinsurance obligations;
2. (2) an evaluation in qualitative or quantitative terms of the error introduced in the results of the method due to any deviation between the following:
   1. (a) the assumptions underlying the method in relation to the risks;
   2. (b) the results of the assessment referred to in (1).

27.3

The assessment referred to in 27.2(2)(a) must include all risks which affect the amount, timing or value of the cash in- and out-flows required to settle the insurance and reinsurance obligations over their lifetime. For the purpose of the calculation of the risk margin, the assessment must include all risks referred to in 27.2(2)(a) over the lifetime of the underlying insurance and reinsurance obligations. The assessment shall be restricted to the risks that are relevant to that part of the calculation of technical provisions to which the method is applied.

27.4

A method shall be considered disproportionate to the nature, scale and complexity of the risks if the error referred to in 27.2(2)(b) leads to a misstatement of technical provisions or their components that could influence the decision-making or judgment of the intended user of the information relating to the value of technical provisions, unless one of the following conditions are met:

1. (1) no other method with a smaller error is available and the method is not likely to result in an underestimation of the amount of technical provisions;
2. (2) the method leads to an amount of technical provisions of the firm that is higher than the amount that would result from using a proportionate method and the method does not lead to an underestimation of the risk inherent in the insurance and reinsurance obligations that it is applied to.