Prudential Regulation Authority Rulebook

7.1

Assumptions shall only be considered realistic for the purposes of 3.1(2)(a) in the Technical Provisions Part where they meet all of the following conditions:

1. (1) the firm is able to explain and justify each of the assumptions used, taking into account the significance of the assumption, the uncertainty involved in the assumption as well as relevant alternative assumptions;
2. (2) the circumstances under which the assumptions would be considered false can be clearly identified;
3. (3) unless otherwise provided in this Part, the assumptions are based on the characteristics of the portfolio of insurance and reinsurance obligations, where possible regardless of the firm holding the portfolio;
4. (4) the firm uses the assumptions consistently over time and within homogeneous risk groups and lines of business, without arbitrary changes; and
5. (5) the assumptions adequately reflect any uncertainty underlying the cash-flows.

For the purpose of (3), a firm must only use information specific to that firm, including information on claims management and expenses, where that information better reflects the characteristics of the portfolio of insurance or reinsurance obligations than information that is not limited to the specific firm or where the calculation of technical provisions in a prudent, reliable and objective manner without using that information is not possible.

7.2

Assumptions must only be used for the purpose of 4.2 in the Technical Provisions Part where they comply with 7.1.

7.3

A firm must set assumptions on future financial market parameters or scenarios that are appropriate and consistent with 2 to 12 of the Valuation Part. Where a firm uses a model to produce projections of future financial market parameters, the firm must ensure it complies with all of the following requirements: 

1. (1) it generates asset prices that are consistent with asset prices observed in financial markets;
2. (2) it assumes no arbitrage opportunity; and
3. (3) the calibration of the parameters and scenarios is consistent with the relevant risk-free interest rate term structure used to calculate the best estimate as referred to in 3 of the Technical Provisions Part.