Health Income Protection Disability-Morbidity Risk

Overview

This calculator implements the gross capital requirement for the Health Income Protection Disability-Morbidity Risk sub-module within the Solvency II standard formula.^[1] The Income Protection sub-module is defined as the economic capital necessary to cover the loss in basic own funds resulting from a 1-in-200 year stress event affecting sickness and disability inception or recovery rates.^[2]

Input Terms

• Basic Own Funds (Pre-Stress): The undertaking's basic own funds before the application of the income-protection shocks.
• Scenario Shock (Assets/Liabilities): The instantaneous change in the value of assets and technical provisions resulting from the prescribed inception and recovery rate shocks.^[1]
• LAC TP / LAC DT (Scenario-Specific): The reduction in the gross scenario loss provided by the loss-absorbing capacity of technical provisions and deferred taxes.

Technical Rationale

The Health Income Protection sub-module is calibrated to a 99.5% confidence level over a one-year horizon. It captures the sensitivity of the undertaking’s basic own funds to an adverse increase in disability inception rates and a decrease in recovery rates for policies where sickness-related events are a risk driver (e.g., long-term income protection).^[1]

The calculation follows a stressed-own-funds approach, measuring the capital requirement as the reduction in net asset value (NAV) after applying several scenarios, including high-intensity first-year inception shocks (35%) and persistent long-term increases (25%), alongside a 20% decrease in recovery rates. This method ensures that the requirement reflects the real economic loss after claims, reserves, and potential tax offsets have all reacted to the change in disability assumptions. The final result represents the gross health underwriting component before diversification.

Important Notes

• Stress-ledger evidence gate: Stressed basic own funds must be backed by a full balance-sheet revaluation flag and model-run evidence flag. The capital result remains the visible loss in basic own funds, while the governance-breach output flags unsupported stress inputs for review. Use `underwriting-stressed-bof-loss-bridge` when the valuation delta needs to be inspected as its own atomistic calculator.
• Recovery Bound: For many portfolios, the recovery-rate shock (decrease in people returning to health) is the binding driver, leading to higher long-term payouts even if the initial number of sickness claims remains stable.
• Gross vs. Net SCR: This calculator determines the standalone Health Income Protection Disability-Morbidity Risk SCR on the visible stressed basis. Even where the page already reflects direct own-funds or tax effects, Solvency II risk is only finalized as a net impact on Basic Own Funds after diversification in the higher Health Risk aggregation chain, then within BSCR, and after the top-level LAC TP and LAC DT adjustments.
• Regulatory deviation: Material deviation from standard-formula assumptions at this layer may support a capital add-on or a move toward an internal model where justified.^[3]
• Reporting: The displayed result is intended to support the corresponding standard-formula component feeding the S.25.01.01 standard-formula reporting view.^[4]