Life Risk

Overview

This calculator implements the diversified capital requirement for the Life Underwriting Risk module within the Solvency II standard formula.^[1] The Life Risk requirement 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 underwriting risk factors including mortality, longevity, lapse, and catastrophes.^[2]

Input Terms

• Mortality Risk: The capital requirement for the permanent increase in mortality rates affecting life-insurance obligations.^[3]
• Longevity Risk: The capital requirement for the permanent decrease in mortality rates affecting annuity and longevity-sensitive obligations.^[4]
• Disability-Morbidity Risk: The capital requirement for the adverse change in disability, sickness, and morbidity rates.^[5]
• Life Expense Risk: The capital requirement for the unexpected increase in the level of expenses or the rate of expense inflation.^[6]
• Revision Risk: The capital requirement for the adverse change in revision rates affecting annuity benefits.^[7]
• Lapse Risk: The capital requirement for the adverse change in the rate of policy lapses, encompassing lapse-up, lapse-down, and mass-lapse scenarios.^[8]
• Life Catastrophe Risk: The capital requirement for extreme, mass-casualty events or pandemics leading to a spike in short-term mortality.^[9]

Technical Rationale

The Life Underwriting Risk module follows a 99.5% confidence level over a one-year horizon. Each sub-module measures the instantaneous change in net asset value following the application of the regulatory stress. The standard formula then aggregates these sub-module requirements using the correlation matrix defined in Article 136 of the Delegated Regulation.^[1]

This structure accounts for the diversification between different biometric and behavioral risks. Most notably, the correlation matrix recognizes the partial hedge between mortality and longevity exposures, where a single shock to mortality rates would impact the two portfolios in opposite directions. The final result represents the diversified life underwriting component feeding into the Basic SCR (BSCR).

Important Notes

• Lapse Binding Scenario: Lapse risk is calculated as the maximum loss across three distinct scenarios (up, down, and mass-lapse). The binding scenario is policy-specific and depends on whether the contract represents an asset or a liability to the undertaking in a lapse situation.^[8]
• Hedging Recognition: While the correlation matrix allows for diversification, each sub-module capital requirement is floored at zero to ensure that profit-making scenarios do not offset other losses within the module aggregation.^[1]
• 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.^[10]
• Reporting: The displayed result is intended to support the corresponding standard-formula component feeding the S.25.01.01 standard-formula reporting view.^[11]