Risk Capital Margin

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Background
The risk capital margin has been intorduced to make allowances for losses as a result of worldwide events eg. Stock Market falls, interest rate goes up, property prices fall etc.

There are a number of areas which have to be looked at, and tests have to be applied as follows

Test Name	PRU Location	Description
Equities	PRU 7.4.65R	plus or minus 20 % movement with only 90 day dampner
Properties	PRU 7.4.65R	plus or minus 12.5% movement.
Interest Yield test	PRU 7.4.65R(1)	plus or minus 17.5% movement in the 15 year gilt yield
Persistency test	PRU 7.4.97R	plus or minus 35% of discontinuance rates assessed across all with-profits business. This test is not applied to non profit business.
Credit Spreads	PRU 7.4.75R(1)	Certain national and supranational bonds have been exempted from the credit stress test. For other bonds there is a general change from CP195 where higher quality bonds will produce lower capital requirements. Therefore bonds rated A and higher will require less reserves and bonds rated BBB or lower will require more reserves. Similar tests will be applied to reassurance assets and it will also be necessary to apply stresses to other credit exposures, in particular those arising under credit derivatives.

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