LAM15320 - Excess expenses, losses and deficits:  Loss reform: shock losses: solvency loss and shock loss threshold company that has no ring-fenced funds CTA2010/S269ZN and CTA2010/S269ZO

Calculating solvency loss CTA10/S269O

There will be a ‘solvency loss’ if the company’s basic own funds (BOF) (see LAM15310) at the end of the period is less than its BOF at the beginning of the period.

Where the insurer has no ‘relevant ring-fenced funds’ the solvency loss is:

• BOF at the end of the 12-month period (CTA10/269ZO) less
• BOF at the beginning of the 12-month period.

Closing BOF must be calculated on the assumption that the period is a solvency shock period and therefore the loss restriction rules will not apply.

The method of calculation of the solvency loss must fairly represent the method by which the company calculates its SCR.

Calculating the shock loss threshold CTA10/S269ZN

Step 1

Calculate the company’s solvency capital requirement (SCR) at the beginning of the period In that calculation any adjustment for the loss-absorbing capacity of deferred taxes (as defined within the Solvency II directive) is calculated and applied on the assumption that the period is a solvency shock period in relation to the company and therefore loss restriction rules will not apply. The resulting amount is the company’s ‘adjusted SCR’.

Step 2

The adjusted SCR is multiplied by 90%.

The result is the company’s shock loss threshold for the period.

Further rules apply where the solvency shock period does not coincide with an accounting period (see LAM15340).