Prudential Regulation Authority Rulebook

3.1

The PRA has developed a five-step framework that sets out how the MA could be considered in the context of the SCR calculation. The steps in the framework are:

1. Step 1: re-value the MA portfolio assets under a one-year stress;
2. Step 2: calculate updated FS values, reflecting the stressed modelled economic environment;
3. Step 3: verify whether the MA eligibility conditions are still met (allowing also for any changes in asset and liability cash flows/values);
4. Step 4: if step 3 has failed, then the cost of re-establishing an MA compliant position should be estimated; and
5. Step 5: re-calculate the MA. Note that based on the analysis in the previous steps this may need to be based on a re-balanced MA asset portfolio.

3.2

The PRA considers that this framework will help a firm to exhibit and validate that its approach covers all material and quantifiable risks to which it is exposed. Therefore, it would be good practice for a firm to reconcile its approach with the steps in the framework in its internal model documentation.

3.3

The chapters that follow contain the PRA’s more detailed expectations as to how the MA should be reflected within the SCR calculation. These have been linked, where appropriate, to the relevant steps in the PRA’s framework for ease of reference. However, the PRA considers that a firm should be able to meet these expectations regardless of the modelling approach it has used.