The ICS capital requirement is based on the potential adverse change in the IAIG’s qualifying capital resources resulting from unexpected changes of specified risks. The target criterion is a 99.5% Value at Risk (VaR) measure over a one-year time horizon. The reference ICS coverage ratio is calculated as:
ICS Ratio = Qualifying capital resources / ICS capital requirement
The categories of risk included in the standard method are:
- Insurance risk
- Market risk
- Credit risk
- Operational risk
Risks are measured using two approaches: a stress approach and a factor-based approach. The Prescribed Capital Requirement (PCR) under ICS is similar in many ways to the Solvency Capital Requirement under Solvency II, in respect of its calculations and its categorisation of risks.
The individual risk charges are combined in a way that recognises risk diversification, using correlation matrices. For the life insurance segment, geographical segmentation is used to calculate the risk charge. This means that the stress factor applied will vary by region. Most of the prescribed stress factors are more stringent under the Solvency II regime. For example, the SII mortality shock is +15% compared to +12.5% for the EEA region under ICS. The ICS risk map does not include a Health module. This risk is implicitly allowed for in the premium and claim reserve risk segments of the non-life module.
The interest rate risk charge is notable in that it is based on a combination of five stresses, as opposed to two stresses under Solvency II (interest rate up and interest rate down). The five stresses for the ICS interest rate risk charge are as follows:
- A mean-reversion scenario;
- A level up scenario;
- A level down scenario;
- A twist up-to-down scenario; and
- A twist down-to-up scenario.
The equity risk charge is calculated as the change in net asset value following the occurrence of a stress scenario that impacts the level and volatility of the fair value of equities. Thanks to a larger number of asset classes and shock scenarios, ICS will estimate more precisely the capital requirements for companies. This precision will in theory imply a lower market PCR compared to its SCR equivalent.