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:

Step 1: re-value the MA portfolio assets under a one-year stress; 
Step 2: calculate updated fundamental spread values, reflecting the stressed modelled economic environment;  
Step 3: verify whether the MA qualifying conditions are still met (allowing also for any changes in liability cash flows/values);  
Step 4: if step 3 has failed, then the cost of re-establishing an MA compliant position should be estimated; and  
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 firms to exhibit and validate that their approach covers all material and quantifiable risks to which they are exposed. Therefore, it would be good practice for firms to reconcile their approach with the steps in the framework in their 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 firms should be able to meet these expectations regardless of the modelling approach they have used.