Life Expense Risk

Overview

This calculator implements the gross capital requirement for the Life Expense Risk sub-module within the Solvency II standard formula.^[1] The Life Expense Risk requirement is defined as the economic capital necessary to cover the loss in basic own funds resulting from a 1-in-200 year stress event affecting administrative expenses and expense inflation.^[2]

Input Terms

• Basic Own Funds (Pre-Stress): The undertaking's basic own funds before the application of the expense shock.
• Scenario Shock (Assets/Liabilities): The instantaneous change in the value of assets and technical provisions resulting from the prescribed 10% expense increase and 1% inflation increase.^[1]
• LAC TP / LACDT (Scenario-Specific): The reduction in the gross scenario loss provided by the loss-absorbing capacity of technical provisions and deferred taxes.

Technical Rationale

The Life Expense Risk sub-module is calibrated to a 99.5% confidence level over a one-year horizon. It captures the sensitivity of the undertaking’s basic own funds to an adverse increase in the level of future administrative expenses and an unexpected rise in expense inflation.^[1]

The calculation follows a stressed-own-funds approach, measuring the capital requirement as the reduction in net asset value (NAV) after applying a 10% permanent increase in the amount of expenses and a 100-basis-point (1%) increase in the annual expense-inflation rate. This method ensures that the requirement reflects the real economic loss after claims, reserves, and potential tax offsets have all reacted to the change in expense assumptions. The final result represents the gross expense underwriting component before diversification in Life Risk.

Important Notes

• Expense Inelasticity: For many life portfolios, expense risk is a significant driver because administrative costs are often relatively fixed, while the profit-earning policy base may fluctuate. The 10% shock assumes a permanent increase in management and maintenance costs.
• Inflation Sensitivity: The 1% inflation add-on can be the binding driver for long-dated life obligations, where even a small increase in the per-policy expense growth rate compound significantly over many decades.^[1]
• Gross vs. Net SCR: This calculator determines the standalone Life Expense Risk SCR on the visible stressed basis. Even where the page already reflects direct own-funds or tax effects, Solvency II risk is only finalized as a net impact on Basic Own Funds after diversification in Life Risk, then within BSCR, and after the top-level LAC TP and LACDT adjustments.
• Regulatory deviation: Material deviation from standard-formula assumptions at this layer may support a capital add-on or a move toward an internal model where justified.^[3]
• Reporting: The displayed result is intended to support the corresponding standard-formula component feeding the S.25.01 standard-formula reporting view.^[4]