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Life Lapse Risk

Life

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Lapse Risk Capital

€8 000 000

Basic Own Funds After Lapse-Up Stress

€94 000 000

Basic Own Funds After Lapse-Down Stress

€95 000 000

Basic Own Funds After Mass-Lapse Stress

€92 000 000

Lapse-Up Loss

€6 000 000

Lapse-Down Loss

€5 000 000

Mass-Lapse Loss

€8 000 000

Lapse-Up Increase

50.0%

Lapse-Down Decrease

50.0%

Mass-Lapse Discontinuance Rate

40.0%

Life Lapse Risk

Shock charge
Retained value
ModuleShockPre-shockPost-shockCharge
Basic Own Funds-50%100 000 000 €94 000 000 €6 000 000 €
Basic Own Funds-50%100 000 000 €95 000 000 €5 000 000 €
Basic Own Funds-40%100 000 000 €92 000 000 €8 000 000 €
1Step 1

Basic Own Funds After Lapse-Up Stress

Basic Own Funds After Lapse-Up Stress=max⁡(0,Basic Own Funds Before Lapse Stress+Lapse-Up Stress Asset Change+Lapse-Up Stress Tax Effect+Lapse-Up Stress Other Own-Funds Change+(−Lapse-Up Stress TP Increase)+(−Lapse-Up Stress Other Liabilities Increase))\textit{Basic Own Funds After Lapse-Up Stress} = \max(0, \textit{Basic Own Funds Before Lapse Stress} + \textit{Lapse-Up Stress Asset Change} + \textit{Lapse-Up Stress Tax Effect} + \textit{Lapse-Up Stress Other Own-Funds Change} + \left(-\textit{Lapse-Up Stress TP Increase}\right) + \left(-\textit{Lapse-Up Stress Other Liabilities Increase}\right))
2Step 2

Basic Own Funds After Lapse-Down Stress

Basic Own Funds After Lapse-Down Stress=max⁡(0,Basic Own Funds Before Lapse Stress+Lapse-Down Stress Asset Change+Lapse-Down Stress Tax Effect+Lapse-Down Stress Other Own-Funds Change+(−Lapse-Down Stress TP Increase)+(−Lapse-Down Stress Other Liabilities Increase))\textit{Basic Own Funds After Lapse-Down Stress} = \max(0, \textit{Basic Own Funds Before Lapse Stress} + \textit{Lapse-Down Stress Asset Change} + \textit{Lapse-Down Stress Tax Effect} + \textit{Lapse-Down Stress Other Own-Funds Change} + \left(-\textit{Lapse-Down Stress TP Increase}\right) + \left(-\textit{Lapse-Down Stress Other Liabilities Increase}\right))
3Step 3

Basic Own Funds After Mass-Lapse Stress

Basic Own Funds After Mass-Lapse Stress=max⁡(0,Basic Own Funds Before Lapse Stress+Mass-Lapse Stress Asset Change+Mass-Lapse Stress Tax Effect+Mass-Lapse Stress Other Own-Funds Change+(−Mass-Lapse Stress TP Increase)+(−Mass-Lapse Stress Other Liabilities Increase))\textit{Basic Own Funds After Mass-Lapse Stress} = \max(0, \textit{Basic Own Funds Before Lapse Stress} + \textit{Mass-Lapse Stress Asset Change} + \textit{Mass-Lapse Stress Tax Effect} + \textit{Mass-Lapse Stress Other Own-Funds Change} + \left(-\textit{Mass-Lapse Stress TP Increase}\right) + \left(-\textit{Mass-Lapse Stress Other Liabilities Increase}\right))
4Step 4

Lapse-Up Loss

Lapse-Up Loss=max⁡(0,Basic Own Funds Before Lapse Stress−Basic Own Funds After Lapse-Up Stress)\textit{Lapse-Up Loss} = \max(0, \textit{Basic Own Funds Before Lapse Stress} - \textit{Basic Own Funds After Lapse-Up Stress})
5Step 5

Lapse-Down Loss

Lapse-Down Loss=max⁡(0,Basic Own Funds Before Lapse Stress−Basic Own Funds After Lapse-Down Stress)\textit{Lapse-Down Loss} = \max(0, \textit{Basic Own Funds Before Lapse Stress} - \textit{Basic Own Funds After Lapse-Down Stress})
6Step 6

Mass-Lapse Loss

Mass-Lapse Loss=max⁡(0,Basic Own Funds Before Lapse Stress−Basic Own Funds After Mass-Lapse Stress)\textit{Mass-Lapse Loss} = \max(0, \textit{Basic Own Funds Before Lapse Stress} - \textit{Basic Own Funds After Mass-Lapse Stress})
7Step 7

Lapse-Up Increase

Lapse-Up Increase=50\textit{Lapse-Up Increase} = 50
8Step 8

Lapse-Down Decrease

Lapse-Down Decrease=50\textit{Lapse-Down Decrease} = 50
9Step 9

Mass-Lapse Discontinuance Rate

Mass-Lapse Discontinuance Rate=40\textit{Mass-Lapse Discontinuance Rate} = 40
10Step 10

Lapse Risk Capital

Lapse Risk Capital=max⁡(Lapse-Up Loss,Lapse-Down Loss,Mass-Lapse Loss)\textit{Lapse Risk Capital} = \max(\textit{Lapse-Up Loss}, \textit{Lapse-Down Loss}, \textit{Mass-Lapse Loss})

Understand the Life Lapse Risk

Overview

This calculator implements the gross capital requirement for the Life Lapse Risk sub-module within the Solvency II standard formula.[1] The Life Lapse 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 policyholder termination or lapse behavior.[2]

Input Terms

  • Lapse-Up Scenario: The capital requirement for a permanent 50% increase in life lapse rates.
  • Lapse-Down Scenario: The capital requirement for a permanent 50% decrease in life lapse rates.
  • Mass-Lapse Scenario: The capital requirement for a sudden, mass-termination event affecting 40% of the life portfolio (or 70% for certain products).[1]
  • NAV Base / NAV Shock: The net asset values used to determine the change in basic own funds under each adverse lapse scenario.

Technical Rationale

The Life Lapse 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 changes in the behavioral assumptions regarding policyholder terminations.[1]

The calculation determines the capital requirement by taking the maximum loss in NAV derived from three distinct scenarios: Lapse-up, Lapse-down, and Mass-lapse. The binding scenario depends on the profit-sharing and commission structure of the portfolio. The goal is to ensure that the undertaking holds sufficient capital to absorb the loss of future premium income or the cost of sudden termination payments under extreme market or operational conditions. The final result represents the gross lapse underwriting component before diversification in Life Risk.

Important Notes

  • Mass-Lapse Priority: For many life undertakings, particularly those with profitable unit-linked business, the mass-lapse scenario is the binding requirement, reflecting a sudden loss of the fee-earning asset base.
  • Adverse Direction Sensitivity: The binding direction (up or down) is policy-specific. If an undertaking gains from higher lapse rates (typical for some protection products), the lapse-up scenario will result in a negative capital charge which is floored at zero at the module layer.[1]
  • Gross vs. Net SCR: This calculator determines the standalone Life Lapse 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]

Sources

  1. Delegated Regulation (EU) 2015/35 - Art. 142 (Lapse risk sub-module) - EIOPA
  2. Directive 2009/138/EC - Art. 101 (99.5% VaR / 1-in-200 calibration) - EIOPA
  3. Directive 2009/138/EC - Art. 37 (Capital add-on) - EIOPA
  4. Commission Implementing Regulation (EU) 2015/2450 - QRT S.25.01 - EUR-Lex

Default values are illustrative sample inputs for navigation, training, and QA. Replace them with controlled data before using the result in capital analysis, governance, or reporting decisions.