382. In 2015 Field Testing, lapse or persistency changes due to changes in market conditions were addressed under Market risk. Although the effect from market changes may be experienced through lapses, increases in coverage or unexpected persistence, the risk driver for many such changes is due to market changes. For instance, in an equity stress situation, the effect on lapse rates should be considered in respect of this particular risk. The IAIS elaborated in the published frequently asked questions (FAQ) for the 2015 Quantitative Field Testing that the level and trend component need not be determined for such products with dynamic lapse function such as variable annuities and universal life products.⁴²

383. Experience from 2015 Field Testing indicates that there are merits to requiring an explicit level and trend shock to products with dynamic lapse functions. For 2016 Field Testing, the level and trend component as well as the mass lapse component applies to products with
a dynamic lapse function. The level and trend component shock is to be applied to the base rate of the dynamic lapse function.

⁴² A dynamic lapse function typically varies the lapse rate used in the calculation of liabilities depending on the difference between the return the insurer is providing on its policies and the returns provided by competitors.

Risk-based Global Insurance Capital Standard Version 1.0
Public Consultation - 19 July 2016 – 19 October 2016 Page 114 of 175