The standard model prescribes no method for determining required own funds for underwriting risk (S6). Pension funds must determine the level of underwriting risk in the standard model themselves. However, De Nederlandsche Bank (DNB) provides the pension funds with a suggested method for making this estimate.
For mortality risk, a distinction is made between process risk, mortality trend uncertainty (MTU) and negative stochastic variance (NSV). Process risk is based on a 1-year horizon and a confidence level of 97.5%. MTU and NSV cover the full maturity of the liabilities and are determined as the difference (greater than or equal to nil) between the 75th percentile of the distribution of the value of liabilities and the expected value thereof.
The required own funds for process risk are meant to cover potential abnormal negative variations in underwriting results, given the technical provision on current value. This only concerns the possible negative effect of membership base mutations with a time horizon of 1 year and a confidence level of 97.5%. Process risk is expressed as a percentage of technical provisions and depends on the number of members and the fund's level of life mortality risk coverage.
Mortality trend uncertainty (MTU)
The required own funds for MTU are necessary to cover the sensitivity of the pension fund's own funds to the uncertainty related to the longevity trend. The lower the average age of the membership base, the higher the MTU. MTU is determined for the full maturity of the liabilities.
Negative stochastic variance (NSV)
The required own funds for NSV are necessary to cover the fund's sensitivity to the risk that the average age of members upon death deviates from the policies for the valuation of the technical provisions. NSV is determined for the full maturity of the liabilities.
The square root formula assumes no correlation (0) between the underwriting risk (S6) and the other risks.