I was surprised that the "unit pricing" risk and thus operational risk stress is not mentioned as one of the key non-economic risks in the exam solution (ASET). Is that for a reason? Wouldn't unit pricing be one of the major risks for UL pensions business?
Yes: unit pricing is a good example of a source of operational risk for such business - but be careful with the question wording. It isn't asking for a list of non-economic risks impacting unit-linked business, it is asking you to "Outline the main risk to the company from the unit-linked pension business and, hence, the main non-economic stress tests that would be required." The question is asking for the main risk singular. For unit-linked business, the most significant risk is the risk that the charges taken from the product are insufficient to meet expenses incurred. The main non-economic stress tests that would be used to determine the level of capital required to cover this risk (relating this back to the context of this part of the question, which is about modelling capital requirements) are then as listed in the solution (ie expenses, persistency etc). Note also that it may be difficult to perform an operational risk "stress test": which specific parameters within the model would you stress? More likely would be to perform some kind of scenario test, with the company analysing the potential costs and losses arising from an adverse operational event. As noted in the course, allowing for operational risk within capital requirements such as the SCR is normally done relatively simplistically.
The ASET solution is mentioning a downward stress for NB volumes for this product. I am having a hard time figuring out where would that fall under a SF approach to SCR stress calculations. I have not come across seeing NB volumes being stressed for SII Pillar 1. Would this NB volume stress fall under SII Pillar 2 or be part of the P 1 Standard Formula or Internal Model?
Remember that the main risk that is relevant to this question is the risk that charges taken from products are insufficient to meet expenses incurred. A lower volume of new business would mean that existing business has to cover a higher proportion of fixed (overhead) costs, ie per policy expenses will increase. Thus this scenario (lower new business volumes) is relevant to expense risk.
