GENPRU 1
Application
GENPRU 1.1
Application
- 31/12/2006
GENPRU 1.1.1
See Notes
There is no overall application statement for GENPRU. Each chapter or section has its own application statement.
GENPRU 1.1.2-A
See Notes
- 01/01/2014
GENPRU 1.1.2A
See Notes
A firm should refer to GEN 2.2.13A R (cross-references in the Handbook) and GEN 2.2.23 R to GEN 2.2.25 G (cutover: application of provisions made by both the FCA and the PRA) when applying the rules and guidance in GENPRU. In particular, many rules in GENPRU are made by both the PRA (in relation to PRA-authorised persons) and by the FCA (in relation to
BIPRU firms
that are FCA-authorised persons).
Scope
GENPRU 1.1.3
See Notes
GENPRU 1.2
Adequacy of financial resources
- 31/12/2006
Application
GENPRU 1.2.1A
See Notes
This section also applies to an insurer, unless it is:
(1) a non-directive friendly society; or
(2) a Swiss general insurer; or
(3) an EEA-deposit insurer; or
(4) an incoming EEA firm; or
(5) an incoming Treaty firm.
- 01/01/2014
GENPRU 1.2.6
See Notes
If an insurer carries on:
(1)
long-term insurance business; and
This section applies separately to each type of business.GENPRU 1.2.7
See Notes
GENPRU 1.2.10
See Notes
GENPRU 1.2.11
See Notes
Purpose
GENPRU 1.2.12
See Notes
Adequate financial resources and adequate systems and controls are necessary for the effective management of prudential risks. This section therefore has requirements relating to both of these topics.
GENPRU 1.2.13
See Notes
This section amplifies Principle 4, under which a firm must maintain adequate financial resources. It is concerned with the adequacy of the financial resources that a firm needs to hold in order to be able to meet its liabilities as they fall due. These resources include both capital and liquidity resources.
GENPRU 1.2.15
See Notes
This section also has rules requiring a firm to identify and assess risks to its being able to meet its liabilities as they fall due, how it intends to deal with those risks, and the amount and nature of financial resources that the firm considers necessary. GENPRU 1.2.60 R provides that a firm should document that assessment. The
appropriate regulator
will review that assessment as part of its own assessment of the adequacy of a firm's capital under its supervisory review and evaluation process (SREP). When forming a view of any individual capital guidance to be given to the firm, the
appropriate regulator
will also review the regulator's risk assessment and any other issues arising from day-to-day supervision.
GENPRU 1.2.16
See Notes
This section also has rules requiring a firm to carry out appropriate stress tests and scenario analyses for the risks it has previously identified and to establish the amount of financial resources needed in each of the circumstances and events considered in carrying out the stress tests and scenario analyses. In the case of a BIPRU firm, the
appropriate regulator
will consider as part of its SREP whether the BIPRU firm should hold a capital planning buffer and, in such a case, the amount and quality of that buffer. The capital planning buffer is an amount separate, though related to, the individual capital guidance, insofar as its purpose is to ensure that a BIPRU firm is able to continue to meet the overall financial adequacy rule throughout the relevant capital planning period in the face of adverse circumstances, after allowing for realistic management actions. Therefore, when forming its view on a BIPRU firm'scapital planning buffer, the
appropriate regulator
will take into account the assessment made in relation to the firm'sICG.
GENPRU 1.2.17
See Notes
The basic requirements in this section are drafted to apply to a firm on a solo basis. This section then goes on to describe when its requirements do and do not apply on a solo basis and on a consolidated basis (see GENPRU 1.2.45 R to GENPRU 1.2.47 R and GENPRU 1.2.57 R to GENPRU 1.2.58 R). It also sets out some details about how the solo requirements are adjusted when they are applied on a consolidated basis (see GENPRU 1.2.48 R to GENPRU 1.2.56 G and GENPRU 1.2.29 G).
Outline of other related provisions
GENPRU 1.2.18
See Notes
GENPRU 2.1 sets out the minimum capital resources requirements for a firm. GENPRU 2.2 sets out how capital resources are defined and measured for the purpose of meeting the requirements of GENPRU 2.1.
GENPRU 1.2.19
See Notes
(1)
BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment) set out detailed guidance on how a firm should carry out the assessment referred to in GENPRU 1.2.15 G. The more thorough, objective, and prudent a firm's assessment is, and can be demonstrated as being, the more reliance the
appropriate regulator
will be able to place on the results of that assessment.
(2)
BIPRU 2.2 and INSPRU 7.1also have information on how the
appropriate regulator
will review and respond to the assessments referred to in GENPRU 1.2.15 G and, in the case of BIPRU firms, in GENPRU 1.2.16 G. In particular they deal with the giving of
individual capital guidance
to a firm, which is guidance about the amount and quality of capital resources that the
appropriate regulator
thinks a firm should hold at all times under the overall financial adequacy rule as it applies on a solo level and a consolidated level.
BIPRU 2.2. also deals with the giving of a capital planning buffer to a BIPRU firm on a solo level and a consolidated level.
GENPRU 1.2.20
See Notes
GENPRU 1.2.21
See Notes
(1)
SYSC 11 sets out material on systems and controls that apply specifically to liquidity risk as that concept relates to an insurer.
(2) [deleted]
(2A) [deleted]
(3) [deleted]
(4)
SYSC 11.1.21 E is an evidential provision relating to the general stress and scenario testing rule concerning stress testing and scenario analyses. SYSC 11.1.24 E is an
evidential provision relating to the overall Pillar 2 rule about contingency funding plans. Both of these evidential provisions apply only to an insurer to which that section of SYSC applies.
(5) [deleted]
Requirement to have adequate financial resources
GENPRU 1.2.26
See Notes
A firm must at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.
GENPRU 1.2.27
See Notes
The liabilities referred to in the overall financial adequacy rule include a firm's contingent and prospective liabilities. They exclude liabilities that might arise from transactions that a firm has not entered into and which it could avoid, for example, by taking realistic management actions such as ceasing to transact new business after a suitable period of time has elapsed.They include liabilities or costs that arise both in scenarios where the firm is a going concern and those where the firm ceases to be a going concern. Theyalso include claims that could be made against a firm, which ought to be paid in accordance with fair treatment of customers, even if such claims could not be legally enforced.
GENPRU 1.2.28
See Notes
A firm should therefore make its assessment of adequate financial resources on realistic valuation bases for assets and liabilities taking into account the actual amounts and timing of cash flows under realistic adverse projections.
GENPRU 1.2.29
See Notes
Risks may be addressed through holding capital to absorb losses that unexpectedly materialise. The ability to pay liabilities as they fall due also requires liquidity. Therefore, in assessing the adequacy of a firm's financial resources, both capital and liquidity needs should be considered. A firm should also consider the quality of its financial resources such as the loss-absorbency of different types of capital and the time required to liquidate different types of asset. SYSC 11.1.24 E is an evidential provision relating to the overall financial adequacy rule concerning contingency funding plans.
Systems, strategies, processes and reviews
GENPRU 1.2.30
See Notes
A firm must have in place sound, effective and complete processes, strategies and systems:
(1) to assess and maintain on an ongoing basis the amounts, types and distribution of financial resources, capital resources and internal capital that it considers adequate to cover:
(a) the nature and level of the risks to which it is or might be exposed;
(b) the risk in the overall financial adequacy rule; and
(2) that enable it to identify and manage the major sources of risks referred to in (1), including the major sources of risk in each of the following categories where they are relevant to the firm given the nature and scale of its business:
(a) credit risk;
(b)
market risk;
(c)
liquidity risk;
(d)
operational risk;
(e) insurance risk;
(f) concentration risk;
(g) residual risk;
(h)
securitisation risk;
(i) business risk;
(j) interest rate risk (including, in the case of a BIPRU firm, interest rate risk in the non-trading book);
(k) pension obligation risk; and
(l) group risk.
GENPRU 1.2.31
See Notes
(2) Residual risk means the risk that credit risk mitigation techniques used by the firm prove less effective than expected.
(3)
Securitisation risk includes the risk that the capital resources held by a firm in respect of assets which it has securitised are inadequate having regard to the economic substance of the transaction, including the degree of risk transfer achieved.
(4) Business risk means any risk to a firm arising from changes in its business, including the risk that the firm may not be able to carry out its business plan and its desired strategy. It also includes risks arising from a firm'sremuneration policy (see also the Remuneration Code which applies to
BIPRU firms
and the detailed application of which is set out in
SYSC 19A.1).
(5) Pension obligation risk is the risk to a firm caused by its contractual or other liabilities to or with respect to a pension scheme (whether established for its employees or those of a related company or otherwise). It also means the risk that the firm will make payments or other contribution to or with respect to a pension scheme because of a moral obligation or because the firm considers that it needs to do so for some other reason.
GENPRU 1.2.32
See Notes
(2) Insurance risk refers to the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities.
(3) Interest rate risk in the non-trading book is explained in BIPRU 2.3 (Interest rate risk in the non-trading book).
(4) In a narrow sense, business risk is the risk to a firm that it suffers losses because its income falls or is volatile relative to its fixed cost base. However, in a broader sense, it is exposure to a wide range of macro-economic, geopolitical, industry, regulatory and other external risks that might deflect a firm from its desired strategy and business plan. GENPRU 1.2.73 G provides further guidance on business risk.
(6)
Group risk is the risk that the financial position of a firm may be adversely affected by its relationships (financial or non-financial) with other entities in the same group or by risks which may affect the financial position of the whole group, for example reputational contagion. Further guidance on group risk can be found in GENPRU 1.2.87 G to GENPRU 1.2.91 G.
GENPRU 1.2.34
See Notes
In the overall Pillar 2 rule , internal capital refers to the financial resources of a firm which it treats as being held against the risks listed in the overall Pillar 2 rule. The obligation in that rule to assess the distribution of such capital refers, in relation to a firm making an assessment on a solo basis, for example, to the need to take account of circumstances where part of a firm's financial resources are held by a branch of that firm which are subject to restrictions on its ability to transfer that capital. An assessment of internal capital distribution might also take account of such of a firm's financial resources as may be ring-fenced in the event of its insolvency.
GENPRU 1.2.35
See Notes
The processes, strategies and systems required by the overall Pillar 2 rule must be comprehensive and proportionate to the nature, scale and complexity of the firm's activities.
GENPRU 1.2.36
See Notes
As part of its obligations under GENPRU 1.2.30R (1) (Main requirement relating to risk processes, strategies and systems), a firm must identify separately the amount of tier one capital, tier two capital, tier three capital, other capital eligible to form part of its capital resources and each category of capital (if any) that is not eligible to form part of its capital resources which it considers adequate for the purposes described in GENPRU 1.2.30R (1).
GENPRU 1.2.37
See Notes
The processes and systems required by the overall Pillar 2 rule must:
(1) include an assessment of how the firmintends to deal with each of the major sources of risk identified in accordance with GENPRU 1.2.30R (2);
(2) take into account the impact of diversification effects and how such effects are factored into the firm's systems for measuring and managing risks; and
(3)
include an assessment of the firm-wide impact of the risks identified in accordance with GENPRU 1.2.30R (2), to which end a firm must aggregate the risks across its various business lines and units, making appropriate allowance for the correlation between risks.
GENPRU 1.2.38
See Notes
Certain risks such as systems and controls weaknesses may not be adequately addressed by, for example, holding additional capital and a more appropriate response would be to rectify the weakness. In such circumstances, the amount of financial resources required to address these risks might be zero. However, a firm should consider whether holding additional capital might be an appropriate response until the identified weaknesses are rectified. A firm, should, in accordance with GENPRU 1.2.60 R (Documentation of risk assessments), document the approaches taken to manage these risks.
GENPRU 1.2.39
See Notes
A firm must:
(1) carry out regularly the assessments required by the overall Pillar 2 rule; and
(2) carry out regularly assessments of the processes, strategies and systems required by the overall Pillar 2 rule to ensure that they remain compliant with GENPRU 1.2.35 R.
GENPRU 1.2.40
See Notes
A firm should carry out assessments of the sort described in the overall Pillar 2 rule and GENPRU 1.2.39 R at least annually, or more frequently if changes in the business, strategy, nature or scale of its activities or operational environment suggest that the current level of financial resources is no longer adequate. The appropriateness of the internal process, and the degree of involvement of senior management in the process, will be taken into account by the
appropriate regulator
when reviewing a firm's assessment as part of the
appropriate regulator's
own assessment of the adequacy of a firm's financial resources. The processes and systems should ensure that the assessment of the adequacy of a firm's financial resources is reported to its senior management as often as is necessary.
GENPRU 1.2.41
See Notes
The assessments undertaken by firms in run-off may not need to be as comprehensive or frequent compared to a firm not in run off since this may better reflect the reduced nature and complexity of its business and reduced access to new capital. Whilst a firm in run-off will still need to carefully monitor the progress of the run off, a more comprehensive assessment may only be appropriate on commencement of the run off or when considering a reduction in capital through the payment of a dividend or other capital distribution or if the firm's circumstances change materially.
Stress and scenario tests
GENPRU 1.2.42
See Notes
(1) As part of its obligation under the overall Pillar 2 rule, a firm must, for the major sources of risk identified in accordance with GENPRU 1.2.30R (2), carry out stress tests and scenario analyses that are appropriate to the nature, scale and complexity of those major sources of risk and to the nature, scale and complexity of the firm's business.
(a) [deleted]
(b) [deleted]
(i) [deleted]
(ii) [deleted]
(iii) [deleted]
(iv) [deleted]
(2) In carrying out the stress tests and scenario analyses in (1), a
firm
must identify an appropriate range of adverse circumstances of varying nature, severity and duration relevant to its business and risk profile and consider the exposure of the firm to those circumstances, including:
(a) circumstances and events occurring over a protracted period of time;
(b) sudden and severe events, such as market shocks or other similar events; and
(c) some combination of the circumstances and events described in (a) and (b), which may include a sudden and severe market event followed by an economic recession.
(3) In carrying out the stress tests and scenario analyses in (1), the firm must estimate the financial resources that it would need in order to continue to meet the overall financial adequacy rule and the CRR in the adverse circumstances being considered.
(4)
In carrying out the stress tests and scenario analyses in (1), the firm must assess how risks aggregate across business lines or units, any material non-linear or contingent risks and how risk correlations may increase in stressed conditions.
(5)
As part of its obligation under the overall Pillar 2 rule, a BIPRU firm must also incorporate and take into account any stress tests and scenario analyses that it is required to carry out under BIPRU. In particular, a BIPRU firm with an IRB permission must incorporate and take into account the stress test required to be carried out under BIPRU 4.3.40 R (2).
GENPRU 1.2.42A
See Notes
In order to comply with the general stress and scenario testing rule, a firm should undertake a broad range of stress tests which reflect a variety of perspectives, including sensitivity analysis, scenario analysis and stress testing on an individual portfolio as well as a firm-wide level.
GENPRU 1.2.42B
See Notes
A BIPRU firm with an IRB permission which has any material credit exposures excluded from its IRB models should also include these exposures in its stress and scenario testing to meet its obligations under the general stress and scenario testing rule. A BIPRU firm without an IRB permission, or an insurer that has any material credit and counterparty credit risk exposures, should conduct analyses to assess risks to the credit quality of its counterparties, including any protection sellers, considering both on and off-balance sheet exposures.
GENPRU 1.2.42C
See Notes
An insurer may choose to carry out its ICA through the use of stress testing and scenario analyses (see INSPRU 7.1.10 G and INSPRU 7.1.68 G). If it does so, in carrying out the stress tests and scenario analyses referred to in GENPRU 1.2.42 R, an insurer should take into account the stress tests it uses for its ICA.
GENPRU 1.2.42D
See Notes
In carrying out the stress tests and scenario analyses required by GENPRU 1.2.42R (1), a firm should also consider any impact of the adverse circumstances on its capital resources. In particular, a firm should consider the capital resources gearing rules where its tier one capital is eroded by the event.
GENPRU 1.2.42E
See Notes
A firm should assign adequate resources, including IT systems, to stress testing and scenario analysis, taking into account the stress testing techniques employed, so as to be able to accommodate different and changing stress tests at an appropriate level of granularity.
GENPRU 1.2.42F
See Notes
GENPRU 1.2.63 G to GENPRU 1.2.78 G provide additional guidance on stress testing and scenario analyses. In particular, GENPRU 1.2.73A G provides specific guidance on capital planning.
GENPRU 1.2.43
See Notes
Stress tests and scenario analyses should be carried out at least annually. A firm should, however, consider whether the nature of the major sources of risks identified by it in accordance with GENPRU 1.2.30R (2) (Main requirement relating to risk processes, strategies and systems) and their possible impact on its financial resources suggest that such tests and analyses should be carried out more frequently. For instance, a sudden change in the economic outlook may prompt a firm to revise the parameters of some of its stress tests and scenario analyses. Similarly, if a firm has recently become exposed to a particular sectoral concentration, it may wish to add some stress tests and scenario analyses in order to reflect that concentration. SYSC 11.1.21 E is an evidential provision relating to the general stress and scenario testing rule concerning scenario analysis in relation to liquidity risk.
Application of this section on a solo and consolidated basis: General
GENPRU 1.2.44
See Notes
(1)
GENPRU 1.2.45 R - GENPRU 1.2.56 G explain when the ICAAP rules apply on a solo basis and when they apply on a consolidated basis. This material also explains how the ICAAP rules are adjusted to apply on a consolidated basis.
(2)
GENPRU 1.2.57 R - GENPRU 1.2.59 R provide that the overall financial adequacy rule always applies on a solo basis. They also explain when and how it applies on a consolidated basis.
Application of this section on a solo and consolidated basis: Processes and tests
GENPRU 1.2.45
See Notes
If an insurer is a member of an insurance group and INSPRU 6.1.9 R, INSPRU 6.1.10 R or INSPRU 6.1.15 R (Requirement to maintain group capital) apply to it with respect to that insurance group the ICAAP rules:
(1) apply to that insurer on a consolidated basis; and
(2) do not apply to it on a solo basis.
GENPRU 1.2.47A
See Notes
The ICAAPrules apply on a solo basis to an insurer to which those rules do not apply on a consolidated basis under GENPRU 1.2.45 R.
- 01/01/2014
GENPRU 1.2.48
See Notes
The requirements of the ICAAP rules as they apply on a consolidated basis must be carried out on the basis of the consolidated position of:
(2) (if BIPRU 8.2.1 R (Basic consolidation rule for a UK consolidation group) applies) the UK consolidation group of which the firm is a member; and
GENPRU 1.2.49
See Notes
(1) In accordance with the general principles in GENPRU 1.2.48 R and BIPRU 8 (Group risk - consolidation), for the purpose of the ICAAP rules as they apply on a consolidated basis:
(a) the firm must ensure that the relevant group as defined in (2) have the processes, strategies and systems required by the overall Pillar 2 rule;
(b) the risks to which the overall Pillar 2 rule and the general stress and scenario testing rule refer are those risks as they apply to each member of the relevant group;
(c) the reference in the overall Pillar 2 rule to amounts and types of financial resources, capital resources and internal capital (referred to in this rule as resources) must be read as being to the amounts and types that the firm considers should be held by the members of the relevant group as defined in (2);
(d) other references to resources must be read as being to resources of the members of the relevant group as defined in (2);
(e) references to the CRR are to the consolidated capital requirements applicable to the relevant group under BIPRU 8 (Group risk - consolidation) or, as the case may be, INSPRU 6 (Group risk: Insurance groups);
(f) the reference in the overall Pillar 2 rule to the distribution of resources must be read as including a reference to the distribution between members of the relevant group as defined in (2); and
(g) the reference in the overall Pillar 2 rule to the overall financial adequacy rule must be read as being to that rule as adjusted under GENPRU 1.2.59 R (Application of the overall financial adequacy rule on a consolidated basis).
(2) For the purpose of this rule the relevant group is the group referred to in GENPRU 1.2.48 R and the members of that group are those undertakings that are included in the scope of consolidation with respect to the
insurance group,
UK consolidation group or, as the case may be, non-EEAsub-group in question.
GENPRU 1.2.50
See Notes
GENPRU 1.2.49 R means that non-financial members of the firm's group are excluded from the group assessment. Notwithstanding the scope of GENPRU 1.2.49 R, a firm should nevertheless take account of risks arising from the activities of those excluded members in its overall assessment of risk.
GENPRU 1.2.51
See Notes
(1) This rule relates to the assessment of the amounts, types and distribution of financial resources, capital resources and internal capital (referred to in this rule as "resources") under the overall Pillar 2 rule as applied on a consolidated basis and to the assessment of diversification effects as referred to in GENPRU 1.2.37R (2) as applied on a consolidated basis.
(2) A firm must be able to explain how it has aggregated the risks referred to in the overall Pillar 2 rule and the resources required by each member of the relevant group as referred to in GENPRU 1.2.49R (2) and how it has taken into account any diversification benefits with respect to the group in question.
(3) In particular, to the extent that the transferability of resources affects the assessment in (2), a firm must be able to explain how it has satisfied itself that resources are transferable between members of the group in question in the stressed cases and the scenarios referred to in the general stress and scenario testing rule.
GENPRU 1.2.52
See Notes
(1) A firm must allocate the total amount of financial resources, capital resources and internal capital identified as necessary under the overall Pillar 2 rule (as applied on a consolidated basis) between different parts of the relevant group (as defined in GENPRU 1.2.49 R). GENPRU 1.2.36 R (Identifying different tiers of capital) does not apply to this allocation.
(2) The firm must carry out the allocation in (1) in a way that adequately reflects the nature, level and distribution of the risks to which the group is subject and the effect of any diversification benefits.
GENPRU 1.2.53
See Notes
A firm must also allocate the total amount of financial resources, capital resources and internal capital (referred to in this rule as "resources") identified as necessary under the overall Pillar 2 rule as applied on a consolidated basis between each firm which is a member of the relevant group (as defined in GENPRU 1.2.49 R) on the following basis:
(1) the amount allocated to each firm must be decided on the basis of the principles in GENPRU 1.2.52R (2); and
(2) if the process in (1) were carried out for each group member, the total so allocated would equal the total amount of resources identified as necessary under the overall Pillar 2 rule as applied on a consolidated basis.
GENPRU 1.2.54
See Notes
A firm to which the ICAAP rules apply on a consolidated basis need not prepare a consolidated basis assessment if such an assessment has been prepared by another member of its group. Where that is the case, a firm may adopt such an assessment as its own. A firm nevertheless remains responsible for the assessment.
GENPRU 1.2.55
See Notes
The purpose of GENPRU 1.2.51 R - GENPRU 1.2.53 R is to enable the
appropriate regulator
to assess the extent, if any, to which a firm's assessment, calculated on a consolidated basis, is lower than it would be if each separate legal entity were to assess the amount of capital it would require to mitigate its risks (to the same level of confidence) were it not part of a group subject to consolidated supervision under BIPRU 8 (Group risk - consolidation) or INSPRU 6.1 (Group risk: Insurance groups). The reason the
appropriate regulator
wishes to make this assessment is so that individual capital guidance which it gives is fair and comparable as between different firms and groups. Group diversification benefits which a firm might assert exist can be a material consideration in a capital adequacy assessment. Understanding the methods used to aggregate the different risks (for example, the correlation assumptions) is crucial to a proper evaluation of such benefits.
GENPRU 1.2.56
See Notes
Whereas a single legal entity can generally use its capital to absorb losses wherever they arise, there are often practical and legal restrictions on the ability of a group to do so. For instance:
(1) capital which is held by overseas regulated firms may not be capable of being remitted to a firm in the UK which has suffered a loss;
(2) a firm which is insolvent or likely to become so may be obliged to look to the interests of its creditors first before transferring capital to other group companies; and
(3) a parent company may have to balance the interests of its shareholders against the protection of the creditors of a subsidiary undertaking which is or might become insolvent and may, rationally, conclude that a subsidiary undertaking should be allowed to fail rather than provide capital to support it.
Application of this section on a solo and consolidated basis: Adequacy of resources
GENPRU 1.2.57
See Notes
The overall financial adequacy rule applies to a firm on a solo basis whether or not it also applies to the firm on a consolidated basis.
GENPRU 1.2.58
See Notes
The overall financial adequacy rule applies to a firm on a consolidated basis if the ICAAP rules apply to it on a consolidated basis.
GENPRU 1.2.59
See Notes
(1) When the overall financial adequacy rule applies on a consolidated basis, the firm must ensure that at all times its group maintains overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that the liabilities of any members of its group cannot be met as they fall due.
(2) The group referred to in (1) is the relevant group as defined in GENPRU 1.2.49 R.
(3) The members of the group referred to in (1) must be identified in accordance with GENPRU 1.2.49 R.
Documentation of risk assessments
GENPRU 1.2.60
See Notes
A firm must make a written record of the assessments required under this section. These assessments include assessments carried out on a consolidated basis and on a solo basis. In particular it must make a written record of:
(1) the major sources of risk identified in accordance with GENPRU 1.2.30R (2) (Main requirement relating to risk processes, strategies and systems);
(2) how it intends to deal with those risks; and
(3) details of the stress tests and scenario analyses carried out, including any assumptions made in relation to scenario design, and the resulting financial resources estimated to be required in accordance with the general stress and scenario testing rule.
GENPRU 1.2.61
See Notes
A firm must retain the records of its assessments referred to in GENPRU 1.2.60 R for at least three years.
GENPRU 1.2.62
See Notes
Where a firm assesses the adequacy of its CRR in its particular circumstances in accordance with BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment) as a basis for deciding what financial resources are adequate, it should include this in the documentation produced in accordance with GENPRU 1.2.60 R.
Additional guidance on stress tests and scenario analyses
GENPRU 1.2.63
See Notes
The general stress and scenario testing rule requires a firm to carry out stress tests and scenario analyses as part of its obligations under the overall Pillar 2 rule. Both stress tests and scenario analyses are undertaken by a firm to further a better understanding of the vulnerabilities that it faces under adverse conditions. They are based on the analysis of the impact of a range of events of varying nature, severity and duration. These events can be financial, operational or legal or relate to any other risk that might have an economic impact on the firm.
GENPRU 1.2.64
See Notes
GENPRU 1.2.65
See Notes
Scenario analysis typically refers to a wider range of parameters being varied at the same time. Scenario analyses often examine the impact of adverse events on the firm's financial position, for example, simultaneous movements in a number of risk categories affecting all of a firm's business operations, such as business volumes, investment values and interest rate movements.
GENPRU 1.2.66
See Notes
There are three broad purposes of stress testing and scenario analysis. Firstly, it can be used as a means of quantifying how much capital might be absorbed if an adverse event or events occurred. As such it represents a simple 'what if' approach to estimating exposure to risks. This might be a proportionate approach to risk management for an unsophisticated business. Secondly, it can be used to provide a check on the outputs and accuracy of risk models; particularly, in identifying non-linear effects when aggregating risks. Thirdly, it can be used to explore the sensitivities in longer term business plans and how capital needs might change over time.
GENPRU 1.2.68
See Notes
Subject to GENPRU 1.2.76 G, the purpose of stress tests and scenario analyses under the general stress and scenario testing rule is to test the adequacy of overall financial resources. Scenarios need only be identified, and their impact assessed, in so far as this facilitates that purpose. In particular, the nature, depth and detail of the analysis depend, in part, upon the firm's capital strength and the robustness of its risk prevention and risk mitigation measures.
GENPRU 1.2.69
See Notes
Both stress testing and scenario analyses are forward-looking analysis techniques, which seek to anticipate possible losses that might occur if an identified risk crystallises. In applying them, a firm should decide how far forward to look. This should depend upon:
(1) how quickly it would be able to identify events or changes in circumstances that might lead to a risk crystallising resulting in a loss; and
(2) after it has identified the event or circumstance, how quickly and effectively it could act to prevent or mitigate any loss resulting from the risk crystallising and to reduce exposure to any further adverse event or change in circumstance.
GENPRU 1.2.70
See Notes
Where a firm is exposed to market risk, the time horizon over which stress tests and scenario analyses should be carried out will depend on, among other things, the maturity and liquidity of the positions stressed. For example, for the market risk arising from the holding of investments, this will depend upon:
(1) the extent to which there is a regular, open and transparent market in those assets, which would allow fluctuations in the value of the investment to be more readily and quickly identified; and
(2) the extent to which the market in those assets is sufficiently liquid (and would remain liquid in the changed circumstances contemplated in the stress test or scenario analysis) to allow the firm, if needed, to sell, hedge or otherwise mitigate the risks relating to its holding so as to prevent or reduce exposure to future price fluctuations. In devising stress tests and scenario analyses for market risk, a BIPRU firm should also take into account BIPRU 7.1.17 R to BIPRU 7.1.20 G.
GENPRU 1.2.71
See Notes
In identifying scenarios, and assessing their impact, a firm should take into account, where material, how changes in circumstances might impact upon:
(1) the nature, scale and mix of its future activities; and
(2) the behaviour of counterparties, and of the firm itself, including the exercise of choices (for example, options embedded in financial instruments or contracts of insurance).
GENPRU 1.2.72
See Notes
In determining whether it would have adequate financial resources in the event of each identified realistic adverse scenario, a firm should:
(1) only include financial resources that could reasonably be relied upon as being available in the circumstances of the identified scenario; and
(2) take account of any legal or other restriction on the use of financial resources.
Capital planning
GENPRU 1.2.73A
See Notes
(1)
In identifying an appropriate range of adverse circumstances and events in accordance with GENPRU 1.2.42R (2):
(a) a firm will need to consider the cycles it is most exposed to and whether these are general economic cycles or specific to particular markets, sectors or industries;
(b) for the purposes of GENPRU 1.2.42R (2)(a), the amplitude and duration of the relevant cycle should include a severe downturn scenario based on forward looking hypothetical events, calibrated against the most adverse movements in individual risk drivers experienced over a long historical period;
(c) the adverse scenarios considered should in general be acyclical and, accordingly, the scenario should not become more severe during a downturn and less severe during an upturn. However, the
appropriate regulator
does expect scenarios to be updated with relevant new economic data on a pragmatic basis to ensure that the scenario continues to be relevant; and
(d) the adverse scenarios considered should reflect a firm's risk tolerance of the adverse conditions through which it expects to remain a going concern.
(2)
In making the estimate required by GENPRU 1.2.42R (3), a firm should project both its capital resources and its required capital resources over a time horizon of 3 to 5 years, taking account of its business plan and the impact of relevant adverse scenarios. In making the estimate, the firm should consider both the capital resources required to meet its CRR and the capital resources needed to meet the overall financial adequacy rule. The firm should make these projections in a manner consistent with its risk management processes and systems as set out in GENPRU 1.2.37 R.
(3)
In projecting its financial position over the relevant time horizon, the firm should:
(a) reflect how its business plan would "flex" in response to the adverse events being considered, taking into account factors such as changing consumer demand and changes to new business assumptions;
(b) consider the potential impact on its stress testing of dynamic feedback effects and second order effects of the major sources of risk identified in accordance with GENPRU 1.2.30R (2);
(c) estimate the effects on the firm's financial position of the adverse event without adjusting for management actions;
(d) separately, identify any realistic management actions that the firm could and would take to mitigate the adverse effects of the stress scenario; and
(e) estimate the effects of the stress scenario on the firm's financial position after taking account of realistic management actions.
(4)
A firm should identify any realistic management actions intended to maintain or restore its capital adequacy. These could include ceasing to transact new business after a suitable period has elapsed, balance sheet shrinkage, restricting distribution of profits or raising additional capital. A firm should reflect management actions in its projections only where it could and would take such actions, taking account of factors such as market conditions in the stress scenario and any effects upon the firm's reputation with its counterparties and investors. The combined effect on capital and retained earnings should be estimated. In order to assess whether prospective management actions in a stress scenario would be realistic and to determine which actions the firm would and could take, the firm should take into account any preconditions that might affect the value of management actions as risk mitigants and analyse the difference between the estimates in (3)(c) and (3)(e) in sufficient detail to understand the implications of taking different management actions at different times, particularly where they represent a significant divergence from the firm's business plan.
(5)
The firm should document its stress testing and scenario analysis policies and procedures, as well as the results of its tests in accordance with GENPRU 1.2.60 R. These records should be included within the firm'sICAAP or ICA submission document.
(6)
The
appropriate regulator
will review the firm's records referred to in (5) as part of its SREP. The purpose of examining these is to enable the
appropriate regulator
to judge whether a firm will be able to continue to meet its CRR and the overall financial adequacy rule throughout the projection period.
(7)
If, after taking account of realistic management actions, a firm's stress testing management plan shows that the firm's projected capital resources are less than those required to continue to meet its CRR or less than those needed to continue to meet the overall financial adequacy rule over the projection period, the
appropriate regulator
may require the firm to set out additional countervailing measures and off-setting actions to reduce such difference or to restore the firm's capital adequacy after the stress event.
(8)
The firm's senior management or governing body should be actively involved and engaged in all relevant stages of the firm's stress testing and scenario analysis programme. This would include establishing an appropriate stress testing programme, reviewing the programme's implementation (including the design of scenarios) and challenging, approving and actioning the results of the stress tests.
(9) [deleted]
GENPRU 1.2.73B
See Notes
The
appropriate regulator
may formulate macroeconomic and financial market scenarios which a firm may use as an additional input to its ICAAP or ICA submission. In addition, the
appropriate regulator
may also ask a firm to apply specific scenarios directly in its ICAAP or ICA submission.
GENPRU 1.2.73C
See Notes
For an insurer:
(1) the treatment of new business when making capital projections is likely to be different from its ICA. In projecting its financial position, an insurer should take account of new business based on the firm's business plan, but flexed to take account of potential changes in trading conditions and strategy. When assessing its current capital adequacy under its ICA, an insurer should take account of the effects of closure to new business (see GENPRU 1.2.27 G, GENPRU 1.2.73AG (3) and (4) and INSPRU 7.1.16 G to INSPRU 7.1.19 G). Also, an insurer may use methods that are more approximate than used for its ICA(for example, in projecting the with-profits insurance capital component for realistic basis life firms and the capital resources needed to meet the overall financial adequacy rule); and
(2) where management discretion is exercised as a normal part of an insurer's business (for example, in changing bonus rates or surrender values in accordance with the PPFM for with-profits business), under GENPRU 1.2.73AG (3)(c) the insurer does not need to estimate the effect of an adverse event on its financial position without adjusting for such changes. However, the effect on the financial position of varying such actions should be estimated and understood.
- 01/04/2013
GENPRU 1.2.74
See Notes
A firm may consider scenarios in which expected future profits will provide capital reserves against future risks. However, it would only be appropriate to take into account profits that can be foreseen with a reasonable degree of certainty as arising before the risk against which they are being held could possibly arise. In estimating future reserves, a firm should deduct future dividend payment estimates from projections of future profits.
GENPRU 1.2.75
See Notes
(1) [deleted]
(2) Stress and scenario analyses should, in the first instance, be aligned with the risk appetite of the firm, as well as the nature, scale and complexity of its business and of the risks that it bears. The calibration of the stress and scenario analyses should be reconciled to a clear statement setting out the premise upon which the firm's internal capital assessment under the overall Pillar 2 rule is based.
(3) [deleted]
(4) In identifying adverse circumstances and events in accordance with GENPRU 1.2.42R (2), a firm should consider the results of any reverse stress testing conducted in accordance with SYSC 20. Reverse stress testing may be expected to provide useful information about the firm's vulnerabilities and variations around the most likely ruin scenarios for the purpose of meeting the firm's obligations under GENPRU 1.2.42 R. In addition, such a comparison may help a firm to assess the sensitivity of its financial position to different stress calibrations.
GENPRU 1.2.76
See Notes
A firm should use the results of its stress testing and scenario analysis not only to assess capital needs, but also to decide if measures should be put in place to minimise the adverse effect on the firm if the risk covered by the stress or scenario test actually materialises. Such measures might be a contingency plan or might be more concrete risk mitigation steps.
GENPRU 1.2.77
See Notes
Additional guidance on stress tests and scenario analyses for the assessment of capital resources is available in BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment).
GENPRU 1.2.78
See Notes
Additional guidance in relation to stress tests and scenario analysis for liquidity risk as that concept relates to an insureris available in SYSC 11 (Liquidity risk systems and controls).
Pension obligation risk
GENPRU 1.2.79
See Notes
GENPRU 1.2.80 G
to
GENPRU 1.2.86 G contain guidance on the assessment required by GENPRU 1.2.30R (2)(k)for a firm exposed to pension obligation risk as defined in GENPRU 1.2.31R (5).
GENPRU 1.2.80
See Notes
The pension scheme itself (i.e. the scheme's assets and liabilities) is not the focus of the risk assessmentbut rather the firm's obligations towards the pension scheme . A firm should include in its estimate of financial resources both its expected obligations to the pension scheme and any increase in obligations that may arise in a stress scenario.
GENPRU 1.2.81
See Notes
If a firm has a current funding obligation in excess of normal contributions or there is a risk that such a funding obligation will arise then, when calculating available capital resources, it should reverse out any accounting deficit and replace this in its capital adequacy assessment with its best estimate, calculated in discussion with the scheme's actuaries or trustees, of the cash that will need to be paid into the scheme in addition to normal contributions over the foreseeable future. This may differ from the approach taken in assessing pension scheme risks for the purposes of calculating resources to meet the CRR, where a firm may not need to consider funding obligations beyond the next five years.
GENPRU 1.2.82
See Notes
GENPRU 1.2.83A
See Notes
A firm is expected to determine where the scope of any stress test impacts upon its pension obligation risk and estimate how the relevant measure of pension obligation risk will change in the scenario in question. For example, in carrying out stress tests under GENPRU 1.2.42 R a firm must consider how a stress scenario, such as an economic recession, would impact on the firm's current obligations towards its pension scheme and any potential increase in those obligations. Risks such as interest rate risk or reduced investment returns may have a direct impact on a firm's financial position as well as an indirect impact resulting from an increase in the firm's pension scheme obligations. Both effects should be taken into account in a firm's estimate of financial resources under GENPRU 1.2.30 R.
GENPRU 1.2.84
See Notes
GENPRU 1.2.85
See Notes
A firm should consider issues such as:
(1) the extent to which trustees of the pension scheme or a pension regulator (such as the one created under the Pensions Act 2004) can compel a certain level of contributions or a one-off payment in adverse financial situations or in order to meet the minimum legal requirements under the scheme's trust deed and rules or under the applicable laws relating to the pension scheme;
(2) whether the valuation bases used to set pension scheme contribution rates are consistent with the firm's current business plans and anticipated changes in the workforce; and
(3) which valuation basis is appropriate given the expected investment return on scheme assets and actions the firm can take if those returns do not materialise.
GENPRU 1.2.86
See Notes
A firm should carry out analyses only to a degree of sophistication and complexity which is commensurate with the materiality of its pension risks.
Group risk
GENPRU 1.2.87
See Notes
GENPRU 1.2.88G to GENPRU 1.2.91G contain additional guidance on the assessment required by GENPRU 1.2.30R (2)(l) (Group risk).
GENPRU 1.2.88
See Notes
A firm should include in the written record referred to in GENPRU 1.2.60 R a description of the broad business strategy ofthe insurance group, the UK consolidation group or the non-EEA sub-group of which it is a member, the group's view of its principal risks and its approach to measuring, managing and controlling the risks. This description should include the role of stress testing, scenario analysis and contingency planning in managing risk at the solo and consolidated level.
GENPRU 1.2.89
See Notes
A firm should satisfy itself that the systems (including IT) ofthe insurance group, the UK consolidation group or the non-EEA sub-group of which it is a member are sufficiently sound to support the effective management and, where applicable, the quantification of the risks that could affectthe insurance group, the UK consolidation group or the non-EEA sub-group, as the case may be.
GENPRU 1.2.90
See Notes
In performing stress tests and scenario analyses, a firm should take into account the risk that its group may have to bring back on to its consolidated balance sheet the assets and liabilities of off-balance sheet entities as a result of reputational contagion, notwithstanding the appearance of legal risk transfer.
GENPRU 1.2.91
See Notes
GENPRU 1.3
Valuation
- 31/12/2006
Application
GENPRU 1.3.1A
See Notes
(1) This section of the Handbook also applies to an insurer, unless it is:
(b) an incoming EEA firm; or
(c) an incoming Treaty firm.
- 01/01/2014
Purpose
GENPRU 1.3.2
See Notes
General requirements: Accounting principles to be applied
GENPRU 1.3.4
See Notes
Subject to GENPRU 1.3.9 R to GENPRU 1.3.10 R and GENPRU 1.3.36 R, except where a rule in GENPRU, BIPRU or INSPRU provides for a different method of recognition or valuation, whenever a rule in GENPRU, BIPRU or INSPRU refers to an asset, liability, exposure, equity or income statement item, a firm must, for the purpose of that rule, recognise the asset, liability, exposure, equity or income statement item and measure its value in accordance with whichever of the following are applicable:
(1) the insurance accounts rules, or the Friendly Societies (Accounts and Related Provisions) Regulations 1994;
(2) Financial Reporting Standards and Statements of Standard Accounting Practice issued or adopted by the Accounting Standards Board;
(3) Statements of Recommended Practice, issued by industry or sectoral bodies recognised for this purpose by the Accounting Standards Board;
(4) [deleted]
(6) the Companies Act 1985; and
(7) the Companies Act 2006;
as applicable to the firm for the purpose of its external financial reporting (or as would be applicable if the firm was a company with its head office in the United Kingdom).GENPRU 1.3.5
See Notes
Except where a rule in GENPRU, BIPRU or INSPRU makes different provision, GENPRU 1.3.4 R applies whenever a rule in GENPRU, BIPRU or INSPRU refers to the value or amount of an asset, liability, exposure, equity or income statement item, including:
(1) whether, and when, to recognise or de-recognise an asset or liability;
(2) the amount at which to value an asset, liability, exposure, equity or income statement item; and
(3) which description to place on an asset, liability, exposure, equity or income statement item.
GENPRU 1.3.6
See Notes
In particular, unless an exception applies, GENPRU 1.3.4 R should be applied for the purposes of GENPRU, BIPRU or INSPRU to determine how to account for:
(1) netting of amounts due to or from the firm;
(2) the securitisation of assets and liabilities (see also GENPRU 1.3.7 G);
(3) leased tangible assets;
(4) assets transferred or received under a sale and repurchase or stock lending transaction; and
(5) assets transferred or received by way of initial or variation margin under a derivative or similar transaction.
GENPRU 1.3.7
See Notes
In the case of an insurer or a UK ISPV, where assets or liabilities are securitised, GENPRU 1.3.4 R only permits de-recognition where Financial Reporting Standards (or, where applicable, International Accounting Standards) permit either de-recognition or the linked presentation. However, the
PRA
will consider granting a waiver to permit de-recognition in other circumstances provided that the firm can demonstrate that securitisation has effectively transferred risk
GENPRU 1.3.8
See Notes
Articles 23.3(viii) and 24.2(iv) of the Consolidated Life Directive require assets of an insurer that are managed on its behalf by a subsidiary undertaking to be taken into account for the purposes of determining the insurer'sadmissible assets and its assets in excess of concentration limits. The application of GENPRU 1.3.4 R will result in such assets remaining on the balance sheet of the insurer.
General requirements: Adjustments to accounting values
GENPRU 1.3.9
See Notes
For the purposes of GENPRU, BIPRU or INSPRU, except where a rule in GENPRU, BIPRU or INSPRU provides for a different method of recognition or valuation:
(1) when a firm, upon initial recognition, designates its liabilities as at fair value through profit or loss, it must always adjust any value calculated in accordance with GENPRU 1.3.4 R by subtracting any unrealised gains or adding back in any unrealised losses which are not attributable to changes in a benchmark interest rate;
(2) in respect of a defined benefit occupational pension scheme:
GENPRU 1.3.10
See Notes
An election made under GENPRU 1.3.9R (2) must be applied consistently for the purposes of GENPRU, BIPRU or INSPRU in respect of any one financial year.
GENPRU 1.3.11
See Notes
A firm should keep a record of and be ready to explain to its supervisory contacts in the
appropriate regulator
the reasons for any difference between the deficit reduction amount and any commitment the firm has made in any public document to provide funding in respect of a defined benefit occupational pension scheme.
GENPRU 1.3.12
See Notes
The provisions of GENPRU 1.3.9 R to GENPRU 1.3.10 R and GENPRU 1.3.36 R apply only to the extent that the items referred to in those paragraphs would otherwise be recognised under the accounting requirements applicable to the firm. Some of those requirements may only be relevant to a firm subject to international accounting standards.
General requirements: Methods of valuation and systems and controls
GENPRU 1.3.13
See Notes
(1) Except to the extent that GENPRU, BIPRU or INSPRU provide for another method of valuation, GENPRU 1.3.14 R to GENPRU 1.3.34 R (Marking to market, Marking to model, Independent price verification, Valuation adjustments or, in the case of an insurer or a UK ISPV, valuation adjustments or reserves) apply:
(a) for the purposes set out in GENPRU 1.3.41 R;
(b) for the purposes set out in GENPRU 1.3.39 R; and
(c) to any balance sheet position measured at market value or fair value.
(2) A firm must establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates.
(3) Systems and controls under (2) must include at least the following elements:
(a) documented policies and procedures for the process of valuation, including clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month-end and ad-hoc verification procedures, and, in the case of a BIPRU firm, guidelines for the use of unobservable inputs reflecting the firm's assumptions of what market participants would use in pricing the position; and
(b) reporting lines for the department accountable for the valuation process that are:
(i) clear and independent of the front office; and
(ii) ultimately to a main board executive director.
General requirements: Marking to market
GENPRU 1.3.14
See Notes
Wherever possible, a firm must use mark to market in order to measure the value of the investments and positions to which this rule applies under GENPRU 1.3.13 R and GENPRU 1.3.38 R to GENPRU 1.3.41 R. Marking to market is valuation (on at least a daily basis in the case of the trading book positions of a BIPRU firm) at readily available close out prices from independent sources.
GENPRU 1.3.15
See Notes
For the purposes of GENPRU 1.3.14 R, examples of readily available close out prices include exchange prices, screen prices, or quotes from several independent reputable brokers.
GENPRU 1.3.16
See Notes
(1)
When marking to market, a firm must use the more prudent side of bid/offer unless the firm is a significant market maker in a particular position type and it can close out at the mid-market price.
(2)
When calculating the current exposure value of a credit risk exposure for counterparty credit risk purposes:
General requirements: Marking to model
GENPRU 1.3.17
See Notes
Where marking to market is not possible, a firm must (in the case of a BIPRU firm, conservatively)use mark to model in order to measure the value of the investments and positions to which this rule applies under GENPRU 1.3.13 R and GENPRU 1.3.38 R to GENPRU 1.3.41 R. Marking to model is any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input. GENPRU 1.3.18 R to GENPRU 1.3.25 R apply when marking to model.
GENPRU 1.3.18
See Notes
When the model used is developed by the firm, that model must be:
(1) based on appropriate assumptions which have been assessed and challenged by suitably qualified parties independent of the development process;
(2) independently tested, including validation of the mathematics, assumptions, and software implementation; and
(3) (in the case of a BIPRU firm) developed or approved independently of the front office.
GENPRU 1.3.19
See Notes
GENPRU 1.3.20
See Notes
A firm must source market inputs in line with market prices so far as possible and assess the appropriateness of the market inputs for the position being valued and the parameters of the model on a frequent basis.
GENPRU 1.3.21
See Notes
A firm must use generally accepted valuation methodologies for particular products where these are available.
GENPRU 1.3.22
See Notes
A firm must establish formal change control procedures, hold a secure copy of the model, and periodically use that model to check valuations.
GENPRU 1.3.23
See Notes
A firm must ensure that its risk management functions are aware of the weaknesses of the models used and how best to reflect those in the valuation output.
GENPRU 1.3.24
See Notes
A firm must periodically review the model to determine the accuracy of its performance.
GENPRU 1.3.25
See Notes
Examples of periodical review are assessing the continued appropriateness of the assumptions, analysis of profit and loss versus risk factors and comparison of actual close out values to model outputs.
General requirements: Independent price verification
GENPRU 1.3.26
See Notes
In addition to marking to market or marking to model, a firm must perform independent price verification. This is the process by which market prices or model inputs are regularly verified for accuracy and independence.
GENPRU 1.3.27
See Notes
For independent price verification, where independent pricing sources are not available or pricing sources are more subjective (for example, only one available broker quote), prudent measures such as valuation adjustments may be appropriate.
GENPRU 1.3.28
See Notes
In the case of the trading book positions of a BIPRU firm, while daily marking to market may be performed by dealers, verification of market prices and model inputs must be performed by a unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently).
General requirements: Valuation adjustments or, in the case of an insurer or a UK ISPV, valuation adjustments or reserves
GENPRU 1.3.29
See Notes
The recognition of any gains or losses arising from valuations subject to GENPRU 1.3.13 R and GENPRU 1.3.38 R to GENPRU 1.3.41 R must be recognised for the purpose of calculating capital resources in accordance with GENPRU 1.3.14 R to GENPRU 1.3.34 R (Marking to market, Marking to model, Independent price verification, Valuation adjustments or, in the case of an insurer or a UK ISPV, valuation adjustments or reserves). However if GENPRU, BIPRU or INSPRU provide for another treatment of such gains or losses, that other treatment must be applied.
GENPRU 1.3.30
See Notes
A firm must establish and maintain procedures for considering valuation adjustments or, in the case of an insurer or a UK ISPV, valuation adjustments or reserves. These procedures must be compliant with the requirements set out in GENPRU 1.3.33 R.
GENPRU 1.3.31
See Notes
A firm using third-party valuations, or marking to model, must consider whether valuation adjustments are necessary.
GENPRU 1.3.32
See Notes
A firm must consider the need for making adjustments or, in the case of an insurer or a UK ISPV,establishing reserves for less liquid positions and, on an ongoing basis, review their continued appropriateness in accordance with the requirements set out in GENPRU 1.3.33 R. Less liquid positions could arise from both market events and institution-related situations e.g. concentration positions and/or stale positions.
GENPRU 1.3.33
See Notes
(2) A firm must consider the following adjustments or, in the case of an insurer or a UK ISPV, adjustments or reserves: unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, future administrative costs and, where appropriate, model risk.
(3)
(a) In the case of a BIPRU firm, a firm must establish and maintain procedures for calculating adjustments to the current valuation of less liquid positions. Those adjustments must, where necessary, be in addition to any changes to the value of the position required for financial reporting purposes and must be designed to reflect the illiquidity of the position.
(b) A firm must consider several factors when determining whether a valuation adjustment or, in the case of an insurer or a UK ISPV, valuation adjustment or reserve is necessary for less liquid positions. These factors include the amount of time it would take to hedge out the position/risks within the position; the average and volatility of bid/offer spreads; the availability of market quotes (number and identity of market makers); the average and volatility of trading volumes; market concentrations; the ageing of positions; the extent to which valuation relies on marking to model and the impact of other model risks.
(4) With regard to complex products including, but not limited to, securitisation exposures and nth-to-default credit derivatives, a BIPRU firm must explicitly consider the need for valuation adjustments for model risk arising from using a valuation which may be incorrect or the risk from using unobservable calibration parameters in the valuation model.
GENPRU 1.3.34
See Notes
If the result of making adjustments or, in the case of an insurer or a UK ISPV, making adjustments or establishing reserves under GENPRU 1.3.29 R to GENPRU 1.3.33 R is a valuation which differs from the fair value determined in accordance with GENPRU 1.3.4 R, a firm must reconcile the two valuations.
GENPRU 1.3.35
See Notes
Reconciliation differences under GENPRU 1.3.34 R should not be reflected in the valuations under GENPRU 1.3 but should be disclosed to the
appropriate regulator
in prudential returns.
Firms which are subject to the reporting requirement under SUP 16.16 should disclose those reconciliation differences in the Prudent Valuation Return which they are required to submit to the
appropriate regulator
under SUP 16.16.4 R.
Investments, derivatives and quasi-derivatives
GENPRU 1.3.41
See Notes
(1) For the purposes of GENPRU and INSPRU, an insurer or a UK ISPV must apply GENPRU 1.3.14 R to GENPRU 1.3.34 R (Marking to market, Marking to model, Independent price verification,Valuation adjustments or, in the case of an insurer or a UK ISPV, valuation adjustments or reserves) to account for:
(a) investments that are, or amounts owed arising from the disposal of:
(i)
debt securities, bonds and other money- and capital-market instruments;
(ii) loans;
(iii)
shares and other variable yield participations;
(iv)
units in UCITS schemes, non-UCITS retail schemes, recognised schemes and any other collective investment scheme falling within paragraph(1)(A)(d)(iv) of GENPRU 2 Annex 7; and
Shares in and debts due from related undertakings
GENPRU 1.3.42
See Notes
GENPRU 1.3.43
See Notes
GENPRU 1.3.13 R and GENPRU 1.3.41 R do not apply to shares in, and debts due from a related undertaking that is:
(2) an ancillary services undertaking; or
(3) any other subsidiary undertaking, the shares of which a firm elects to value in accordance with GENPRU 1.3.47 R.
GENPRU 1.3.44
See Notes
The effect of GENPRU 1.3.43 R is that shares in, and debts due from, related undertakings of the types referred to are not valued on a mark to market basis by insurers. As a result, debts due from these undertakings, and shares in related undertakings which are ancillary services undertakings, are valued at their accounting book value in accordance with GENPRU 1.3.4 R. shares in related undertakings referred to in GENPRU 1.3.43R (1) or (3) are valued by insurers in accordance with GENPRU 1.3.45 R to GENPRU 1.3.50 R.
GENPRU 1.3.45
See Notes
Except where the contrary is expressly stated in GENPRU, whenever a rule in GENPRUor INSPRU refers to shares held in, and debts due from, an undertaking referred to in GENPRU 1.3.43R (1) or GENPRU 1.3.43R (3), a firm must value the shares held in accordance with GENPRU 1.3.47 R.
GENPRU 1.3.46
See Notes
In relation to shares in, and debts due from, an undertaking referred to in GENPRU 1.3.43R (1), GENPRU 1.3.45 R does not apply for the purposes of GENPRU 2.2.256 R (Adjustments for regulated related undertakings other than insurance undertakings) and INSPRU 6.1 (Group risk: Insurance groups).
GENPRU 1.3.47
See Notes
For the purposes of GENPRU 1.3.45 R, the value of the shares held in an undertaking referred to in GENPRU 1.3.43R (1) or GENPRU 1.3.43R (3) is the sum of:
(2) for the purposes of GENPRU 2.2.256 R (Adjustments for regulated related undertakings other than insurance undertakings), the book value of the total investments in the tier one capital resources and tier two capital resources of that undertaking by the firm and its related undertakings; or
(3) for other purposes in GENPRU and INSPRU, the sum of:
(a) the book value of the investments by the firm and its related undertakings in the tier two capital resources of the undertaking; and
(b) if the undertaking is an insurance undertaking, its ineligible surplus capital and any restricted assets of the undertaking which have been excluded under INSPRU 6.1.41R (1).
GENPRU 1.3.48
See Notes
For the purposes of GENPRU 1.3.47R (1), the regulatory surplus value of an undertaking referred to in GENPRU 1.3.43R (1) or GENPRU 1.3.43R (3) is, subject to GENPRU 1.3.49 R, the sum of:
(1) the total capital after deductions of the undertaking; less
GENPRU 1.3.49
See Notes
(1) Subject to GENPRU 1.3.50 R, for the purposes of GENPRU 1.3.48 R, only the relevant proportion of the:
(a) total capital after deductions of the undertaking; and
is to be taken into account.(2) In (1), the relevant proportion is the proportion of the total number of shares issued by the undertaking held, directly or indirectly, by the firm.
GENPRU 1.3.50
See Notes
If the individual capital resources requirement of an undertaking in GENPRU 1.3.43R (1) that is a subsidiary undertaking exceeds total capital after deductions, then the full amount of the items referred to in GENPRU 1.3.49R (1) must be taken into account for the purposes of GENPRU 1.3.48 R.
GENPRU 1.3.51
See Notes
For the purposes of GENPRU 1.3.47 R to GENPRU 1.3.50 R:
(1) in relation to an undertaking referred to in GENPRU 1.3.43R (1):
(a) subject to (2), individual capital resources requirement has the meaning given by INSPRU 6.1.34 R;
(b) total capital after deductions means:
(i) when used in relation to a regulated related undertaking that is subject to the capital resources table, the total capital after deductions (as calculated at stage M of the capital resources table) of the undertaking; and
(ii) when used in relation to a regulated related undertaking that is not subject to the capital resources table, the total capital after deductions calculated as if that undertaking were required to calculate its total capital after deductions in accordance with stage M of the calculation in the capital resources table, but with such adjustments being made to secure that the undertaking's calculation of its total capital after deductions complies with the relevant sectoral rules applicable to it; and
(c) ineligible surplus capital has the meaning given by INSPRU 6.1.67 R;
(2) in relation to an undertaking referred to in GENPRU 1.3.43R (3),
(a) the individual capital resources requirement is zero; and
(b) the total capital after deductions means the total capital after deductions of the undertaking calculated as if the undertaking were an insurance holding company required to calculate its total capital resources in accordance with the capital resources table but with such adjustments being made to secure that the undertaking's calculation of its total capital after deductions complies with the sectoral rules for the insurance sector.
GENPRU 1.3.52
See Notes
GENPRU 1.3.47 R to GENPRU 1.3.51 R set out several different valuation bases for an insurer'sshares in related undertakings. The
regulatory surplus value
(defined in GENPRU 1.3.48 R) measures the related undertaking's own capital surplus or deficit. This is used: (i) in GENPRU 1.3.47 R as a basis for calculating the impact on the firm's position of its investments in related undertakings; and (ii) in INSPRU 6.1 as a starting point for the calculation of ineligible surplus capital.
GENPRU 1.3.53
See Notes
GENPRU 1.3.47 R determines how, for the purposes of the solo capital adequacy calculation of an insurer, that insurer'scapital resources should be adjusted to take into account its investments in related undertakings.
GENPRU 1.3.54
See Notes
The rules that specify how, for the purposes of the adjusted solo capital calculation, an insurer should incorporate its related undertakings into its capital resources and capital resources requirement are set out in INSPRU 6.1.
Insurance Special Purpose Vehicles
GENPRU 1.3.55
See Notes
GENPRU 1.3.56
See Notes
An insurer may value amounts recoverable from an ISPV if it obtains a waiver of GENPRU 1.3.55 R under section 138A of the Act. The conditions that will need to be met, in addition to the statutory tests under section 138A(4) of the Act, before the
PRA
will consider granting such a waiver are set out in INSPRU 1.6.13 G to INSPRU 1.6.18 G.
General insurance business: Community co-insurance operations -
GENPRU 1.3.57
See Notes
Where a relevant insurer determines the amount of a liability in order to make provision for outstanding claims under a Community co-insurance operation, then, if the leading insurer has informed the relevant insurer of the amount of the provision made by the leading insurer for such claims, the amount determined by the relevant insurer:
(1) must be at least as great as the amount of the provision made by the leading insurer; or
(2) in a case where it is not the practice in the United Kingdom to make such provision separately, must be sufficient, when all liabilities are taken into account, to include provision at least as great as that made by the leading insurer for such claims,
due regard being had in either case to the proportion of the risk covered by the relevant insurer and by the leading insurer respectively.GENPRU 1.5
Application of GENPRU 1 to Lloyd's
- 31/12/2006
Application of GENPRU 1.2
GENPRU 1.5.1
See Notes
GENPRU 1.5.2
See Notes
Insurance market direction
GENPRU 1.5.3
See Notes
The insurance market direction in GENPRU 1.5.5 D is given under section 316(1) of the Act (Direction by Authority) and applies to members.
GENPRU 1.5.4
See Notes
The purpose of the insurance market direction in GENPRU 1.5.5 D is to enable the
PRA
to make the rule in GENPRU 1.5.7 R applying to members, in order to:
(1) protect policyholders against the risk that members may not have adequate financial resources to meet liabilities under or in respect of contracts of insurance as they fall due;
(2) promote confidence in the market at Lloyd's by requiring members to maintain financial resources which are adequate to meet their liabilities.
GENPRU 1.5.5
See Notes
With effect from 1 January 2005, Part 9A of the Act (Rules and Guidance) applies to the members of the Society taken together in relation to the insurance market activities of effecting and carrying out contracts of insurance written at Lloyd's, for the purpose of applying the rules and guidance in GENPRU 1.5.7 R to GENPRU 1.5.9 G.
GENPRU 1.5.6
See Notes
Part 9A of the Act is a core provision specified in section 317(1) of the Act (The core provisions). Section 317(2) provides that references in an applied core provision to an authorised person are to be read as references to a person in the class to which the insurance market direction applies. From 1 January 2005, references in Part 9A of the Act are to be read as references to members for the purposes of GENPRU 1.5.7 R to GENPRU 1.5.9 G.
Members' obligation to maintain adequate financial resources
GENPRU 1.5.7
See Notes
The members taken together must at all times maintain overall financial resources, including capital and liquidity resources, that are adequate, both as to amount and quality, to ensure that there is no significant risk that liabilities under or in respect of contracts of insurance written at Lloyd's will not be met as they fall due.
GENPRU 1.5.8
See Notes
Under GENPRU:
(1)
managing agents must ensure that adequate financial resources are available to support the insurance business carried on through each syndicate that they manage; and
(2) the Society must, having regard to the availability and value of the central assets, ensure that the financial resources supporting the insurance business of each member are adequate at all times.
GENPRU 1.5.9
See Notes
In practice, compliance with the requirements described in GENPRU 1.5.8 G is likely to have the effect that members comply with GENPRU 1.5.7 R.
Application of GENPRU 1.3
GENPRU 1.5.10
See Notes
Amounts receivable but not yet received
GENPRU 1.5.11
See Notes
When recognising and valuing assets that are available to meet liabilities arising from a member'sinsurance business, neither the Society nor managing agents may attribute any value to any amounts receivable but not yet received from that member or another member, except for:
(1) timing differences provided that a corresponding amount has been deducted from syndicate assets or funds at Lloyd's;
(2) the Society'scallable contributions, which are valued according to GENPRU 1.5.17 R to GENPRU 1.5.18 R; and
(3) debts owed by a member to another member of the Society where the debt is a liability arising out of the insurance business he carries on at Lloyd's.
Letters of credit, guarantees and life assurance policies
GENPRU 1.5.12
See Notes
When recognising and valuing assets held as members'funds at Lloyd's the Society may, if the conditions in GENPRU 1.5.13 R are satisfied, attribute a value to letters of credit and guarantees that it holds in respect of a member'sinsurance business.
GENPRU 1.5.13
See Notes
The conditions referred to in GENPRU 1.5.12 R are that letters of credit and guarantees must be:
GENPRU 1.5.14
See Notes
When recognising and valuing assets held as members'funds at Lloyd's the Society may attribute a value to verifiable sums arising out of life assurance policies.
GENPRU 1.5.15
See Notes
The Society must value any letter of credit, guarantee or life assurance policy at its net realisable value. The Society must make all appropriate deductions, including those in respect of:
(1) the expenses of realisation; and
(2) any reduction in value that would be likely to occur if the asset needed to be realised at short notice to meet liabilities falling due earlier than expected.
GENPRU 1.5.16
See Notes
If a member relies on a value attributed to a letter of credit or guarantee to meet any applicable capital resources requirement and that letter of credit or guarantee will expire in less than one month, the Society must take appropriate steps to ensure that the applicable capital resources requirement will continue to be met, including taking steps to ensure that sums due under the letter of credit or guarantee are drawn down when due and carried to the appropriate Lloyd's trust fund.
The Society's callable contributions
GENPRU 1.5.17
See Notes
For the purposes of GENPRU 1.5.15R (2), the amount assumed to be callable from a member must not exceed the lower of:
(1) the maximum callable contribution that member is or may be liable to make in that financial year; and
(2) the amount by which the member's own capital resources exceed the member's own capital resources requirement.
GENPRU 1.5.18
See Notes
The Society must value callable contributions taking appropriate account of any legal, constructive or other limits on its ability to call for contributions from members or to realise the amount called.
GENPRU 1.5.19
See Notes
The Society must give the
PRA
adequate advance notice if it proposes to change the maximum amount of the callable contribution that members may be liable to make in any financial year.
GENPRU 1.5.20
See Notes
The
PRA
would normally expect not less than six months' notice under GENPRU 1.5.19 R.
Liabilities
GENPRU 1.5.21
See Notes
Subject to GENPRU 1.5.22 R, the Society must recognise and value all of a member's liabilities in respect of its insurance business.
GENPRU 1.5.22
See Notes
The Society need not recognise or value a member's liabilities that are recognised and valued at syndicate level by managing agents in accordance with GENPRU 1.3.
GENPRU 1.5.23
See Notes
For the purposes of calculating a member'scapital resources, when valuing a member'sfunds at Lloyd's the Society must deduct the value of a member's liabilities determined under GENPRU 1.5.21 R.
GENPRU 1.5.24
See Notes
The liabilities to be valued under GENPRU 1.5.21 R and deducted under GENPRU 1.5.23 R include:
(1) amounts owing to members' agents;
(2) amounts owing to the Society;
(3) an appropriate accrual for tax payable on any profits;
(4) (where required under any applicable accounting principle in accordance with GENPRU 1.3.4 R), any contingent liability relating to liabilities reinsured into Equitas Reinsurance Ltd; and
GENPRU 1.5.25
See Notes
In recognising and valuing a member's liabilities, the Society and managing agents may, to the extent permitted by applicable accounting principles, leave out of account the liabilities in respect of 1992 and prior general insurance business reinsured by Equitas Reinsurance Limited.
GENPRU 1.5.26
See Notes
There may be contingent liabilities associated with the reinsurance into Equitas. GENPRU 1.3 requires managing agents and the Society to treat those contingent liabilities in accordance with applicable accounting principles: see GENPRU 1.3.4 R. Depending on the circumstances, managing agents or the Society may need to disclose or account for such a liability.
GENPRU 2
Capital
GENPRU 2.1
Calculation of capital resources requirements
- 31/12/2006
Application
GENPRU 2.1.1A
See Notes
Except as indicated in SUP 2.1.60R, this section applies to an insurer, unless it is:
(1) a non-directive friendly society; or
(2) a Swiss general insurer; or
(3) an EEA-deposit insurer; or
(4) an incoming EEA firm; or
(5) an incoming Treaty firm.
- 01/01/2014
GENPRU 2.1.2
See Notes
GENPRU 2.1.3
See Notes
(1) This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.
(2) Where an insurer carries on both long-term insurance business and general insurance business, except where a particular provision provides otherwise, this section applies separately to each type of business.
GENPRU 2.1.4
See Notes
The adequacy of a firm'scapital resources needs to be assessed in relation to all the activities of the firm and the risks to which they give rise.
GENPRU 2.1.5
See Notes
The requirements in this section apply to a firm on a solo basis.
Purpose
GENPRU 2.1.6
See Notes
Principle 4 requires a firm to maintain adequate financial resources. GENPRU 2 sets out provisions that deal specifically with the adequacy of that part of a firm's financial resources that consists of capital resources. The adequacy of a firm'scapital resources needs to be assessed both by that firm and the
appropriate regulator
. Through its rules, the
appropriate regulator
sets minimum capital resources requirements for firms. It also reviews a firm's own assessment of its capital needs, and the processes and systems by which that assessment is made, in order to see if the minimum capital resources requirements are appropriate (see GENPRU 1.2 (Adequacy of financial resources), BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment)).
GENPRU 2.1.7
See Notes
This section sets capital resources requirements for a firm. GENPRU 2.2 (Capital resources) sets out how, for the purpose of meeting capital resources requirements, the amounts or values of capital, assets and liabilities are to be determined. More detailed rules relating to capital, assets and liabilities are set out in GENPRU 1.3 (Valuation) and, for an insurer, INSPRU and, for a BIPRU firm, BIPRU.
GENPRU 2.1.8A
See Notes
This section implements minimum EC standards for the capital resources required to be held by an insurer undertaking business that falls within the scope of the Consolidated Life Directive (2002/83/EC), the Reinsurance Directive (2005/68/EC) or the First Non-Life Directive (1973/239/EEC) as amended.
- 01/01/2014
Monitoring requirements
GENPRU 2.1.9
See Notes
A firm must at all times monitor whether it is complying with GENPRU 2.1.13 R (the main capital adequacy rule for insurer) or the main BIPRU firm Pillar 1 rules and be able to demonstrate that it knows at all times whether it is complying with those rules.
GENPRU 2.1.10
See Notes
For the purposes of GENPRU 2.1.9 R, a firm should have systems in place to enable it to be certain whether it has adequate capital resources to comply with GENPRU 2.1.13 R and the main BIPRU firm Pillar 1 rules (as applicable) at all times. This does not necessarily mean that a firm needs to measure the precise amount of its capital resources and its CRR on a daily basis. A firm should, however, be able to demonstrate the adequacy of its capital resources at any particular time if asked to do so by the
appropriate regulator
.
GENPRU 2.1.11
See Notes
A firm must notify the
appropriate regulator
immediately of any breach, or expected breach, of GENPRU 2.1.13 R (in the case of an insurer) or the main BIPRU firm Pillar 1 rules (in the case of a BIPRU firm).
Additional capital requirements
GENPRU 2.1.12
See Notes
The
appropriate regulator
may impose a higher capital requirement than the minimum requirement set out in this section as part of the firm's
Part 4A permission
(see GENPRU 1.2 (Adequacy of financial resources), BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment)).
Main requirement: Insurers
GENPRU 2.1.13
See Notes
(1) Subject to (2), an insurer must maintain at all times capital resources equal to or in excess of its capital resources requirement (CRR).
(2) An insurer which is a participating insurance undertaking and, in relation to its own group capital resources, is in compliance with INSPRU 6.1.9 R (Requirement to maintain group capital), is deemed to comply with this rule.
GENPRU 2.1.14
See Notes
An insurer must comply with GENPRU 2.1.13 R separately in respect of both its long-term insurance business and its general insurance business unless it is a pure reinsurer or a captive reinsurer which has a single MCR in respect of its entire business in accordance with GENPRU 2.1.26 R.
GENPRU 2.1.15
See Notes
In order to comply with GENPRU 2.1.14 R, an insurer carrying on both general insurance business and long-term insurance business will need to allocate its capital resources between its general insurance business and long-term insurance business so that the capital resources allocated to its general insurance business are equal to or in excess of its CRR for its general insurance business and the capital resources allocated to its long-term insurance business are equal to or in excess of its CRR for its long-term insurance business. Whereas long-term insurance assets cannot be used towards meeting a firm'sCRR for its general insurance business, surplus general insurance assets may be used towards meeting the CRR for its long-term insurance business (see INSPRU 1.5.30 R to INSPRU 1.5.32 G). INSPRU 1.5 (Internal-contagion risk) sets out the detailed requirements for the separation of long-term and general insurance business.
GENPRU 2.1.16
See Notes
Calculation of the CRR for an insurer
GENPRU 2.1.17
See Notes
The CRR for any insurer carrying on general insurance business is equal to the MCR in GENPRU 2.1.24 R or, for a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business, in GENPRU 2.1.26 R.
GENPRU 2.1.18
See Notes
The CRR for any insurer to which this rule applies (see GENPRU 2.1.19 R and GENPRU 2.1.20 R) is the higher of:
GENPRU 2.1.19
See Notes
Subject to GENPRU 2.1.20 R, GENPRU 2.1.18 R applies to an insurer carrying on long-term insurance business, other than:
(1) a non-directive mutual;
(3) an insurer which has with-profits insurance liabilities that are, and at all times since 31 December 2004 (the coming into force of GENPRU 2.1.18 R) have remained, less than £500 million.
GENPRU 2.1.20
See Notes
GENPRU 2.1.21
See Notes
The effect of GENPRU 2.1.19R (3) is that an insurer to which GENPRU 2.1.18 R applies because it has with-profits insurance liabilities of £500 million or more, will continue to be subject to GENPRU 2.1.18 R even if its with-profits insurance liabilities fall below £500 million. However, if that happens, it may apply for a waiver from GENPRU 2.1.18 R under section 138A of the Act. In exercising its discretion under section 138A of the Act, the
appropriate regulator
will have regard (among other factors) to whether there has been a material and permanent change to the insurer's business and to the prospects of it continuing to have with-profits insurance liabilities of less than £500 million.
GENPRU 2.1.22
See Notes
An insurer that has always had with-profits insurance liabilities of less than £500 million since GENPRU 2.1.18 R came into force may wish to "opt in" to GENPRU 2.1.18 R and therefore become a realistic basis life firm. By doing so, it becomes obliged to calculate a with-profits insurance capital component (see GENPRU 2.1.38 R and INSPRU 1.3 (With-profits insurance capital component)), but it also becomes entitled to certain modifications to the way that a firm is required to calculate its mathematical reserves (see INSPRU 1.2.46 R (Future net premiums: adjustment for deferred acquisition costs) and INSPRU 1.2.76 R (Persistency assumptions)). The firm is also then required to report its liabilities on a realistic basis (see IPRU(INS) rule 9.31R(b)). In order to "opt in", the insurer must make an election under GENPRU 2.1.20 R that GENPRU 2.1.18 R is to apply to it. If an insurer that has elected to calculate and report its with-profits insurance liabilities on a realistic basis subsequently decides that it no longer wishes to do so, it may seek to "opt out" by applying for a waiver from GENPRU 2.1.18 R under section 138A of the Act. In exercising its discretion under section 138A of the Act, the
appropriate regulator
will have regard (among other factors) to whether there has been a material and permanent change to the firm's business and to whether it continues to have with-profits insurance liabilities of less than £500 million.
GENPRU 2.1.23
See Notes
The CRR for an insurer carrying on long-term insurance business, but to which GENPRU 2.1.18 R does not apply, is equal to the MCR in GENPRU 2.1.25 R or, for a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business, in GENPRU 2.1.26 R.
Calculation of the MCR (Insurer only)
GENPRU 2.1.24
See Notes
Subject to GENPRU 2.1.26 R, for an insurer carrying on general insurance business the MCR in respect of that business is the higher of:
(1) the base capital resources requirement for general insurance business applicable to that firm; and
GENPRU 2.1.24A
See Notes
Subject to GENPRU 2.1.26 R, for an insurer carrying on long-term insurance business to which GENPRU 2.1.18 R applies the MCR in respect of that business is the higher of:
(1) the base capital resources requirement for long-term insurance business applicable to that firm; and
GENPRU 2.1.25
See Notes
Subject to GENPRU 2.1.26 R, for an insurer carrying on long-term insurance business, but to which GENPRU 2.1.18 R does not apply, the MCR in respect of that business is the higher of:
(1) the base capital resources requirement for long-term insurance business applicable to that firm; and
(2) the sum of:
(a) the long-term insurance capital requirement; and
(b) the resilience capital requirement.
GENPRU 2.1.26
See Notes
For a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business:
(1) the MCR in respect of its general insurance business is the general insurance capital requirement; and
(2) the MCR in respect of its long-term insurance business is the sum of:
unless the sum of:(a) the long-term insurance capital requirement; and
(b) the resilience capital requirement;
(3) the general insurance capital requirement; and
(4) the sum of:
is lower than the base capital resources requirement, in which case the firm has a single MCR in respect of its entire business equal to the base capital resources requirement.(a) the long-term insurance capital requirement; and
(b) the resilience capital requirement;
GENPRU 2.1.27
See Notes
The MCR gives effect to the
EU
Directive minimum requirements. For general insurance business, the
EU
Directive minimum is the higher of the general insurance capital requirement and the relevant base capital resources requirement. For long-term insurance business, the
EU
Directive minimum is the higher of the long-term insurance capital requirement and the base capital resources requirement. For pure reinsurers and captive reinsurers carrying on both general insurance business and long-term insurance business, however, the base capital resources requirement is the
EU
Directive required minimum only when it is higher than the sum of the general insurance capital requirement and the long-term insurance capital requirement. The base capital resources requirement is the minimum guarantee fund for the purposes of article 29(2) of the Consolidated Life Directive (2002/83/EC), article 17(2) of the First Non-Life Directive (1973/239/EEC) as amended and article 40(2) of the Reinsurance Directive (2005/68/EC). The resilience capital requirement is a PRAminimumrequirement for
long-term insurance business for
regulatory basis only life firms
that is additional to the
EU
minimum requirement for long-term insurance business.
GENPRU 2.1.28
See Notes
The calculation of the resilience capital requirement is set out in INSPRU 3.1 (Market Risk in insurance).
Calculation of the base capital resources requirement for an insurer
GENPRU 2.1.29
See Notes
The amount of an insurer'sbase capital resources requirement is set out in the table in GENPRU 2.1.30 R. If an insurer falls within one or more of the descriptions of type of firm set out in GENPRU 2.1.30 R, its base capital resources requirement is the highest amount set out against the different types of firm within whose description it falls.
Table: Base capital resources requirement for an insurer
GENPRU 2.1.30
See Notes
This table belongs to GENPRU 2.1.29 R
| Firm category | Amount: Currency equivalent of | |
| General insurance business | ||
| Liability insurer (classes 10-15) | Directive mutual | €2.775 million |
| Non-directive insurer | €350,000 | |
| Other (including mixed insurer but excluding pure reinsurer) | €3.7 million | |
| Other insurer | Directive mutual | €1.875 million |
| Non-directive insurer (classes 1 to 8, 16 or 18) | €260,000 | |
| Non-directive insurer (classes 9 or 17) | €175,000 | |
| Mixed insurer | €3.7 million | |
| Other (excluding pure reinsurer) | €2.5 million | |
| Long-term insurance business | ||
| Mutual | Directive | €2.775 million |
| Non-directive mutual | €700,000 | |
| Any other insurer (including mixed insurer but excluding pure reinsurer) | €3.7 million | |
| All business (general insurance business and long-term insurance business) | ||
| Pure reinsurer excluding captive reinsurer | €3.7 million | |
| Captive reinsurer | €1.2 million | |
GENPRU 2.1.31
See Notes
(1) Under the Insurance Directives the amount of the base capital resources requirement specified in the last column of the table in GENPRU 2.1.30 R for an insurer which is not a Non-directive insurer is subject to annual review. The relevant amounts will be increased by the percentage change in the European index of consumer prices (comprising all EU member states, as published by Eurostat) from 20 March 2002, to the relevant review date, rounded up to a multiple of €100,000, provided that where the percentage change since the last increase is less than 5%, no increase will take place.
(2) Similar provisions for the index-linking of the base capital resources requirement are included in the Reinsurance Directive, although in that case the index-linking starts from 10 December 2005. However, to ensure consistency as between all firms affected by the index-linking of the base capital resources requirement under the Insurance Directives and the Reinsurance Directive, the
PRA
intends, so far as possible, to amend the amounts in GENPRU 2.1.30 R for all such firms (and GENPRU 2.3.9 R for the base capital resources requirements applying to Lloyd's) when an index-linked increase is required by the Insurance Directives. The
PRA
may, however, have to depart from this approach where the result would be that the base capital resources requirement required for any type of firm under GENPRU 2.1.30 R is less than the increased amount resulting from the operation of an index-linking provision to which it is subject.
GENPRU 2.1.32
See Notes
Any increases in the base capital resources requirement referred to in GENPRU 2.1.31 G will be published on the
PRA
website.
GENPRU 2.1.33
See Notes
In the case of an insurer and for the purposes of the base capital resources requirement, the exchange rate from the Euro to the pound sterling for each year beginning on 31 December is the rate applicable on the last day of the preceding October for which the exchange rates for the currencies of all the European Union member states were published in the Official Journal of the European Union.
Calculation of the general insurance capital requirement (Insurer only)
GENPRU 2.1.34
See Notes
An insurer must calculate its general insurance capital requirement as the highest of:
(1) the premiums amount;
(2) the claims amount; and
(3) the brought forward amount.
GENPRU 2.1.35
See Notes
The calculation of each of the premiums amount, claims amount and brought forward amount is set out in INSPRU 1.1 (Capital resources requirement and technical provisions for insurance business).
Calculation of the long-term insurance capital requirement (Insurer only)
GENPRU 2.1.36
See Notes
An insurer must calculate its long-term insurance capital requirement as the sum of:
(3) the insurance expense risk capital component; and
GENPRU 2.1.37
See Notes
The calculation of each of the capital components is set out in INSPRU 1.1 (Capital resources requirement and technical provisions for insurance business).
Calculation of the ECR (Insurer only)
GENPRU 2.1.38
See Notes
For an insurer carrying on long-term insurance business the ECR in respect of that business is the sum of:
(1) the long-term insurance capital requirement; and
GENPRU 2.1.39
See Notes
Details of the resilience capital requirement and the with-profits insurance capital component are set out in INSPRU 3.1 (Market Risk in insurance) and INSPRU 1.3 (With-profits insurance capital component) respectively.
GENPRU 2.2
Capital resources
- 31/12/2006
Application
GENPRU 2.2.1A
See Notes
This section applies to an insurer unless it is:
(1) a non-directive friendly society; or
(2) a Swiss general insurer; or
(3) an EEA-deposit insurer; or
(4) an incoming EEA firm; or
(5) an incoming Treaty firm.
- 01/01/2014
Purpose
GENPRU 2.2.2
See Notes
GENPRU 2.1 (Calculation of capital resources requirement) sets out minimum capital resources requirements for a firm. This section (GENPRU 2.2) sets out how, for the purpose of these requirements, capital resources are defined and measured.
GENPRU 2.2.3
See Notes
This section implements minimum EC standards for the composition of capital resources required to be held by an insurer undertaking business that falls within the scope of the Consolidated Life Directive (2002/83/EC), the First Non-Life Directive (1973/239/EEC) as amended or the Reinsurance Directive (2005/68/EC).
Principles underlying the definition of capital resources
GENPRU 2.2.8
See Notes
The
appropriate regulator
has divided its definition of capital into categories, or tiers, reflecting differences in the extent to which the capital instruments concerned meet the purpose and conform to the characteristics of capital listed in GENPRU 2.2.9 G. The
appropriate regulator
generally prefers a firm to hold higher quality capital that meets the characteristics of permanency and loss absorbency that are features of tier one capital. Capital instruments falling into core tier one capital can be included in a firm's regulatory capital without limit. Typically, other forms of capital are either subject to limits (see the capital resources gearing rules) or, in the case of some specialist types of capital, may only be included with the express consent of the
appropriate regulator
(which takes the form of a waiver under section 138A of the Act). Details of the individual components of capital are set out in the capital resources table.
Tier one capital
GENPRU 2.2.9
See Notes
Tier one capital typically has the following characteristics:
(1) it is able to absorb losses;
(2) it is permanent or (in the case of a BIPRU firm) available when required;
(3) it ranks for repayment upon winding up, administration or similar procedure after all other debts and liabilities; and
(4) it has no fixed costs, that is, there is no inescapable obligation to pay dividends or interest.
GENPRU 2.2.10
See Notes
The forms of capital that qualify for Tier one capital are set out in the capital resources table and include, for example, share capital, reserves, partnership and sole trader capital, verified interim net profits and, for a mutual, the initial fund plus permanent members' accounts. Tier one capital is divided into:
(1)
in the case of an insurer, core tier one capital, perpetual non-cumulative preference shares and innovative tier one capital; and
(2) in the case of a BIPRU firm, core tier one capital and hybrid capital. Hybrid capital is further divided into the different stages B1, B2 and C of the calculation in the capital resources table.
Upper and lower tier two capital
GENPRU 2.2.11
See Notes
Tier two capital includes forms of capital that do not meet the requirements for permanency and absence of fixed servicing costs that apply to tier one capital. Tier two capital includes, for example:
(1) capital which is perpetual (that is, has no fixed term) but cumulative (that is, servicing costs cannot be waived at the issuer's option, although they may be deferred - for example, cumulative preference shares); only perpetual capital instruments may be included in upper tier two capital;
(2) capital which is not perpetual (that is, it has a fixed term) or which may have fixed servicing costs that cannot generally be either waived or deferred (for example, most subordinated debt); such capital should normally be of a medium to long-term maturity (that is, an original maturity of at least five years); dated capital instruments are included in lower tier two capital;
(3) (for BIPRU firms) certain revaluation reserves such as reserves arising from the revaluation of land and buildings, including any net unrealised gains for the fair valuation of equities held in the available-for-sale financial assets category; and
(4) (for BIPRU firms) general/collective provisions.
Tier three capital
GENPRU 2.2.12
See Notes
Tier three capital consists of forms of capital conforming least well to the characteristics of capital listed in GENPRU 2.2.9 G: either subordinated debt of short maturity (upper tier three capital) or net trading book profits that have not been externally verified (lower tier three capital).
Non-standard capital instruments
GENPRU 2.2.13
See Notes
There may be examples of capital instruments that, although based on a standard form, contain structural features that make the rules in this section difficult to apply. In such circumstances, a firm may seek individual guidance on the application of those rules to the capital instrument in question. See SUP 9 (Individual guidance) for the process to be followed when seeking individual guidance.
Deductions from capital
GENPRU 2.2.14
See Notes
Deductions should be made at the relevant stage of the calculation of capital resources to reflect capital that may not be available to the firm or assets of uncertain value (for example, holdings of intangible assets and assets that are inadmissible for an insurer.
GENPRU 2.2.16
See Notes
A full list of deductions from capital resources is shown in the capital resources table applicable to the firm.
Calculation of capital resources: Insurers
GENPRU 2.2.22
See Notes
Capital resources for an insurer can be calculated either as the total of eligible assets less foreseeable liabilities (which is the approach taken in the Insurance Directives) or by identifying the components of capital. Both calculations give the same result for the total amount of capital resources. The approach taken in this section has been to specify the components of capital and the relevant deductions. This is set out in the capital resources table. A simple example, showing the reconciliation of the two methods, is given in the table in GENPRU 2.2.23 G.
Table: Approaches to calculating capital resources
GENPRU 2.2.23
See Notes
This table belongs to GENPRU 2.2.22 G
| Liabilities | Assets | ||
| Borrowings | 100 | Admissible assets | 350 |
| Ordinary shares | 200 | Intangible assets | 100 |
| Profit and loss account and other reserves | 100 | Other inadmissible assets | 100 |
| Perpetual subordinated debt | 150 | ||
| Total | 550 | Total | 550 |
| Calculation of capital resources: eligible assets less foreseeable liabilities | |||
| Total assets | 550 | ||
| less intangible assets | (100) | ||
| less inadmissible assets | (100) | ||
| less liabilities (borrowings) | (100) | ||
| Capital resources | 250 | ||
| Calculation of capital resources: components of capital | |||
| Ordinary shares | 200 | ||
| Profit and loss account and other reserves | 100 | ||
| Perpetual subordinated debt | 150 | ||
| less intangible assets | (100) | ||
| less inadmissible assets | (100) | ||
| Capital resources | 250 | ||
Limits on the use of different forms of capital: General
GENPRU 2.2.24
See Notes
As the various components of capital differ in the degree of protection that they offer the firm and its customers and consumers, restrictions are placed on the extent to which certain types of capital are eligible for inclusion in a firm'scapital resources. These rules are called the capital resources gearing rules.
Limits on the use of different forms of capital: Use of higher tier capital in lower tiers
GENPRU 2.2.25
See Notes
A firm may include in a lower stage of capital, capital resources which are eligible for inclusion in a higher stage of capital if the capital resources gearing rules would prevent the use of that capital in that higher stage of capital. However:
(1) the capital resources gearing rules applicable to that lower stage of capital apply to higher stage of capital included in that lower stage of capital; and
(2) (subject to GENPRU 2.2.26 R and GENPRU 2.2.26A R) the rules in GENPRU governing the eligibility of capital in that lower stage of capital continue to apply.
GENPRU 2.2.26
See Notes
An item of tier one capital which is included in a firm'stier two capital resources under GENPRU 2.2.25 R is not subject to the requirement to obtain a legal opinion in GENPRU 2.2.159R (12).
GENPRU 2.2.26A
See Notes
A dated item of tier one capital which is included in a BIPRU firm'stier two capital resources under GENPRU 2.2.25 R is not subject to the requirement to have no fixed maturity date in GENPRU 2.2.177R (1).
Limits on the use of different forms of capital: Limits relating to tier one capital applicable to insurers
GENPRU 2.2.29
See Notes
In relation to the tier one capital resources of an insurer, calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions), at least 50% must be accounted for by core tier one capital.
GENPRU 2.2.30
See Notes
In relation to the
tier one capital resources
of an insurer, calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions), no more than 15% may be accounted for by innovative tier one capital.
Limits on the use of different forms of capital: Limits relating to tier one capital: Purpose of the requirements
GENPRU 2.2.31
See Notes
The purpose of the requirements in GENPRU 2.2.29 R and GENPRU 2.2.30AR (1) is to ensure that the firm'stier one capital resources includes a minimum proportion of core tier one capital which provides the highest quality capital. Within the 50% limit on non-core tier one capital:
(1)
GENPRU 2.2.30 R places a further sub-limit on the amount of innovative tier one capital that an insurer may include in its tier one capital resources; and
(2)
GENPRU 2.2.30AR (2) and GENPRU 2.2.30AR (3) place further sub-limits on the amounts of hybrid capital included at stages B2 and C of the calculation in the capital resources table that a BIPRU firm may include in its tier one capital resources.
These limits are necessary to ensure that most of a firm'stier one capital comprises items of capital of the highest quality.
Limits on the use of different forms of capital: Insurers
GENPRU 2.2.32
See Notes
At least 50% of an insurer'sMCR must be accounted for by the sum of:
(1) the amount calculated at stage A of the calculation in the capital resources table (Core tier one capital); and
(2) notwithstanding GENPRU 2.2.29 R, the amount calculated at stage B of the calculation in the capital resources table (Perpetual non-cumulative preference shares);
less the amount calculated at stage E of the calculation in the capital resources table (Deductions from tier one capital).GENPRU 2.2.33
See Notes
Subject to GENPRU 2.2.34A R, an
insurer carrying on long-term insurance business must meet the higher of:
(1) 1/3 of the long-term insurance capital requirement; and
(2) the base capital resources requirement;
with the sum of the items listed at stages A (Core tier one capital), B (Perpetual non-cumulative preference shares), G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table less the sum of the items listed at stage E in the capital resources table (Deductions from tier one capital).GENPRU 2.2.34
See Notes
Subject to GENPRU 2.2.34A R, an
insurer carrying on general insurance business must meet the higher of:
(1) 1/3 of the general insurance capital requirement; and
(2) the base capital resources requirement;
with the sum of the items listed at stages A (Core tier one capital), B (Perpetual non-cumulative preference shares), G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table less the sum of the items listed at stage E (Deductions from tier one capital) in the capital resources table.GENPRU 2.2.34A
See Notes
A pure reinsurer carrying on both long-term insurance business and general insurance business must meet the higher of:
(1) 1/3 of the sum of the long-term insurance capital requirement and the general insurance capital requirement; and
(2) the base capital resources requirement;
with the sum of the items listed at stages A (Core tier one capital), B (Perpetual non-cumulative preference shares), G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table less the sum of the items listed at stage E (Deductions from tier one capital) in the capital resources table.GENPRU 2.2.35
See Notes
In GENPRU 2.2.33 R,
GENPRU 2.2.34 R
and GENPRU 2.2.34A R:
(1) items listed at stage B (Perpetual non-cumulative preference shares) in the capital resources table may be included notwithstanding GENPRU 2.2.29 R;
(2)
innovative tier one capital that meets the conditions (other than GENPRU 2.2.159R (12) (Requirement for a legal opinion)) for it to be included as upper tier two capital at stage G (Upper tier two capital) in the capital resources table may be treated as an item listed at stage G; and
(3) an insurer must exclude from the calculation the higher of the following:
(a) the amount (if any) by which the sum of the items listed at stages G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table exceeds the total (net of deductions) of the remaining constituents of adjusted stage M; and
(b) the amount (if any) by which the sum of the items listed at stage H in the capital resources table exceeds one-third of the total (net of deductions) of the remaining constituents of adjusted stage M;
where adjusted stage M means the amount calculated at stage M of the calculation in the capital resources table (Total capital after deductions) less the amount of any innovative tier one capital that is not treated as upper tier two capital for the purpose of GENPRU 2.2.33 R,
GENPRU 2.2.34 R
or GENPRU 2.2.34A R, as the case may be.GENPRU 2.2.36
See Notes
The purpose of the requirements in
GENPRU 2.2.33 R
to
GENPRU 2.2.34A R is to comply with the requirements of the Insurance Directives and the Reinsurance Directive that an insurer must maintain a guarantee fund of higher quality capital resources items.
GENPRU 2.2.37
See Notes
Subject to GENPRU 2.2.38 R, an insurer must exclude from the calculation of its capital resources the following:
(1) the amount (if any) by which tier two capital resources exceed the amount calculated at stage F (Total tier one capital after deductions) of the calculation in the capital resources table; and
(2) the amount (if any) by which lower tier two capital resources exceed 50% of the amount calculated at stage F of the calculation in the capital resources table.
GENPRU 2.2.38
See Notes
At least 75% of an insurer'sMCR must be accounted for by the sum of:
(1) the amount calculated at stage A (Core tier one capital) plus, notwithstanding GENPRU 2.2.29 R, the amount calculated at stage B (Perpetual non-cumulative preference shares) less the amount calculated at stage E (Deductions from tier one capital) of the calculation in the capital resources table; and
(2) the amount calculated at stage G (Upper tier two capital) of the calculation in the capital resources table.
GENPRU 2.2.39
See Notes
In GENPRU 2.2.38 R the amount of any innovative tier one capital that meets the conditions for it to be included as upper tier two capital at stage G (Upper tier two capital) in the capital resources table may be included in the amount calculated at stage G.
GENPRU 2.2.40
See Notes
GENPRU 2.2.32 R, GENPRU 2.2.37 R and GENPRU 2.2.38 R give effect to the requirements of the Insurance Directives and the Reinsurance Directive that no more than 50% of the amount which is the lesser of the available solvency margin and the required solvency margin should consist of tier two capital resources and that no more than 25% of that amount should consist of lower tier two capital resources.
GENPRU 2.2.41
See Notes
An insurer(other than a pure reinsurer)that carries on both long-term insurance business and general insurance business must apply the relevant limits in GENPRU 2.2.32 R to GENPRU 2.2.38 R separately for each type of business.
Notification of issuance of capital instruments
GENPRU 2.2.61A
See Notes
This section applies to a firm intending to issue a capital instrument on or after 1 March 2012 for inclusion in its capital resources.
GENPRU 2.2.61B
See Notes
A firm must notify the
appropriate regulator
in writing of its intention to issue a capital instrument which it intends to include within its capital resources at least one month before the intended date of issue, unless there are exceptional circumstances which make it impracticable to give such a period of notice, in which event the firm must give as much notice as is practicable in those circumstances. When giving notice, a firm must:
(1) provide details of the amount of capital the firm is seeking to raise through the intended issue and whether the capital is intended to be issued to external investors or within its group;
(2) identify the stage of the capital resources table the capital instrument is intended to fall within;
(3) include confirmation from a senior manager of the firm responsible for authorising the intended issue that the capital instrument complies with the rules applicable to instruments included in the stage of the capital resources table identified in (2); and
(4) provide a copy of the term sheet and details of any features of the capital instrument which are novel, unusual or different from a capital instrument of a similar nature previously issued by the firm or widely available in the market or not specifically contemplated by GENPRU 2.2.
This rule does not apply to a firm which intends to issue a capital instrument listed in GENPRU 2.2.61E RGENPRU 2.2.61C
See Notes
A firm must provide a further notification to the
appropriate regulator
in writing including all the information required in GENPRU 2.2.61BR (1) to (4) as soon as it proposes any change to the intended date of issue, amount of issue, type of investors, stage of capital or any other feature of the capital instrument to that previously notified to the
appropriate regulator
.
GENPRU 2.2.61D
See Notes
If a firm proposes to establish a debt securities program for the issue of capital instruments for inclusion within its capital resources, it must:
(1) notify the
appropriate regulator
of the establishment of the program; and
at least one month before the first proposed drawdown. Any changes must be notified to the
appropriate regulator
in accordance with GENPRU 2.2.61C R.GENPRU 2.2.61E
See Notes
The capital instruments to which GENPRU 2.2.61B R does not apply are:
(1) ordinary shares which:
(b) meet the criteria set out in GENPRU 2.2.83R (2) and (3) and, for a BIPRU firm, GENPRU 2.2.83A R; and
(2) debt instruments issued from a debt securities program, provided that program was notified to the
appropriate regulator
prior to its first drawdown, in accordance with GENPRU 2.2.61D R; and
(3)
capital instruments which are not materially different in terms of their characteristics and eligibility for inclusion in a particular tier of capital to capital instruments previously issued by the firm.
GENPRU 2.2.61F
See Notes
A firm must notify the
appropriate regulator
in writing, no later than the date of issue, of its intention to issue a capital instrument listed in GENPRU 2.2.61E R which it intends to include within its capital resources. When giving notice, a firm must:
(2) confirm that the terms of the capital instrument have not changed since the previous issue by the firm of that type of capital instrument.
GENPRU 2.2.61G
See Notes
GENPRU 2.2.61B R provides that, in exceptional circumstances, a firm may provide less than one month's notice of the intended issue. The
appropriate regulator
is unlikely to consider circumstances to be exceptional unless they are such that there is a risk of a firm'scapital resources falling below its capital resources requirement if a one-month notification period is observed. In such circumstances, a firm should notify the
appropriate regulator
as soon as it has resolved to issue further capital, and provide details of its circumstances and why it is not possible to provide one month's notice of the intended issue.
GENPRU 2.2.61H
See Notes
Details of the notification to be provided by a BIPRU firm in relation to capital instruments issued by another undertaking in its group for inclusion in its capital resources or the consolidated capital resources of its UK consolidation group or non-EEA sub-group are set out in BIPRU 8.6.1A R to BIPRU 8.6.1F R. Details of the notification to be provided by an insurer in relation to capital instruments issued by another undertaking in its group for inclusion in its group capital resources are set out in INSPRU 6.1.43A R to INSPRU 6.1.43F R.
Tier one capital: General
GENPRU 2.2.62
See Notes
A firm may not include a capital instrument in its tier one capital resources unless it complies with the following conditions:
(1) it is included in one of the categories in GENPRU 2.2.63 R;
(2) it complies with the conditions set out in GENPRU 2.2.64 R;
(3) i t is not excluded under GENPRU 2.2.65 R (Connected transactions); and
GENPRU 2.2.63
See Notes
General conditions for eligibility as tier one capital
GENPRU 2.2.64
See Notes
The conditions that an item of capital of a firm must comply with under GENPRU 2.2.62R (2) are as follows:
(1) it is issued by the firm;
(2) it is fully paid and the proceeds of issue are immediately and fully available to the firm;
(3) it:
(a) cannot be redeemed at all or can only be redeemed on a winding up of the firm; or
(b) complies with the conditions in GENPRU 2.2.70 R (Basic requirements for redeemability) and GENPRU 2.2.76 R (Redeemable instrument subject to a step-up);
(4) the item of capital meets the following conditions in relation to any coupon:
(b) (if the firm is obliged to pay the coupon) the coupon is payable in the form of an item of capital that is:
(ii) in the case of an insurer, included in a higher stage of capital or the same stage of capital as that first item of capital;
(5) any coupon is either:
(a) non-cumulative; or
(b) (if it is cumulative) it must, if deferred, be paid by the firm in the form of tier one capital complying with (4)(b);
(6) it is able to absorb losses to allow the firm to continue trading and:
(a)
in the case of an insurer, in particular it complies with GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) and, in the case of an innovative tier one instrument, GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption); and
(b)
in the case of a BIPRU firm, it does not, through appropriate mechanisms, hinder the recapitalisation of the firm, and in particular it complies with:
(ii) in the case of core tier one capital, GENPRU 2.2.83AR (9) to GENPRU 2.2.83AR (10) (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)); and
(iii)
in the case of hybrid capital, GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption);
(7) the amount of the item included must be net of any foreseeable tax charge at the moment of its calculation or must be suitably adjusted in so far as such tax charges reduce the amount up to which that item may be applied to cover risks or losses;
(8) it is available to the firm for unrestricted and immediate use to cover risks and losses as soon as these occur;
(9) it ranks for repayment upon winding up, administration or any other similar process:
(a)
in the case of an insurer, no higher than a share of a company incorporated under the Companies Act 2006 (whether or not it is such a share); or
(b) in the case of a BIPRU firm, lower than any items of capital that are:
(10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9) and, where it applies, GENPRU 2.2.271 R (Other requirements: insurers carrying on with-profits business (Insurer only)).
GENPRU 2.2.65
See Notes
An item of capital does not qualify for inclusion as tier one capital if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could result in that item of capital no longer displaying all of the characteristics set out in GENPRU 2.2.64R (1) to GENPRU 2.2.64R (9).
Guidance on certain of the general conditions for eligibility as tier one capital
GENPRU 2.2.66
See Notes
GENPRU 2.2.65 R is an example of the general principle in GEN 2.2.1 R (Purposive interpretation). Its purpose is to emphasise that an item of capital does not meet the conditions for inclusion in tier one capital if in isolation it does meet those requirements but it fails to meet those requirements when other transactions are taken into account. Examples of such connected transactions might include guarantees or any other side agreement provided to the holders of the capital instrument by the firm or a connected party or a related transaction designed, for example, to enhance their security or to achieve a tax benefit, but which may compromise the loss absorption capacity or permanence of the original capital item.
GENPRU 2.2.67
See Notes
GENPRU 2.2.64R (2) is stricter than the Companies Act definition of fully paid, which only requires an undertaking to pay.
GENPRU 2.2.67A
See Notes
The purpose of GENPRU 2.2.64R (4) is to ensure that a firm retains flexibility over the payment of coupons and can preserve cash in times of financial stress. However, a firm may include, as part of the capital instrument terms, a right to make payments of a coupon mandatory if an item of capital becomes ineligible to form part of its capital resources (e.g. through a change in the relevant rules) and the firm has notified the
appropriate regulator
that the instrument is ineligible.
GENPRU 2.2.68
See Notes
The
appropriate regulator
considers that dividend pushers diminish the quality of capital by breaching the principle of complete discretion over coupons set out in GENPRU 2.2.64R (4). A dividend pusher operates so that, in a given period of time, payments must be made on senior securities if payments have previously been made on junior securities or securities ranking pari passu. As such, dividend pushers may not be included in the terms of tier one capital, unless the firm has the option to fund the "pushed payment" in stock.
GENPRU 2.2.69
See Notes
An item of capital does not comply with GENPRU 2.2.64R (10) if it is marketed as a capital instrument that would only qualify for a lower level of capital or on the basis that investing in it is like investing in an instrument in a lower tier of capital. For example, an undated capital instrument should not be marketed as a dated capital instrument if the terms of the capital instrument include an option by the issuer to redeem the capital instrument at a specified date in the future.
Redemption of tier one instruments
GENPRU 2.2.70
See Notes
A firm may not include a capital instrument in its tier one capital resources, unless its contractual terms are such that:
(1) (if it is redeemable other than in circumstances set out in GENPRU 2.2.64R (3)(a) (redemption on a winding up)) it is redeemable only at the option of the firm or, in the case of a BIPRU firm, on the date of maturity;
(2) the firm cannot exercise that redemption right:
(a) before the fifth anniversary of its date of issue;
(c) unless at the time of exercise of that right it complies with
GENPRU 2.1.13 R (the main capital adequacy rule for insurers) orthe main BIPRU firm Pillar 1 rules and will continue to do so after redemption;
(3)
(in the case of a BIPRU firm and if it is undated) if it provides for a moderate incentive for the BIPRU firm to redeem it, that incentive does not occur before the tenth anniversary of its date of issue; and
(4)
(in the case of a BIPRU firm and if it is dated):
(a) it has an original maturity date of at least 30 years after its date of issue; and
(b) it does not provide an incentive to redeem on any date other than its maturity date.
GENPRU 2.2.71
See Notes
A firm may include a term in a tier one instrument allowing the firm to redeem it before the date in GENPRU 2.2.70R (2)(a) if the following conditions are satisfied:
(1) the other conditions in GENPRU 2.2.70 R are met;
(2) the circumstance that entitles the firm to exercise that right is:
(a)
(in the case of an insurer) a change in law or regulation in any relevant jurisdiction or in the interpretation of such law or regulation by any court or authority entitled to do so; and
(b)
(in the case of a BIPRU firm) a change in the applicable tax treatment or regulatory classification of those instruments;
(3)
(a)
(in the case of an insurer) it would be reasonable for the firm to conclude that it is unlikely that that circumstance will occur, judged at the time of issue or, if later, at the time that the term is first included in the terms of the tier one instrument; and
(b)
(in the case of a BIPRU firm) the circumstance that entitles the firm to exercise that right was not reasonably foreseeable at the date of issue of the tier one instrument; and
(4) the firm's right is conditional on it obtaining the
appropriate regulator's
consent in the form of a waiver of GENPRU 2.2.72 R.
GENPRU 2.2.72
See Notes
A firm must not redeem a tier one instrument in accordance with a term included under GENPRU 2.2.71 R.
GENPRU 2.2.73
See Notes
The purpose of GENPRU 2.2.71 R to GENPRU 2.2.72 R is this. In general a tier one instrument should not be redeemable by the firm before its fifth anniversary. However there may be circumstances in which it would be reasonable for the firm to redeem it before then. GENPRU 2.2.71 R allows the firm to include a right to redeem the instrument before the fifth anniversary in certain circumstances. A tax call is an example of a term that may be allowed. GENPRU 2.2.71 R says that the terms of the tier one instrument should provide that the firm should not be able to exercise that right without the
appropriate regulator's
consent. Any such consent will be given in the form of a waiver allowing early repayment. Thus although a firm may include a right to redeem early in the terms of a tier one instrument without the need to apply for a waiver the actual exercise of that right will require a waiver.
GENPRU 2.2.74
See Notes
A firm must not redeem any tier one instrument that it has included in its tier one capital resources unless it has notified the
appropriate regulator
of its intention at least one month before it becomes committed to do so. When giving notice, the firm must provide details of its position after such redemption in order to show how it will:
(1) meet its capital resources requirement;
(2)
have sufficient financial resources to meet the overall financial adequacy rule; and
(3)
in the case of a BIPRU firm, not otherwise suffer any undue effects to its financial or solvency conditions.
GENPRU 2.2.74A
See Notes
The
appropriate regulator
considers that, in order to comply with GENPRU 2.2.74 R, the firm should, at a minimum, provide the
appropriate regulator
with the following information:
(1) a comprehensive explanation of the rationale for the redemption;
(2) the firm's financial and solvency position before and after the redemption, in particular whether that redemption, or other foreseeable internal and external events or circumstances, may increase the risk of the firm breaching its capital resources requirement;
(3) an appropriately stressed capital plan covering 3-5 years, which includes the effect of the proposed redemption; and
(4) an evaluation of the risks to which the firm is or might be exposed and whether the level of tier one capital ensures the coverage of such risks including stress tests on the main risks showing potential loss under different scenarios.
GENPRU 2.2.75
See Notes
If a firm gives notice of the redemption or repayment of any tier one instrument, the firm must no longer include that instrument in its tier one capital resources.
Step-ups and redeemable tier one instruments: Insurer only
GENPRU 2.2.76
See Notes
In the case of an insurer, in relation to an innovative tier one instrument which is redeemable and which satisfies the following conditions:
(1) it is or may become subject to a step-up; and
(2) a reasonable person would think that:
(a) the firm is likely to redeem it before the tenth anniversary of its date of issue; or
(b) the firm is likely to have an economic incentive to redeem it before the tenth anniversary of its date of issue;
the redemption date in GENPRU 2.2.70R (2)(a) is amended by replacing "fifth anniversary" with "tenth anniversary".
Meaning of redemption
GENPRU 2.2.77
See Notes
(1) This rule applies to a tier one instrument, tier two instrument or tier three instrument (instrument A) that under its terms is exchanged for or converted into another instrument or is subject to a similar process.
(2) This rule also applies to instrument A if under its terms it is redeemed out of the proceeds of the issue of new securities.
(3) If the instrument with which instrument A is replaced is included in the same stage of capital or a higher stage of capital as instrument A, instrument A is treated as not having been redeemed or repaid for the purposes of GENPRU 2.2.
(4) (3) does not apply to GENPRU 2.2.114 R (Redeemable instrument likely to be repaid etc), GENPRU 2.2.74 R (Notice of redemption of tier one instruments), GENPRU 2.2.174 R (Notice of redemption of tier two instruments) or GENPRU 2.2.245 R (so far as it relates to notice of redemption of tier three instruments).
(5) (3) only applies if it would be reasonable (taking into account the economic substance) to treat the original instruments as continuing in issue on the same or a more favourable basis. The question of whether that basis is more or less favourable must be judged from the point of view of the adequacy of the firm'scapital resources.
GENPRU 2.2.78
See Notes
(1) A share is not redeemable for the purposes of this section merely because the Companies Act 1985, the Companies (Northern Ireland) Order 1986 or the Companies Act 2006allows the firm that issued it to purchase it.
(2) A capital instrument is not redeemable for the purposes of this section merely because the firm that issued it has a right to purchase it similar to the right in (1).
GENPRU 2.2.79
See Notes
This section generally uses the term repay and redeem interchangeably.
Loss absorption
GENPRU 2.2.80
See Notes
A firm may not include a share in its tier one capital resources unless (in addition to complying with the other relevant rules in GENPRU 2.2):
(1) (in the case of a firm that is a company as defined in the Companies Act 2006it is "called-up share capital" within the meaning given to that term in that Act; or
(2) [deleted]
GENPRU 2.2.81
See Notes
A firm may not include a capital instrument other than a share in its tier one capital resources unless it complies with GENPRU 2.2.80R (3).
GENPRU 2.2.82
See Notes
There are additional loss absorption requirements for (in the case of an insurer)
innovative tier one capital
and (in the case of a BIPRU firm) hybrid capital in GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption) and (in the case of a BIPRU firm) for core tier one capital in GENPRU 2.2.83AR (9) to (10) (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)).
Core tier one capital: permanent share capital
GENPRU 2.2.83
See Notes
Permanent share capital means an item of capital which (in addition to satisfying GENPRU 2.2.64 R) meets the following conditions:
(1) it is:
(a) an ordinary share; or
(b) a members' contribution; or
(d) [deleted]
(2) any coupon on it is not cumulative, the firm is under no obligation to pay a coupon in any circumstances and the firm has the right to choose the amount of any coupon that it pays;
(3) the terms upon which it is issued do not permit redemption and it is otherwise incapable of being redeemed to at least the same degree as an ordinary share issued by a company incorporated under the Companies Act 2006(whether or not it is such a share); and
(4)
(in the case of a BIPRU firm) it meets the conditions set out in GENPRU 2.2.83A R (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)).
Core tier one capital: additional information
GENPRU 2.2.84
See Notes
In the case of an insurer, GENPRU 2.2.83R (2) and GENPRU 2.2.83R (3) have the effect that the firm should be under no obligation to make any payment in respect of a tier one instrument if it is to form part of its permanent share capital unless and until the firm is wound up. A tier one instrument that forms part of permanent share capital should not therefore count as a liability before the firm is wound up. The fact that relevant company law permits the firm to make earlier repayment does not mean that the tier one instruments are not eligible. However, the firm should not be required by any contractual or other obligation arising out of the terms of that capital to repay permanent share capital. Similarly a tier one instrument may still qualify if company law allows dividends to be paid on this capital, provided the firm is not contractually or otherwise obliged to pay them. There should therefore be no fixed costs.
GENPRU 2.2.84A
See Notes
Under GENPRU 2.2.83AR (13) a tier one instrument does not meet the conditions for inclusion as core tier one capital if in isolation it does meet those requirements but fails to meet those requirements when other transactions are taken into account. Examples of those transactions include guarantees, pledges of assets or other side agreements provided by the firm to the holder of a tier one instrument designed to enhance the legal or economic seniority of the tier one instrument.
Core tier one capital: profit and loss account and other reserves: Losses
GENPRU 2.2.85A
See Notes
(1)
In the case of an insurer, negative amounts, including any interim net losses, must be deducted from profit and loss account and other reserves.
(2) For these purposes material interim net losses mean unaudited interim losses arising from a firm'strading book and non-trading book business which exceed 10% of the sum of its capital resources calculated at stage A (Core tier one capital) in the capital resources table.
- 01/01/2014
Core tier one capital: profit and loss account and other reserves: Dividends
GENPRU 2.2.87
See Notes
Dividends must be deducted from reserves as soon as they are foreseeable.
GENPRU 2.2.87A
See Notes
Each firm must assess for itself when, in its particular circumstances, dividends are foreseeable. A dividend is foreseeable at the latest:
(1) in the case of an interim dividend, when it is declared by the directors; or
(2) in the case of a final dividend, when the directors approve the dividend to be proposed at the annual general meeting.
Core tier one capital: profit and loss account and other reserves: Capital contributions
GENPRU 2.2.88
See Notes
A firm must account for a capital contribution as an increase in reserves and may, notwithstanding GENPRU 2.2.63 R, count that increase in reserves as core tier one capital.
GENPRU 2.2.89
See Notes
An item of capital qualifies as a capital contribution if it is a gift of capital (and, as such, is not repayable) and a coupon is not payable on it.
Core tier one capital: profit and loss account and other reserves: Valuation
GENPRU 2.2.91
See Notes
Profit and loss account and other reserves should be valued in accordance with the rules in GENPRU 1.3 (Valuation).
Core tier one capital: Share premium account
GENPRU 2.2.101
See Notes
(1) A firm must include share premium account relating to the issue of a share forming part of its core tier one capital in its core tier one capital.
(2) A firm must include share premium account relating to the issue of a share forming part of another tier of capital in that other tier.
(3) A firm that is incorporated under the Companies Act 2006may include its share premium account as core tier one capital notwithstanding (2) to the extent that the terms of issue of the share concerned provide that any premium is not repayable on redemption.
Core tier one capital: externally verified interim net profits
GENPRU 2.2.102
See Notes
Externally verified interim net profits are interim profits which have been verified by a firm's external auditors after deduction of tax, forseeabledividends and other appropriations.
GENPRU 2.2.103
See Notes
Core tier one capital: valuation differences (insurer only)
GENPRU 2.2.104
See Notes
GENPRU 2.2.105
See Notes
Valuation differences are all differences between the valuation of assets and liabilities as valued in GENPRU and the valuation that the insurer uses for its external financial reporting purposes, except valuation differences which are dealt with elsewhere in the capital resources table. The sum of these valuation differences must either be added to (if positive) or deducted from (if negative) an insurer'scapital resources in accordance with the capital resources table.
GENPRU 2.2.106
See Notes
Additions to and deductions from capital resources will arise from the application of asset and liability valuation and admissibility rules (see GENPRU 1.3 (Valuation), GENPRU 2.2.251 R (Deductions from total capital: Inadmissible assets) and GENPRU 2 Annex 7 (Admissible assets in insurance)). Downward adjustments include discounting of technical provisions for general insurance business (which is optional for financial reporting but not permitted for regulatory valuation - see GENPRU 2.2.107 R) and derecognition of any defined benefit asset in respect of a defined benefit occupational pension scheme (see GENPRU 1.3.9R (2) (General requirements: Adjustments to accounting values)). Details of valuation differences relating to technical provisions and liability adjustments for long-term insurance business are set out in INSPRU 1.2 (Mathematical reserves). In particular, contingent loans or other arrangements which are not valued as a liability under INSPRU 1.2.79 R (2) (Reinsurance) result in a positive valuation difference.
GENPRU 2.2.107
See Notes
(1) Subject to (3), this rule applies to an insurer that carries on general insurance business and which discounts or reduces its technical provisions for claims outstanding.
(2) An insurer of a kind referred to in (1) must deduct from its capital resources the difference between the undiscounted technical provisions or technical provisions before deductions, and the discounted technical provisions or technical provisions after deductions. This adjustment must be made for all general insurance businessclasses, except for risks listed under classes 1 and 2. For classes other than 1 and 2, no adjustment needs to be made in respect of the discounting of annuities included in technical provisions. For classes 1 and 2 (other than annuities), if the expected average interval between the settlement date of the claims being discounted and the accounting date is not at least four years, the insurer must deduct:
(a) the difference between the undiscounted technical provisions and the discounted technical provisions; or
(b) where it can identify a subset of claims such that the expected average interval between the settlement date of the claims and the accounting date is at least four years, the difference between the undiscounted technical provisions and the discounted technical provisions for the other claims.
(3) This rule does not apply to a pure reinsurer which became a firm in run-off before 31 December 2006 and whose
Part 4A permission
has not subsequently been varied to add back the regulated activity of effecting contracts of insurance.
Core tier one capital: fund for future appropriations (insurer only)
GENPRU 2.2.108
See Notes
In relation to an insurer the fund for future appropriations means the fund of the same name required by the insurance accounts rules, comprising all funds the allocation of which either to policyholders or to shareholders has not been determined by the end of the financial year, or the balance sheet items under international accounting standards which in aggregate represent as nearly as possible that fund.
Other tier one capital: perpetual non-cumulative preference shares (insurer only)
GENPRU 2.2.109
See Notes
In the case of an insurer, a perpetual non-cumulative preference share may be included at stage B of the calculation in the capital resources table if (in addition to satisfying all the other requirements in relation to tier one capital) it satisfies the following conditions:
(1) any coupon on it is not cumulative, and the firm is under no obligation to pay a coupon in any circumstances; and
(2) it is not an innovative tier one instrument.
GENPRU 2.2.110
See Notes
The other main provisions relevant to the eligibility of a perpetual non-cumulative preference share for inclusion by an insurer in tier one capital are GENPRU 2.2.62 R (Tier one capital: General), GENPRU 2.2.64 R (General conditions for eligibility as tier one capital), GENPRU 2.2.65 R (Connected transactions), GENPRU 2.2.70 R to GENPRU 2.2.75 R (Redemption of tier one instruments) and GENPRU 2.2.80 R (Loss absorption). The rules about innovative tier one capital are also relevant as they may result in perpetual non-cumulative preference shares being treated as innovative tier one capital. Perpetual non-cumulative preference shares should be perpetual and redeemable only at the firm's option. Perpetual preference shares should be non-cumulative if they are to be included at stage B of the calculation in the capital resources table. Any feature that, in conjunction with a call, would make a firm more likely to redeem perpetual non-cumulative preference shares would normally result in classification as an innovative tier one instrument. Such features would include, but not be limited to, a step-up, bonus coupon on redemption or redemption at a premium to the original issue price of the share.
Other tier one capital: innovative tier one capital: general (insurer only)
GENPRU 2.2.113
See Notes
If, in the case of an insurer, an item of capital is stated to be an innovative tier one instrument by the rules in GENPRU 2.2, it cannot be included in stages A (Core tier one capital) or B (Perpetual non-cumulative preference shares) of the calculation in the capital resources table.
Other tier one capital: innovative tier one capital: redemption (insurer only)
GENPRU 2.2.114
See Notes
If, in the case of an insurer, a tier one instrument:
(1) is redeemable; and
(2) a reasonable person would think that:
that tier one instrument is an innovative tier one instrument.(a) the firm is likely to redeem it; or
(b) the firm is likely to have an economic incentive to redeem it;
GENPRU 2.2.115
See Notes
Any feature that in conjunction with a call would make an insurer more likely to redeem a tier one instrument would normally result in classification as innovative tier one capital resources. Innovative tier one instruments include but are not limited to those incorporating a step-up or principal stock settlement.
Other tier one capital: loss absorption
GENPRU 2.2.116
See Notes
An insurer must not include a capital instrument that is not a share in its innovative tier one capital resourcesunless (in addition to satisfying all the other requirements in relation to tier one capital and innovative tier one capital) the firm's obligations under the instrument either:
(1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
(2) do constitute such a liability but the terms of the instrument are such that:
(a) any such liability is not relevant for the purposes of deciding whether:
(i) the firm is, or is likely to become, unable to pay its debts; or
(ii) its liabilities exceed its assets;
GENPRU 2.2.117
See Notes
The effect of GENPRU 2.2.116 R and GENPRU 2.2.116A R is that if a potential tier one instrument does constitute a liability, this should only be the case when the firm is able to pay that liability but chooses not to do so. As tier one capital resources for an insurer should be undated, this will generally only be relevant on a solvent winding up of the firm. The holder should agree that the firm has no liability (including any contingent or prospective liability) to pay any amount to the extent to which that liability would cause the firm to become insolvent if it made the payment or to the extent that its liabilities exceed its assets or would do if the payment were made. The terms of the capital instrument should be such that the directors can continue to trade in the best interests of the senior creditors even if this prejudices the interests of the holders of the instrument.
GENPRU 2.2.118
See Notes
(1)
An insurer may not include an innovative tier one instrument, unless it is a preference share, in its tier one capital resources unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.64R (6) (loss absorption) and GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) are met.
(2) A BIPRU firm may not include a capital instrument at stage B1, B2 or C of the calculation in the capital resources table unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.62 R (Tier one capital: General), GENPRU 2.2.64R (1) to GENPRU 2.2.64R (9) (General conditions for eligibility as tier one capital) and GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) are met.
GENPRU 2.2.119
See Notes
For the purpose of GENPRU 2.2.118 R, an independent legal opinion may be given by an employee of that firm, but if an employee does so he should not be part of the business unit responsible for the transaction (including the drafting of the issue documentation).
Other tier one capital: innovative tier one capital: coupons (insurer only)
GENPRU 2.2.120
See Notes
In the case of an insurer, a tier one instrument with a cumulative or mandatory coupon is an innovative tier one instrument.
Other tier one capital: innovative tier one capital: step-ups (insurer only)
GENPRU 2.2.121
See Notes
If, in the case of an insurer:
(2) that potential tier one instrument is redeemable at any time (whether before, at or after the time of the step-up);
that potential tier one instrument is an innovative tier one instrument.GENPRU 2.2.122
See Notes
Tier one capital: Conversion ratio
GENPRU 2.2.138
See Notes
(1) This rule applies to a potential tier one instrument if:
(b) it provides that if the issuer does not exercise that right or does not do so in specified circumstances the issuer must or may have to redeem it in whole or in part through the issue of shares eligible for inclusion in the firm'stier one capital resources or the instrument converts or may convert into such shares; and
(c)
GENPRU 2.2.77 R means that the obligation in (1)(b) is treated as not being inconsistent with GENPRU 2.2.70R (1) (Tier one capital should not be redeemable at the option of the holder).
(2) A firm must not include a potential tier one instrument to which this rule applies in its tier one capital resources if:
(a) the conversion ratio as at the date of redemption may be greater than the conversion ratio as at the time of issue by more than:
(i) in the case of a BIPRU firm, 150%; and
(ii) in the case of an insurer, 200%; or
(b) the market price of the conversion instruments issued in relation to one unit of the original capital item (plus any cash element of the redemption) may be greater than the issue price of that original capital item.
(3) All determinations under this rule are made as at the date of issue of the original capital item.
GENPRU 2.2.139
See Notes
In GENPRU 2.2.138 R to GENPRU 2.2.142 R:
(1) the original capital item means the capital item that is being redeemed; and
(2) the conversion instrument means the tier one capital to be issued on its redemption.
GENPRU 2.2.140
See Notes
In GENPRU 2.2.138 R to GENPRU 2.2.142 R, the conversion ratio means the ratio of:
(1) the number of units of the conversion instrument that the firm must issue to satisfy its redemption obligation (so far as it is to be satisfied by the issue of conversion instruments) in respect of one unit of the original capital item; to
(2) one unit of the original capital item.
GENPRU 2.2.141
See Notes
In GENPRU 2.2.138 R to GENPRU 2.2.142 R, the conversion ratio as at the date of issue of the original capital item is calculated as if the original capital item were redeemable at that time.
GENPRU 2.2.142
See Notes
If the conversion instruments or the original capital item are subdivided or consolidated or subject to any other occurrence that would otherwise result in like not being compared with like, the conversion ratio calculation in GENPRU 2.2.138 R must be adjusted accordingly.
GENPRU 2.2.143
See Notes
(1) The significance of the limitations on conversion in GENPRU 2.2.138R (2) can be seen in the example in this paragraph, which uses the conversion ratio applicable to an insurer.
(2) An insurer issues innovative notes with a par value of £100 each. The terms of the instrument provide that if the instrument is not called at par at the first call date the notes convert into a variable number of ordinary shares.
(3) If the market price of the ordinary shares is 400 pence per share on the day of issue of the innovative notes then the maximum number of ordinary shares (M) that a single £100 par value innovative note can be converted into is calculated as follows:
(a) M = Par value of innovative instrument * 200% / market value of ordinary share;
(b) M = £100 * 2 / £4 = 50 shares.
(4) The practical effect is that conversion will result in the holder of an innovative capital note receiving ordinary shares equal to the par value of that note only when the market price of the ordinary shares remains above half the market price of the shares at the date of issue of the notes.
(5) If the market price of the ordinary shares fell by half to 200 pence, the maximum permitted number of shares (50) would have to be issued in order to give an investor in the innovative note ordinary shares with a market value equal to £100. If the market price of the ordinary shares fell below 200 pence, the issue of the maximum permitted number of ordinary shares would have a market value below £100.
GENPRU 2.2.144
See Notes
(1) In addition to the maximum conversion ratios of 200% for an insurer and 150% for a BIPRU firm,
GENPRU 2.2.138R (2)(b) does not permit a firm to issue shares that would have a market value that exceeds the issue price of the instrument being redeemed.
(2) In the example in GENPRU 2.2.143 G, if the market value of the ordinary shares was 250 pence at the conversion date, the maximum number of ordinary shares that may be issued to satisfy the redemption of one of the £100 par value innovative notes would be 40 (= £100 / £2.5).
Tier one capital: Requirement to have sufficient unissued stock
GENPRU 2.2.145
See Notes
(1) This rule applies to a potential tier one instrument of a firm where either:
can be satisfied by the issue of another capital instrument.(a) the redemption proceeds; or
(b) any coupon on that capital item;
(2) A firm may only include an item of capital to which this rule applies in its tier one capital resources if the firm has authorised and unissued capital instruments of the kind in question (and the authority to issue them):
(a) that are sufficient to satisfy all such payments then due; and
(b) are of such amount as is prudent in respect of such payments that could become due in the future.
Step-ups: calculating the size of a step-up
GENPRU 2.2.146
See Notes
(1) Where a rule in this section says that a particular treatment applies to an item of capital that is subject to a step-up of a specified amount, the question of whether that rule is satisfied must be judged by reference to the cumulative amount of all step-ups since the issue of that item of capital rather than just by reference to a particular step-up.
(2) Where a step-up arises through a change from paying a coupon on a debt instrument to paying a dividend on a share issued in settlement of the coupon, any net cost to the firm arising from the different tax treatment of the dividend compared to the tax treatment of interest may be ignored for the purpose of assessing the effect of that step-up.
Step-ups: Limits on the amount of step-ups on tier one and two capital
GENPRU 2.2.147
See Notes
(1) A firm may not include in its tier one capital resources a tier one instrument that is or may be subject to a step-up that does not meet the definition of moderate in the press release of the Basle Committee on Banking Supervision of 27th October 1998 called "Instruments eligible for inclusion in Tier 1 capital".
(2) For the purpose of (1) the words in that press release "than, at national supervisory discretion, either" are replaced by "than the higher of the following two amounts".
(3) The calculations required by this rule and GENPRU 2.2.151 R must be carried out as at the date of issue of the relevant instrument.
(4)
A BIPRU firm may not include a capital instrument in its tier one capital resources if it is redeemable and subject to more than one step-up.
GENPRU 2.2.148
See Notes
The effect of GENPRU 2.2.147 R is that for inclusion in tier one capital resources, step-ups in instruments should be moderate. A moderate step-up for these purposes is one which results in an increase over the initial rate that is no greater than the higher of the following two amounts:
(1) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis; or
(2) 50% of the initial credit spread, less the swap spread between the initial index basis and the stepped-up index basis.
GENPRU 2.2.149
See Notes
If a coupon paid on an item of capital is initially set at a specified spread above an index (the initial index basis), and the coupon moves to being set relative to another index (the stepped up index basis), there will be an implied step-up (positive or negative) even if the specified spread does not change. This is because each index may itself include a spread relative to the risk free rate and this spread may differ between the two indexes. The deduction of the swap spread in GENPRU 2.2.148G (1) and (2) above adjusts for this difference.
GENPRU 2.2.150
See Notes
Where the step-up involves a conversion from fixed to floating (or vice versa), or a switch in basis index, the swap spread should be fixed at pricing date, reflecting the differential in pricing between indices at the time. The significance of deducting the swap spread can be seen by the following example:
(1) the pricing date:
(a) 10 year gilts (G) = 5.5% (the initial index basis);
(b) 3 month LIBOR is the stepped up index basis and the 10 year mid swap rate (L) = 5.9%;
(c) initial fixed coupon rate = G + 200bp;
(d) swap spread = 0.4% (= 5.9% - 5.5%);
(e) initial fixed coupon rate = 7.5%;
(f) the swap spread shows that there is 40bps of spread in the stepped up index basis relative to the initial index basis; and
(g) the initial fixed coupon rate of 7.5% is equivalent to the mid swap rate + 160bp, or L + 200bp - the swap spread;
(2) pricing of stepped-up rate at year 10 with step-up of 100bp without deducting swap spread:
(a)
stepped-up floating rate = L + 200 + 100bp step-up = 8.9%; and
(b) effective step-up from initial fixed rate of 140bp (= 8.9% - 7.5%); and
(3) pricing of stepped-up rate at year 10 with step-up of 100bp with deduction of the swap spread:
(a)
stepped-up floating coupon rate = L + 200 less 40bp swap spread (difference between 5.5% and 5.9%) + 100bp step-up = 8.5%
(b) effective step-up from initial rate of 100bp (= 8.5% - 7.5%).
GENPRU 2.2.151
See Notes
(1) Subject to (2), if a tier two instrument is or may be subject to a step-up that does not meet the definition of moderate in the press release of the Basle Committee on Banking Supervision referred to in GENPRU 2.2.147R (1) as adjusted under GENPRU 2.2.147R (2), the first date that a step-up can take effect is deemed to be its final maturity date if that date is before its actual maturity date.
(2) If a tier two instrument:
(a) is or may be subject to a step-up during the period beginning on the fifth anniversary of the date of issue of that item and ending immediately before the tenth anniversary of the date of issue; and
(b) the step-up or possible step-up is one which may result in an increase over the initial rate that is greater than 50 basis points, less the swap spread between the initial index basis and the stepped-up index basis (all these terms must be interpreted in accordance with GENPRU 2.2.147 R);
the first date that a step-up can take effect is deemed to be its final maturity date if that date is before its actual maturity date.GENPRU 2.2.152
See Notes
An instrument does not breach GENPRU 2.2.147 R or as the case may be, is not subject to a deemed maturity date under GENPRU 2.2.151 R, even though it is or may be subject to a step-up that exceeds the amount specified in those rules if:
(1) the instrument is fungible with other instruments (the "existing stock") that are included in the firm'stier one capital resources (in the case of GENPRU 2.2.147 R) or tier two capital resources (in the case of GENPRU 2.2.151 R);
(2) (if there has been no more than one previous issue of the existing stock) the existing stock complied with those limits on its date of issue;
(3) (if there has been more than one previous issue of the existing stock) the first such issue of the existing stock complied with those limits on its date of issue; and
GENPRU 2.2.153
See Notes
(1) A firm must not include in its tier one capital resources a potential tier one instrument that is or may become subject to a step-up if that step-up can arise earlier than the tenth anniversary of the date of issue of that item of capital.
(2) A firm must not include in its tier two capital resources a capital instrument that is or may become subject to a step-up if that step-up can arise earlier than the fifth anniversary of the date of issue of that item of capital.
GENPRU 2.2.154
See Notes
Debt instruments containing embedded options, e.g. issues containing options for the interest rate after the step-up to be at a margin over the higher of two (or more) reference rates, or for the interest rate in the previous period to act as a floor, may affect the funding costs of the borrower and imply a step-up. In such circumstances, a firm may wish to seek individual guidance on the application of the rules relating to step-ups to the capital instrument in question. See SUP 9 (Individual guidance) for the process to be followed when seeking individual guidance.
Deductions from tier one: Intangible assets
GENPRU 2.2.155
See Notes
A firm must deduct from its tier one capital resources the value of intangible assets.
GENPRU 2.2.156A
See Notes
Intangible assets include goodwill as defined in accordance with the requirements referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) applicable to the firm.
- 01/01/2014
Tier two capital: General
GENPRU 2.2.157
See Notes
Tier two capital resources are split into upper and lower tiers. A major distinction between upper and lower tier two capital is that, except as provided by GENPRU 2.2.26A R for BIPRU firms, only perpetual instruments may be included in upper tier two capital whereas dated instruments, such as fixed term preference shares and dated subordinated debt, may be included in lower tier two capital.
GENPRU 2.2.158
See Notes
Tier two instruments are capital instruments that combine the features of debt and equity in that they are structured like debt, but exhibit some of the loss absorption and funding flexibility features of equity.
General conditions for eligibility as tier two capital instruments
GENPRU 2.2.159
See Notes
A capital instrument must not form part of the tier two capital resources of a firm unless it meets the following conditions:
(1) the claims of the creditors must rank behind those of all unsubordinated creditors;
(2) the only events of default must be non-payment of any amount falling due under the terms of the capital instrument or the winding-up of the firm and any such event of default must not prejudice the subordination in (1);
(3) to the fullest extent permitted under the laws of the relevant jurisdictions, the remedies available to the subordinated creditor in the event of non-payment or other breach of the terms of the capital instrument must (subject to GENPRU 2.2.161 R) be limited to petitioning for the winding-up of the firm or proving for the debt in the liquidation or administration;
(4) any:
(a) remedy permitted by (3);
(b) remedy that cannot be excluded under the laws of the relevant jurisdictions as referred to in (3);
(c) remedy permitted by GENPRU 2.2.161 R; and
(d) terms about repayment as referred to in (5);
must not prejudice the matters in (1) and (2) and in particular any damages permitted by (b) or (c) and repayment obligation must be subordinated in accordance with (1);(5) without prejudice to (1), the debt must not become due and payable before its stated final maturity date (if any) except on an event of default complying with (2) or as permitted by GENPRU 2.2.172 R (Repayment at the option of the issuer) or GENPRU 2.2.194R (2) (Repayment of lower tier two capital at the option of the holder) and any remedy described in (4)(a) to (c) must not prejudice this requirement;
(6) the debt agreement or terms of the capital instrument are governed by the law of England and Wales, or of Scotland or of Northern Ireland;
(7) to the fullest extent permitted under the laws of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the firm against subordinated amounts included in the firm'scapital resources owed to them by the firm;
(8) the terms of the capital instrument must be set out in a written agreement that contains terms that provide for the conditions set out in (1) to (7);
(9) the debt must be unsecured and fully paid up;
(10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9) and, where it applies, GENPRU 2.2.271 R (Other requirements: insurers carrying on with-profits business (Insurer only));
(11) the amount of the item included must be net of any foreseeable tax charge at the moment of its calculation or must be suitably adjusted in so far as such tax charges reduce the amount up to which that item may be applied to cover risks or losses; and
(12) the firm has obtained a properly reasoned independent legal opinion from an appropriately qualified individual stating that the requirements in (1) to (7) and (insofar as it relates to whether the capital instrument is unsecured) (9) have been met.
General conditions for eligibility as tier two capital instruments: Additional remedies
GENPRU 2.2.161
See Notes
A capital instrument may be included in a firm'stier two capital resources even though the remedies available to the subordinated creditor go beyond those referred to in GENPRU 2.2.159R (3), if the following conditions are satisfied:
(1) those remedies are not available for failure to pay any amount of principal, interest or expenses or in respect of any other payment obligation; and
(2) those remedies do not in substance amount to remedies to recover payment of the amounts in (1).
GENPRU 2.2.162
See Notes
If damages are a remedy that cannot be excluded as referred to in GENPRU 2.2.159R (3) those damages should be subordinated in accordance with GENPRU 2.2.159R (1). Damages permitted by GENPRU 2.2.161 R should also be subordinated in accordance with GENPRU 2.2.159R (1).
General conditions for eligibility as tier two capital instruments: Alternative governing laws
GENPRU 2.2.163
See Notes
GENPRU 2.2.159R (6) does not apply if the firm has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the same degree of subordination has been achieved under the law that governs the debt and the agreement as that which would have been achieved under the laws of England and Wales, Scotland, or Northern Ireland.
General conditions for eligibility as tier two capital instruments: Standard form documentation
GENPRU 2.2.164
See Notes
The
appropriate regulator
is more concerned that the subordination provisions listed in GENPRU 2.2.159 R should be effective than that they should follow a particular form. The
appropriate regulator
does not, therefore, prescribe that the loan agreement or capital instrument should be drawn up in a standard form.
Guidance on the general conditions for eligibility as tier two capital instruments
GENPRU 2.2.165
See Notes
For the purposes of GENPRU 2.2.159R (5) the debt agreement or terms of the instrument should not contain any clause which might require early repayment of the debt (e.g. cross default clauses, negative pledges and restrictive covenants). A cross default clause is a clause which says that the loan goes into default if any of the borrower's other loans go into default. It is intended to prevent one creditor being repaid before other creditors, e.g. obtaining full repayment through the courts. A negative pledge is a clause which puts the loan into default if the borrower gives any further charge over its assets. A restrictive covenant is a term of contract that directly, or indirectly, could lead to early repayment of the debt. Some covenants, e.g. relating to the provision of management information or ownership restrictions, are likely to comply with GENPRU 2.2.159R (3) as long as monetary redress is ruled out, or any payments are covered by the subordination clauses.
GENPRU 2.2.166
See Notes
GENPRU 2.2.159R (3) allows a capital instrument to form part of the tier two capital resources even though the laws of the relevant jurisdiction do not allow remedies to be limited in the way described there. For example it is not possible to limit certain remedies in the case of an issue in the United States that is SEC-registered and subject to the provisions of the Trust Indenture Act.
GENPRU 2.2.167
See Notes
The purpose of GENPRU 2.2.159R (7) is to ensure that all of the firm's assets are available to consumers ahead of subordinated creditors. The waiver should apply both before and during liquidation or administration.
GENPRU 2.2.168
See Notes
The guidance in GENPRU 2.2.119 G (Employee may give legal opinion) also applies for the purpose of GENPRU 2.2.159R (12) and GENPRU 2.2.163 R.
Tier two capital instruments: Connected transactions
GENPRU 2.2.169
See Notes
An item of capital does not comply with GENPRU 2.2.159 R (General conditions for eligibility as tier two capital instruments) or GENPRU 2.2.177 R (Upper tier two capital: General) if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could result in that item of capital no longer displaying all of the characteristics set out in whichever of those rules apply.
GENPRU 2.2.170
See Notes
GENPRU 2.2.66 G (Guidance on GENPRU 2.2.65 R) applies to GENPRU 2.2.169 R in the same way as it does to GENPRU 2.2.65 R (The equivalent of GENPRU 2.2.169 R in relation to tier one capital).
Amendment of tier two instruments
GENPRU 2.2.171
See Notes
A firm must not amend the terms of the capital or the documents referred to in GENPRU 2.2.159R (8) unless:
(1) at least one Month before the amendment is due to take effect, the firm has given the
appropriate regulator
notice in writing of the proposed amendment and the
appropriate regulator
has not objected; and
(2) that notice includes confirmation that the legal opinions referred to in GENPRU 2.2.159R (12) and, if applicable, GENPRU 2.2.163 R (General conditions for eligibility as tier two capital instruments: Alternative governing laws) and GENPRU 2.2.181 R (Legal opinions for upper tier two instruments), continue in full force and effect in relation to the terms of the debt and documents after any proposed amendment.
Redemption of tier two instruments
GENPRU 2.2.172
See Notes
A tier two instrument may be redeemable at the option of the firm, but any term of the instrument providing for the firm to have the right to exercise such an option must not provide for that right to be exercisable earlier than the fifth anniversary of the date of issue of the instrument.
GENPRU 2.2.173
See Notes
GENPRU 2.2.71 R to GENPRU 2.2.73 G (Tier one instruments may be redeemed by the issuer before the fifth anniversary in limited circumstances) apply to GENPRU 2.2.172 R in the same way as they do to GENPRU 2.2.70 R (The issuer should not redeem tier one capital before the fifth anniversary).
GENPRU 2.2.174
See Notes
In relation to a tier two instrument, a firm must notify the
appropriate regulator
:before it becomes committed to the proposed repayment (unless that firm intends to repay an instrument on its final maturity date). When giving notice, the firm must provide details of its position after such repayment in order to show how it will:
(3) meet its capital resources requirement; and
(4) have sufficient financial resources to meet the overall financial adequacy rule.
Tier two capital: step-ups
GENPRU 2.2.175
See Notes
The rules and guidance in GENPRU 2.2.146 R to GENPRU 2.2.154 G on step-ups cover tier two capital as well as tier one capital.
Upper tier two capital: General
GENPRU 2.2.176
See Notes
Examples of capital instruments which may be eligible to count in upper tier two capital resources include the following:
(1) perpetual cumulative preference shares;
(2) perpetual subordinated debt; and
(3) other instruments that have the same economic characteristics as (1) or (2).
GENPRU 2.2.177
See Notes
A capital instrument must (in addition to meeting the requirements of the rules about eligibility for inclusion in tier two capital) meet the following conditions before it can be included in a firm'supper tier two capital resources:
(1) it must have no fixed maturity date;
(2) the terms of the instrument must provide for the firm to have the option to defer any coupon on the debt, except that the firm need not have that right in the case of a coupon payable in the form of an item of capital that is included in the same stage of capital or a higher stage of capital as that first item of capital;
(3) the terms of the instrument must provide for the loss-absorption capacity of the capital instrument and unpaid coupons, whilst enabling the firm to continue its business;
(4) it meets the conditions in GENPRU 2.2.169 R (Connected transactions) and GENPRU 2.2.180 R (Loss absorption); and
(5) the terms of the instrument are such that either the instrument or debt is not redeemable or repayable or it is repayable or redeemable only at the option of the firm.
GENPRU 2.2.178
See Notes
If a firm gives notice of the redemption or repayment of an upper tier two instrument, the firm must no longer include it in its upper tier two capital resources.
GENPRU 2.2.179
See Notes
(1) The purpose of GENPRU 2.2.177R (2) is to ensure that a firm which issues an item of capital with a coupon retains flexibility over the payments of such coupon and can preserve cash in times of financial stress. However, a firm may include, as part of the capital instrument terms, a right to make payments of a coupon mandatory if an item of capital becomes ineligible to form part of its capital resources (for example, through a change in the relevant rules) and the firm has notified the
appropriate regulator
that the instrument is ineligible.
(2) For the purpose of GENPRU 2.2.177R (2), GENPRU 2.2.68 G (Dividend pushers) applies equally in relation to the inclusion of an instrument in upper tier two capital resources.
(3)
GENPRU 2.2.26A R provides an exception, in the case of a BIPRU firm, to the rule that instruments must have no fixed maturity date to be eligible for upper tier two capital resources.
Upper tier two capital: Loss absorption
GENPRU 2.2.180
See Notes
A capital instrument may only be included in upper tier two capital resources if a firm's obligations under the instrument either:
(1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
(2) do constitute such a liability but the terms of the instrument are such that:
(a) any such liability is not relevant for the purposes of deciding whether:
(i) the firm is, or is likely to become, unable to pay its debts; or
(ii) its liabilities exceed its assets;
Upper tier two capital: Legal opinions
GENPRU 2.2.181
See Notes
A firm may not include an upper tier two instrument in its upper tier two capital resources unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.177R (3) and GENPRU 2.2.180 R (Loss absorption) are met. This rule does not apply to a perpetual cumulative preference share.
Upper tier two capital: Guidance
GENPRU 2.2.182
See Notes
GENPRU 2.2.180 R is an example of the general principle in GENPRU 2.2.177R (3).
GENPRU 2.2.183
See Notes
The guidance in GENPRU 2.2.117 G (There should be no liability to the extent that the firm would become insolvent, etc) also applies for the purpose of GENPRU 2.2.180 R.
GENPRU 2.2.184
See Notes
The guidance in GENPRU 2.2.119 G (Employee may give legal opinion) also applies for the purpose of GENPRU 2.2.181 R.
Lower tier two capital
GENPRU 2.2.194
See Notes
A firm may include a capital instrument in its lower tier two capital resources if (in addition to meeting the requirements of the rules about eligibility for inclusion in tier two capital) either the holder has no right to repayment or it satisfies either of the following conditions:
(1) it has an original maturity of at least five years; or
(2) it is redeemable on notice from the holder, but the period of notice of repayment required to be given by the holder is five years or more.
GENPRU 2.2.195
See Notes
A firm may include perpetual capital instruments that do not meet the conditions in GENPRU 2.2.177 R (Eligibility conditions for upper tier two capital) in lower tier two capital resources if they meet the general conditions described in GENPRU 2.2.159 R (General conditions for eligibility as tier two capital instruments).
GENPRU 2.2.196
See Notes
(1) For the purposes of calculating the amount of a lower tier two instrument which may be included in a firm'scapital resources:
(a) in the case of an instrument with a fixed maturity date, in the final five years to maturity; and
(b) in the case of an instrument with or without a fixed maturity date but where five years' or more notice of redemption or repayment has been given, in the final five years to the date of redemption or repayment;
the principal amount must be amortised on a straight line basis.(2) If a firm gives notice of the redemption or repayment of a lower tier two instrument and (1) does not apply, the firm must no longer include it in its lower tier two capital resources.
GENPRU 2.2.197
See Notes
If a firm wishes to include in lower tier two capital resources an instrument with or without a fixed maturity date but where less than five years' notice of redemption or repayment has been given, it should seek individual guidance from the
appropriate regulator
.
The effect of swaps on debt capital
GENPRU 2.2.198
See Notes
GENPRU 2.2.198 R to GENPRU 2.2.201 R apply to a tier one instrument, tier two instrument or tier three instrument of a firm that is treated as a liability under the accounting framework to which it is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) (a "debt instrument").
GENPRU 2.2.199
See Notes
A firm must recognise for the purpose of this section any effect that changes in exchange rates or interest rates have on a debt instrument (as defined in GENPRU 2.2.198 R) under the accounting framework to which the firm is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied).
GENPRU 2.2.200
See Notes
A firm must recognise, in accordance with GENPRU 2.2.201 R, the effect of a foreign currency hedge on a debt instrument (as defined in GENPRU 2.2.198 R) denominated in a foreign currency or of an interest rate hedge on a fixed rate coupon debt instrument if:
(1) the accounting framework to which the firm is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) provides for a fair value hedge accounting relationship between a liability and its related hedge;
(2) such a relationship exists under that accounting framework between that debt instrument and that hedge;
(3) (if the debt instrument is a tier one instrument) the firm's obligations under that hedge comply with the conditions in GENPRU 2.2.64 R to GENPRU 2.2.65 R (General conditions for eligibility as tier one capital);
(4) (if the debt instrument is a tier two instrument or an upper tier three instrument) the firm's obligations under that hedge comply with the conditions in GENPRU 2.2.159 R to GENPRU 2.2.169 R (General conditions for eligibility as tier two capital instruments) as modified, in the case of an upper tier three instrument, by GENPRU 2.2.244 R (Application of tier two capitalrules to tier three capital debt) except as follows:
(a)
GENPRU 2.2.159R (9) only applies to the extent that it requires that hedge to be unsecured; and
(b)
GENPRU 2.2.159R (12) (legal opinion) does not apply.
GENPRU 2.2.201
See Notes
A firm must recognise the effect of a hedge as referred to in GENPRU 2.2.200 R by including the net accounting fair value of the hedging instrument in the valuation of the debt instrument (as defined in GENPRU 2.2.198 R).
Deductions from total capital: Inadmissible assets (insurers only)
GENPRU 2.2.250
See Notes
GENPRU 2.2.251
See Notes
For the purposes of the capital resources table, an insurer which is not a pure reinsurer must deduct from total capital resources the value of any asset which is not an admissible asset as listed in GENPRU 2 Annex 7 (Admissible assets in insurance), unless the asset is held to cover property-linked liabilities or index-linked liabilities under INSPRU 3.1.57 R or INSPRU 3.1.58 R (Covering linked liabilities).
GENPRU 2.2.252
See Notes
GENPRU 2.2.251 R does not apply to intangible assets which should be deducted from tier one capital resources under GENPRU 2.2.155 R (Deductions from tier one: Intangible assets).
GENPRU 2.2.253
See Notes
The list of admissible assets has been drawn with the aim of excluding assets:
(1) for which a sufficiently objective and verifiable basis of valuation does not exist; or
(2) whose realisability cannot be relied upon with sufficient confidence; or
(3) whose nature presents an unacceptable custody risk; or
(4) the holding of which may give rise to significant liabilities or onerous duties.
Deductions from total capital: Adjustments for related undertakings
GENPRU 2.2.254
See Notes
GENPRU 2.2.255
See Notes
An insurer must deduct from its capital resources the value of its investments in each of its related undertakings that is an ancillary services undertaking.
GENPRU 2.2.256
See Notes
In relation to each of its related undertakings that is a regulated related undertaking (other than an insurance undertaking) an insurer must add to (if positive), at stage J in the capital resources table (Positive adjustments for related undertakings), or deduct from (if negative), at stage L in the capital resources table (Deductions from total capital), its capital resources the value of its shares in that undertaking calculated in accordance with GENPRU 1.3.47 R (Shares in and debts due from related undertakings).
GENPRU 2.2.257
See Notes
For the purposes of GENPRU 2.2.255 R, investments must be valued at their accounting book value in accordance with GENPRU 1.3.4 R (General requirements: accounting principles to be applied).
GENPRU 2.2.258
See Notes
Related undertakings which are also insurance undertakings are not included in GENPRU 2.2.256 R because an insurer that is a participating insurance undertaking is subject to the requirements of INSPRU 6.1 (Group Risk: Insurance Groups).
Other capital resources: Unpaid share capital or initial funds and calls for supplementary contributions (Insurer only)
GENPRU 2.2.266
See Notes
GENPRU 2.2.267
See Notes
Unpaid share capital or, in the case of a mutual, unpaid initial funds and calls for supplementary contributions are excluded from the capital resources of a firm except to the extent allowed in a waiver under section 138A of the Act (Modification or waiver of rules).
GENPRU 2.2.268
See Notes
Subject to a waiver, under the Insurance Directives a maximum of one half of unpaid share capital or, in the case of a mutual, one half of the unpaid initial fund may be included in an insurer'scapital resources, once the paid-up part amounts to 25% of that share capital or fund, up to 50% of total capital resources.
GENPRU 2.2.269
See Notes
In the case of a mutual carrying on general insurance business and subject to a waiver, calls for supplementary contributions within the financial year may only be included in a firm'scapital resources up to a maximum of 50% of the difference between the maximum contributions and the contributions actually called in, subject to a limit of 50% of total capital resources. In the case of a mutual carrying on long-term insurance business, the Consolidated Life Directive does not permit calls for supplementary contributions to be included in a firm'scapital resources.
Other requirements: insurers carrying on with-profits business (Insurer only)
GENPRU 2.2.270
See Notes
GENPRU 2.2.270A
See Notes
GENPRU 2.2.271 R to GENPRU 2.2.272 G and GENPRU 2.2.274 G are made by both the PRA and FCA for the purpose of applying these provisions to insurers pursuant to the statutory objectives.
- 01/04/2013
GENPRU 2.2.271
See Notes
An insurer carrying on with-profits insurance business must, in addition to the other requirements in respect of capital resources elsewhere in GENPRU 2.2, meet the following conditions before a capital instrument can be included in that insurer'scapital resources:
(1) the insurer must manage the with-profits fund so that discretionary benefits under a with-profits insurance contract are calculated and paid disregarding, insofar as is necessary for its customers to be treated fairly, any liability the firm may have to make payments under the capital instrument;
(2) the intention to manage the with-profits fund on the basis set out in (1) must be disclosed in the firm'sPrinciples and Practices of Financial Management; and
(3) no amounts, whether interest, principal, or other amounts, must be payable by the firm under the capital instrument if the firm's assets would then be insufficient to enable it to declare and pay under a with-profits insurance contract discretionary benefits that are consistent with the firm's obligations under the FCA's
Principle 6 (Customers' interests).
GENPRU 2.2.272
See Notes
The purpose of GENPRU 2.2.271 R is to achieve practical subordination of capital instruments if they are to qualify as capital resources to the liabilities an insurer has to with-profits policyholders, including liabilities which arise from the regulatory duty (as regulated by the FCA)to treat customers fairly in setting discretionary benefits. (
FCA's
Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly.) It is not sufficient for a capital instrument to be subordinated to such liabilities only on winding up of the firm because such liabilities to policyholders may have been reduced by the inappropriate use of management discretion to enable funds to be applied in repaying subordinated capital instruments before winding up proceedings commence.
GENPRU 2.2.273
See Notes
GENPRU 2.2.271 R is an additional requirement to all other rules in this section concerning the eligibility of a capital instrument to count as a component of an insurer'scapital resources. Subordinated debt instruments will be the main type of capital instrument to which this rule is relevant, including both upper tier two (undated) and lower tier two (dated) subordinated debt instruments. Subordinated debt instruments which are issued by a related undertaking are not intended to be covered by this rule and may be included in group capital resources as appropriate if the other eligibility criteria are met.
GENPRU 2.2.274
See Notes
GENPRU 2.2.64R (10) and GENPRU 2.2.159R (10) contain provisions concerning the marketing of a capital instrument. In relation to a firm to which GENPRU 2.2.271 R applies, in order to comply with GENPRU 2.2.64R (10) and GENPRU 2.2.159R (10), it should draw to the attention of subscribers the risk that payments may be deferred or cancelled in order to operate the with-profits fund so as to give priority to the payment of discretionary benefits to with-profits policyholders.
GENPRU 2.2.275
See Notes
(1)
Upper tier two instruments should meet the requirements of GENPRU 2.2.177R (3) which goes beyond the requirement in GENPRU 2.2.271R (3) since it requires a firm to have the option to defer payments in all circumstances, not just if necessary to treat customers fairly. However, for lower tier two instruments, GENPRU 2.2.271R (3) represents an additional requirement since a failure to pay amounts of interest or principal on a due date must not constitute an event of default under GENPRU 2.2.159R (2) for firms carrying on with-profits insurance business.
(2) For firms which are realistic basis life firms compliance with GENPRU 2.2.271R (3) would usually be achieved if the capital instrument provides that no amounts will be payable under it unless the firm'scapital resources exceed its capital resources requirement. However, such firms should ensure that the terms of the capital instrument refer to
capital resources requirements in force from time to time, including the current realistic reserving requirements and are not restricted to former minimum capital requirements based only on the Insurance Directives' required minimum margin of solvency. For firms which are not realistic basis life firms, compliance with GENPRU 2.2.271R (3) will probably require specific reference to be made to treating customers fairly in the terms of the capital instrument.
GENPRU 2.3
Application of GENPRU 2 to Lloyd's
- 31/12/2006
Application of GENPRU 2.1
GENPRU 2.3.1
See Notes
GENPRU 2.3.2
See Notes
GENPRU 2.3.3
See Notes
GENPRU 2.1.13 R requires the Society to ensure, in relation to each member'sinsurance business, that capital resources equal to or in excess of the member'scapital resources requirement (CRR) are maintained. GENPRU 2.1 sets out the overall framework of the CRR. INSPRU 1.1 sets out the calculation of the components of the general insurance capital requirement and the long-term insurance capital requirement.
GENPRU 2.3.4
See Notes
Managing agents are required to calculate the ECR for the purposes of carrying out syndicate ICAs under INSPRU 7.1. As with-profits insurance business is not carried on through any syndicate, the calculation of the with-profits insurance capital component will not be applicable. INSPRU 1.3 is not applied to Lloyd's.
Calculation of the MCR
GENPRU 2.3.5
See Notes
For the purposes of GENPRU 2.1.24 R, the Society must calculate the MCR in respect of the general insurance business of each member as the higher of:
(1) the member's share of the base capital resources requirement in respect of general insurance business for the members in aggregate; and
(2) the general insurance capital requirement for the members, calculated according to GENPRU 2.3.11 R.
GENPRU 2.3.6
See Notes
For the purposes of GENPRU 2.3.5R (1), the Society must determine the member's share by apportioning the base capital resources requirement in respect of general insurance business for the members in aggregate between members in proportion to the result for each member of GENPRU 2.3.11 R.
GENPRU 2.3.7
See Notes
For the purposes of GENPRU 2.1.25 R, the Society must calculate the MCR in respect of the long-term insurance business of each member as the higher of:
(1) the member's share of the base capital resources requirement in respect of long-term insurance business for the members in aggregate; and
(2) the sum of, for each member:
(a) the long-term insurance capital requirement; and
(b) the resilience capital requirement.
GENPRU 2.3.8
See Notes
For the purposes of GENPRU 2.3.7R (1), the Society must determine the member's share by applying to the aggregate long-term business base capital resources requirement the ratio of the result for the member of GENPRU 2.3.7R (2) to the aggregate of the results of GENPRU 2.3.7R (2) for all members.
Calculation of the base capital resources requirement
GENPRU 2.3.9
See Notes
The amount of the base capital resources requirement for the members in aggregate is:
(1) for general insurance business, €3.7 million; and
(2) for long-term insurance business, €3.7 million.
Calculation of the general insurance capital requirement
GENPRU 2.3.10
See Notes
For the purposes of GENPRU 2.1.34 R, the Society must calculate the general insurance capital requirement for the members in aggregate as the higher of:
(1) the aggregate for all members of the higher of, for each member, the result of the premiums amount and the claims amount; and
(2) the brought forward amount.
GENPRU 2.3.11
See Notes
The Society must determine the general insurance capital requirement for each member by apportioning the result of GENPRU 2.3.10 R between members on a fair and reasonable basis, provided that the general insurance capital requirement for a member must not be less than the higher of the result of the premiums amount and the claims amount for that member.
GENPRU 2.3.12
See Notes
The Society should calculate the premiums amount and the claims amount for each member on the basis of the member's own general insurance business, including insurance business that attaches to the reinsuring member for the purposes of GENPRU following an approved reinsurance to close (see INSPRU 8.2.16 R).
GENPRU 2.3.13
See Notes
The Society must calculate the general insurance capital requirement it would have to determine under GENPRU 2.1.34 R if it were an insurer carrying on all the general insurance business carried on by its members, but eliminating inter-syndicate reinsurance (the Society GICR).
GENPRU 2.3.14
See Notes
For the purpose of GENPRU 2.3.13 R the Society may make appropriate approximations, taking reasonable care to avoid underestimating the Society GICR.
GENPRU 2.3.15
See Notes
The Society must determine each member's share of the Society GICR by allocating the Society GICR between the members in proportion to the result for each member of GENPRU 2.3.11 R.
Application of GENPRU 2.2
GENPRU 2.3.16
See Notes
Subject to GENPRU 2.3.18 R, GENPRU 2.3.19 R and GENPRU 2.3.21 R, GENPRU 2.2 applies to managing agents and to the Society in accordance with:
GENPRU 2.3.17
See Notes
GENPRU 2.1 sets out minimum capital resources requirements for a firm and for Lloyd's members. GENPRU 2.2 sets out how, for the purpose of these requirements, capital resources are defined and measured. GENPRU 2.2 applies:
(1) to managing agents for their calculation of the capital resources managed by them in respect of each syndicate they manage (by reference, where there is a change in the underlying capital provision, to each open syndicate year); and
(2) to the Society for its calculation of:
(b) its own capital resources.
GENPRU 2.3.18
See Notes
GENPRU 2.2.32 R to GENPRU 2.2.41 R (Limits on the use of different forms of capital) do not apply to managing agents.
GENPRU 2.3.19
See Notes
GENPRU 2.2.32 R to GENPRU 2.2.41 R (Limits on the use of different forms of capital) do apply to the Society with respect to:
GENPRU 2.3.20
See Notes
GENPRU 2.3.21
See Notes
In this section (GENPRU 2.3), "the aggregate capital resources supporting the insurance business of all the members" are:
Calculation of capital resources
GENPRU 2.3.22
See Notes
The capital resources table applies with the modifications that:
(1)
Core tier one capital includes Lloyd's members' contributions in accordance with GENPRU 2.3.34 R, subject, in the case of letters of credit, guarantees and verifiable sums arising out of life assurance policies, to compliance with GENPRU 1.5.8 G to GENPRU 1.5.12 R; and
GENPRU 2.3.23
See Notes
Lloyd's member's contributions are admissible assets under GENPRU 2.3.34 R and include letters of credit, guarantees and verifiable sums arising out of life assurance policies held as funds at Lloyd's. Assets that may be valued as part of capital resources under PRU are not necessarily, however, permitted investments for members under the terms of any Lloyd's trust deed.
GENPRU 2.3.24
See Notes
In calculating its capital resources, the Society may, subject to GENPRU 1.5.13 R to GENPRU 1.5.14 R, recognise and value callable contributions.
GENPRU 2.3.25
See Notes
The Society must calculate each member'scapital resources as the sum of:
(1) a member's proportionate share of the capital resources held at syndicate level for each syndicate in which the member participates; and
(2) the value of a member'sfunds at Lloyd's after deducting liabilities in compliance with GENPRU 1.5.18 R.
GENPRU 2.3.26
See Notes
In order to comply with GENPRU 2.1.13 R the Society must ensure at all times that:
(1) each member'scapital resources requirement is covered by:
(2) the Society GICR is covered by the aggregate capital resources supporting the insurance business of all the members.
GENPRU 2.3.27
See Notes
For the purposes of GENPRU 2.3.26R (1)(b), the Society must maintain at all times capital resources sufficient to meet the aggregate of, for each member, the amount, if any, by which the member'scapital resources fall short of the member'scapital resources requirement.
GENPRU 2.3.28
See Notes
The Society must calculate each member's share of the amount of capital resources required to comply with GENPRU 2.2.33 R as the higher of:
(2) the base capital resources requirement;
allocated between the members in proportion to the result for each member of GENPRU 2.3.7R (2).GENPRU 2.3.29
See Notes
For the purposes of GENPRU 2.2.34 R, the Society must ensure that the aggregate capital resources supporting the insurance business of all the members meet the higher of:
(2) 1/3 of the Society GICR; and
(3) the base capital resources requirement;
with the sum of the items listed in GENPRU 2.2.34 R.GENPRU 2.3.30
See Notes
The Society must calculate each member's share of the amount of capital resources required to comply with GENPRU 2.2.34 R as the higher of:
(2) 1/3 of the Society GICR; and
(3) the base capital resources requirement;
allocated between the members in proportion to the result for each member of GENPRU 2.3.11 R.
Characteristics of tier one capital
GENPRU 2.3.31
See Notes
A Lloyd's member's contribution may be included in tier one capital resources to the extent that:
(1) the proceeds are immediately and fully available in respect of the member'sinsurance business at Lloyd's;
(2) (except in relation to letters of credit), it complies with GENPRU 2.2.64R (3) or cannot be repaid to a member until all of the member's liabilities in respect of its insurance business at Lloyd's have been extinguished, covered or reinsured by an approved reinsurance to close;
Adjustments for related undertakings
GENPRU 2.3.32
See Notes
GENPRU 2.2.256 R (Adjustment for regulated related undertakings other than insurance undertakings) applies to the Society with the modification that the Society must also value its insurance undertakings in accordance with GENPRU 2.2.256 R.
GENPRU 2.3.33
See Notes
If a related undertaking is an insurance undertaking which has a deficit in the capital resources available to cover its capital resources requirement, the Society must make provision for:
(1) its proportionate share of that deficit; or
(2) in the case of a subsidiary undertaking, the whole of that deficit.
Modification of GENPRU 2 Annex 7R for Lloyd's
GENPRU 2.3.34
See Notes
In the case of members, Lloyd's members' contributions are included in GENPRU 2 Annex 7 and include:
(1) letters of credit;
(2) guarantees; and
(3) verifiable sums arising out of life assurance policies;
held as funds at Lloyd's.GENPRU 2.3.35
See Notes
The effect of GENPRU 2.3.34 R is that Lloyd's members' contributions, including letters of credit, guarantees and life assurance policies, are admissible assets.
GENPRU 2 Annex 1
Capital resources table for an insurer
- 31/12/2006
See Notes
| Capital resources calculation for an insurer | |||
| Type of capital | Related text | Stage | |
| Core tier one capital | (A) | ||
| Permanent share capital | GENPRU 2.2.83 R | ||
| Profit and loss account and other reserves (taking into account interim net losses) | GENPRU 2.2.85A R; GENPRU 2.2.87 R to GENPRU 2.2.88 R | ||
| Share premium account | GENPRU 2.2.101 R | ||
| Externally verified interim net profits | GENPRU 2.2.102 R | ||
| Positive valuation differences | GENPRU 2.2.105 R | ||
| Fund for future appropriations | GENPRU 2.2.108 R | ||
| Perpetual non-cumulative preference shares | (B) | ||
| Perpetual non-cumulative preference shares | GENPRU 2.2.109 R | ||
| Innovative tier one capital | (C) | ||
| Innovative tier one instruments | GENPRU 2.2.113 R to GENPRU 2.2.121 R | ||
| Total tier one capital before deductions = A+B+C | (D) | ||
| Deductions from tier one capital | (E) | ||
| Investments in own shares | None | ||
| Intangible assets | GENPRU 2.2.155 R | ||
| Amounts deducted from technical provisions for discounting and other negative valuation differences | GENPRU 2.2.105 R to GENPRU 2.2.107 R | ||
| Total tier one capital after deductions = D-E | (F) | ||
| Upper tier two capital | (G) | ||
| Perpetual cumulative preference shares | GENPRU 2.2.159 R to GENPRU 2.2.181 R | ||
| Perpetual subordinated debt | See previous entry | ||
| Perpetual subordinated securities | See previous entry | ||
| Lower tier two capital | (H) | ||
| Fixed term preference shares | GENPRU 2.2.159 R to GENPRU 2.2.175 G; GENPRU 2.2.194 R to GENPRU 2.2.196 R | ||
| Long term subordinated debt | See previous entry | ||
| Fixed term subordinated securities | See previous entry | ||
| Total tier two capital = G+H | (I) | ||
| Positive adjustments for related undertakings | (J) | ||
| Related undertakings that are regulated related undertakings (other than insurance undertakings) | GENPRU 2.2.256 R | ||
| Total capital after positive adjustments for insurance undertakings but before deductions = F + I + J | (K) | ||
| Deductions from total capital | (L) | ||
| Inadmissible assets | GENPRU 2.2.250 R to GENPRU 2.2.251 R; GENPRU 2 Annex 7 | ||
| Assets in excess of market risk and counterparty limits | INSPRU 2.1.22 R | ||
| Related undertakings that are ancillary services undertakings | GENPRU 2.2.255 R | ||
| Negative adjustments for Related undertakings that are regulated related undertakings (other than insurance undertakings) | GENPRU 2.2.256 R | ||
| Total capital after deductions = K - L | (M) | ||
| Other capital resources* | (N) | ||
| Unpaid share capital or, in the case of a mutual, unpaid initial funds and calls for supplementary contributions | GENPRU 2.2.266 G to GENPRU 2.2.269 G | ||
| Implicit items | GENPRU 2 Annex 8 | ||
| Total capital resources after deductions = M + N | (O) | ||
| * Items in section (N) of the table can be included in capital resources if subject to a waiver under section 138A of the Act. | |||
| Note: Where the table refers to related text, it is necessary to refer to that text in order to understand fully what is included in the descriptions of capital items and deductions set out in the table. | |||
- 01/01/2014
- Past version of Capital before 01/01/2014
GENPRU 2 Annex 7
Admissible assets in insurance
- 31/12/2006
See Notes
| (1) | (A) | Investments that are, or amounts owed arising from the disposal of: | ||
| (a) | debt securities, bonds and other money and capital market instruments; | |||
| (b) | loans; | |||
| (c) | shares and other variable yield participations; | |||
| (d) | units in: | |||
| (i) | collective investment schemes falling within the UCITS Directive; | |||
| (ii) | non-UCITS retail schemes; | |||
| (iii) | recognised schemes; and | |||
| (iv) | any other collective investment scheme where the insurer's investment in the scheme is sufficiently small to be consistent with a prudent overall investment strategy, having regard to the investment policy of the scheme and the information available to the insurer to enable it to monitor the investment risk being taken by the scheme | |||
| (e) | land, buildings and immovable property rights; | |||
| (f) | an approved derivative or quasi-derivative transaction that satisfies the conditions in INSPRU 3.2.5 R or an approved stock lending transaction that satisfies the conditions in INSPRU 3.2.36 R. | |||
| (B) | Debts and claims | |||
| (a) | debts owed by reinsurers, including reinsurers' shares of technical provisions (but excluding amounts recoverable from an ISPV*); | |||
| (b) | deposits with and debts owed by ceding undertakings; | |||
| (c) | debts owed by policyholders and intermediaries arising out of direct and reinsurance operations (except where overdue for more than 3 months and other than commission prepaid to agents or intermediaries); | |||
| (d) | for general insurance business only, claims arising out of salvage and subrogation; | |||
| (e) | for long-term insurance business only, advances secured on, and not exceeding the surrender value of, long-term insurance contracts issued by the insurer; | |||
| (f) | tax recoveries; | |||
| (g) | claims against compensation funds. | |||
| (C) | Other assets | |||
| (a) | tangible fixed assets, other than land and buildings; | |||
| (b) | cash at bank and in hand, deposits with credit institutions and any other bodies authorised to receive deposits; | |||
| (c) | for general insurance business only, deferred acquisition costs; | |||
| (d) | accrued interest and rent, other accrued income and prepayments; | |||
| (e) | for long-term insurance business only, reversionary interests. | |||
| * | An insurer may treat amounts recoverable from an ISPV as an admissible asset if it obtains a waiver under section 138A of the Act. The conditions that will need to be met, in addition to the statutory tests under section 138A(4) of the Act, before the appropriate regulator will consider granting such a waiver are set out in INSPRU 1.6.13 G to INSPRU 1.6.18 G. | |||
| (2) | Subject to paragraph (3) belowa unit in a collective investment scheme is only admissible for the purposes of paragraph (1) above if it falls within paragraph (1)(A)(d), notwithstanding that it may also fall into one or more other categories in paragraph (1). | |||
| (3) | A derivative, quasi-derivative or stock lending transaction is only admissible for the purposes of paragraph (1) above if it falls within paragraph (1)(A)(f), notwithstanding that it may also fall into one or more other categories in paragraph (1). | |||
- 01/04/2013
- Past version of Capital before 01/04/2013
GENPRU 2 Annex 8
Guidance on applications for waivers relating to Implicit items
- 31/12/2006
See Notes
G Implicit items under the Act
| 1 | The capital resources table does not permit implicit items to be included in the calculation of a firm'scapital resources, except subject to a waiver under section 138A of the Act. Article 27(4) of the Consolidated Life Directive states that implicit items can be included in the calculation of a firm'scapital resources, within limits, provided that the supervisory authority agrees. Certain implicit items, however, are not eligible for inclusion beyond 31 December 2009 (see paragraph 5). The PRA may be to grant a waiver from the capital resources table to allow implicit items, in line with the purpose of the Consolidated Life Directive, and provided the conditions as set out in article 27(4) of the Consolidated Life Directive are met. Such a waiver would allow an implicit item to count towards the firm'scapital resources available to count against its capital resources requirement (CRR) set out for realistic basis life firms in GENPRU 2.1.18 R and for regulatory basis only life firms in GENPRU 2.1.23 R. An implicit item may potentially count as tier one capital (but not core tier one capital) or tier two capital. Where a waiver is granted allowing an implicit item as tier one capital, the value of the implicit item so allowed must be included at stage B of the capital resources table. If the application of the value of the implicit item is restricted by GENPRU 2.2.29 R, which requires that at least 50% of a firm'stier one capital resources must be accounted for by core tier one capital, the remainder may be included at stage G of the calculation in the capital resources table, subject to GENPRU 2.2.31 G. An implicit item treated as tier two capital will also be included at stage G of the calculation, again subject to GENPRU 2.2.81 R. Article 29(1) of the Consolidated Life Directive requires that implicit items be excluded from the capital eligible to cover the guarantee fund. Under GENPRU 2.2.33 R a firm must meet the guarantee fund from the sum of the items listed at stages A, B, G and H of the capital resources table less the sum of the items listed at stage E of the capital resources table. The PRA will only grant an implicit itemswaiver if the waiver includes a modification to GENPRU 2.2.33 R to ensure that the implicit item does not count towards meeting the guarantee fund. | |
| 2 | Under section 138A of the Act, the PRA may, on the application of a firm, grant a waiver. There are general requirements that must be met before any waiver can be granted. The PRA may not give a waiver unless the PRA is satisfied that: | |
| (1) | compliance by the firm with the rules will be unduly burdensome, or would not achieve the purpose for which the rules were made; and | |
| (2) | the waiver would adversely affect the advancement of any of the appropriate regulator's objectives | |
| 3 | The appropriate regulator PRA will assess compliance with the requirements in the light of all the relevant circumstances. This will include consideration of the costs incurred by compliance with a particular rule or whether a rule is framed in a way that would make compliance difficult in view of the firm's circumstances. For example, the firm may demonstrate that if an implicit item were not allowed, the firm would either have to suffer increased (and unwarranted) costs in injecting further capital resources or operate with a lower equity backing ratio (see case studies in paragraph 43). Even if a firm can demonstrate a case for an implicit item waiver, it should not assume that the appropriate regulator PRA will grant the waiver requested, or that any waiver will be granted for the full amount of the implicit item which could be granted, as set out in this annex. The appropriate regulator PRA will consider each application on its own merits, and taking into account all relevant circumstances, including the financial situation and business prospects of the firm. | |
| 4 | Implicit items are economic reserves which are contained within the long-term insurance business provisions. Article 27(4) of the Consolidated Life Directive identifies three types of implicit item, in respect of: future profits, zillmerisation and hidden reserves. This annex is intended to provide guidance relating to the granting of waivers for implicit items and to provide guidance on other aspects. Whilst this guidance applies to applications for waivers for implicit items generally, for a realistic basis life firm, to the extent that an implicit item is allocated to a with-profits fund, this guidance relates to implicit items for the purposes of determining the regulatory value of assets (see INSPRU 1.4.24 R). | |
| 5 | The Consolidated Life Directive (reflecting the changes introduced by the Solvency 1 Directive) requires member states to end a firm's ability to take into account future profits implicit items by (at the latest) 31 December 2009. Until then, the maximum amount of the implicit item relating to future profits permitted under the Consolidated Life Directive is limited to 50% of the product of the estimated annual profits and the average period to run (not exceeding six years) on the policies in the portfolio. The Consolidated Life Directive further limits the maximum amount of these economic reserves that can be counted to 25% of the lesser of the available solvency margin and the required solvency margin. The changes introduced by the Solvency 1 Directive take effect for financial years beginning on or after 1 January 2004. However, the Consolidated Life Directive allows for a transitional period of five years, which runs from 20 March 2002 (the publication date of the Solvency 1 Directive), for Firms to become fully compliant with these new requirements. Firms will need to consider the potential impact of these changes when engaging in future capital planning. When applying for an implicit item waiver a firm should provide the PRA with a plan showing how the firm intends to maintain its capital adequacy over the period to 31 December 2009. firms Firms should also be aware that the PRA will typically only grant waivers for a maximum of 12 months. | |
| Future Profits | ||
| 6 | The future profits implicit item allows firms to take credit for margins in the mathematical reserves to the extent that these are expected to emerge from in force business. The future profit from in force business should be assessed, in the first instance, on prudent assumptions, to demonstrate that there is an 'economic reserve'. Having demonstrated that it exists, the amount should be limited to an amount calculated using a formula that takes into account the actual profit which has emerged over the last five years (see paragraph 28). | |
| Zillmerisation | ||
| 7 | Zillmerisation is an allowance for acquisition costs that are expected, under prudent assumptions, to be recoverable from future premiums. Firms can make a direct adjustment to their reserves for zillmerisation, subject to the rules on mathematical reserves. However, where no such adjustment has been made, the PRA will consider an application for a waiver to take into account an implicit item. | |
| Hidden reserves | ||
| 8 | Hidden reserves are reserves resulting from the underestimation of assets (other than mathematical reserves). | |
| Process for applying for a waiver, including limits applicable when a waiver is granted | ||
| 9 | This annex sets out the procedures to be followed and the form of calculations and data which should be submitted by firms to the PRA . This guidance should also be read in conjunction with the general requirements relating to the waiver process. The PRA expects that applications for waivers in respect of future profits and zillmerising will not normally be considered to pass the "would not adversely affect the advancement of any of the PRA's objectives" test unless the relevant criteria set out in this guidance have been satisfied and an application for such a waiver may require further criteria to be satisfied for this test to be passed. As set out below, waivers in respect of either zillmerising or hidden reserves will not normally be given except in very exceptional circumstances. | |
| Timing | ||
| 10 | A long-term insurer may apply to the PRA for a waiver in respect of implicit items. A waiver will not apply retrospectively. Consequently, applications intended for a particular accounting reference date will normally need to be made well before that reference date. Applications by firms must be made to the PRA in writing and include the relevant details specified under Permissions and Waivers 4 in the PRA Rulebook. Given the uncertainty in predicting the future, waivers will normally be granted for a maximum of 12 months at a time and any further applications will need to be made accordingly. | |
| 11 | The information that will be required to enable an application to be considered as set out below, should normally include a demonstration of how the capital resources requirement is to be met, with and without the waiver. Clearly, up-to-date information may not be available before the financial year-end. In some cases information from the previous year-end's return may be used, as long as any known significant changes in the structure of the firm, or the assumptions used, have been taken into account. | |
| 12 | If the application for a waiver is granted, when a firm submits its next return the amount of the implicit item shown should not exceed that supported by the firm's calculations as at the valuation date. In the event that the amount of the future profits item calculated by the firm based on these updated assumptions is less than the amount calculated at the time of the firm'swaiver application, the lower figure should be used in the return. | |
| 13 | An implicit item waiver in respect of zillmerising or hidden reserves is related to the basis on which liabilities or assets have been valued. In the case of hidden reserves, as explained below, the granting of a waiver will be dependent on the overall capital resources of the firm. Waivers in respect of these implicit items will, therefore, only be made in relation to the position shown in a particular set of returns and it will be essential for firms to submit applications to the appropriate regulator PRA well in advance of the latest date for the submission of the relevant return. | |
| 14 | Waivers may be withdrawn by the PRA at any time (e.g. where the PRA considers the amount in respect of which a waiver has been given can no longer be justified). This may be as a result of changes in the firm's position or as a result of queries arising on scrutiny of the returns. | |
| Information to be submitted | ||
| 15 | An application for a capital resources waiver (which includes an application for an extension to or other variation of a waiver) should be prepared using the standard application form for a waiver. In addition, the application should be accompanied by full supporting information to enable the PRA to arrive at a decision on the merits of the case. In particular, the application should state clearly the nature and the amounts of the implicit items that a firm wishes to count against its capital resources requirement and whether it proposes to treat the implicit item as tier one capital or tier two capital. In order to assess an application, the PRA needs information as to the make-up of the firm'scapital resources, the quality of the capital items which have been categorised into each tier of capital and a breakdown of capital both within and outside the firm'slong-term insurance fund or funds and between the firm'swith-profits funds and non-profit funds. An explanation as to the appropriateness of the proposed treatment of the implicit item under the capital resources table should also be provided, including a demonstration that, in allowing for implicit items, there has been no double counting of future margins and that the basis for valuing such margins is prudent. | |
| 16 | The PRA recognises that the assessment of the insurance technical provisions reflects the contractual obligations of the firm. Implicit items are therefore margins over and above an economic assessment in these technical provisions only. Non-contractual "constructive" obligations arising from a firm's regulatory duty (as regulated by theFCA) to treat customers fairly e.g. regarding future terminal bonuses, are not fully captured by the technical provisions. A firm must instead be satisfied that it has sufficient capital resources at all times to meet its obligations under the FCA'sPrinciple 6. The granting of a waiver for an implicit item does not in any way detract from this requirement and a firm will need to be satisfied that this condition is still met. | |
| 17 | As a minimum, applications for a future profits implicit item waiver should be supported by the information contained in Forms 13, 14, 18, 19, 40, 41, 42, 48, 49, the answers to questions 1 to 12 of the abstract of the valuation report, Appendix 9.4 of IPRU(INS), the abstract of the valuation report for the realistic valuation, Appendix 9.4A of IPRU(INS) and Forms 51, 52, 53, 54 and 58. For a zillmerisation implicit item waiver , only those items noted above forming part of the abstract valuation report will normally be needed. Applications for a waiver in respect of a hidden reserves implicit item will normally be considered only if accompanied by the information which is contained in the annual regulatory returns. In particular, the balance sheet forms, long-term insurance business revenue accounts, and abstract of the valuation report as set out in Appendices 9.1, 9.3 and 9.4 of IPRU(INS) should be provided. This is not to say that a full regulatory return must be provided in the specified format, simply that the information contained in these forms should be provided. Where appropriate, the information may be summarised. | |
| 18 | The following supporting information relating to the calculation of the amounts claimed should be supplied for each type of implicit item in respect of which a waiver is sought: Future profits: in addition to information related to the prospective calculation and retrospective calculation described below, the profits reported in each of the last five financial years up to the date of the most recent available valuation under rule 9.4 of IPRU(INS) which has been submitted to the PRA prior to, or together with, the application, and the amounts and nature of any exceptional items left out of account; the method used for calculating the average period to run and the results for each of the main categories of business, both before and after allowing for premature termination (where the calculation has been made in two stages); and the basis on which this allowance has been made. Zillmerising: the categories of contracts for which an item has been calculated and the percentages of the relevant capital sum in respect of which an adjustment has been made. Hidden reserves: particulars, with supporting evidence, of the undervaluation of assets for which recognition is sought. | |
| Continuous monitoring by firms | ||
| 19 | Firms should take into account any material changes in financial conditions or other relevant circumstances that may have an impact on the level of future profits that can prudently be taken into account. Firms should also re-evaluate whether an application to vary an implicit item waiver should be made whenever circumstances have changed. In the event that circumstances have changed such that an amendment is appropriate, the firm must contact the PRA as quickly as possible in accordance with Fundamental Rule 7. In this context, the PRA would expect notice of any matter that materially impacts on the firm's financial condition, or any waivers granted. | |
| Future profits - factors to take into account when submitting calculations to support waiver applications | ||
| 20 | Where an application is made in respect of a firm which has separate with-profits funds and non-profit funds, the firm should ensure that the capital resources requirement in respect of the non-profit fund is not covered by future profits attributable to policyholders arising in the with-profits fund. Furthermore, for a realistic basis life firm the amount of the implicit item allocated to each with-profits fund should be calculated separately, as the amount allocated to each with-profits fund will be taken into consideration in the calculation of the with-profits insurance capital component (see INSPRU 1.4.24 R). | |
| 21 | Firms need to assess prospective future profit (i.e. how much can reasonably be expected to arise) and compare this to maximum limits (in article 27(4) of the Consolidated Life Directive), which relate to past profits. | |
| Future profits - prospective calculation | ||
| 22 | The application for a waiver should be supported by details of a prospective calculation of future profits arising from in-force business. The information supplied to the PRA should include a description of the method used in the calculation and of the assumptions made, together with the results arising. From 31 December 2009 at the latest, future profits implicit items will no longer be permitted under the Consolidated Life Directive. Where a firm first applies for an implicit item waiver after GENPRU 2.2 comes into effect, under the prospective calculation a firm should only take into consideration future profits that are expected to emerge in the period up to 31 December 2009. Implicit item waivers granted before GENPRU 2.2 comes into effect will continue to operate under the terms of those waivers, but an application to vary the terms of such a waiver, for example to extend the effective period, is an application for a new waiver for which a firm should usually only take into consideration future profits that are expected to emerge in the period up to 31 December 2009. | |
| Assumptions | ||
| 23 | The assumptions made should be prudent, rather than best estimate, assumptions of future experience (that is, the prudent assumptions should allow for the fair market price for assuming that risk including associated expenses). In particular, it would not normally be considered appropriate for the projected return on any asset to be taken to be higher than the risk-free yield (that is, assessed by reference to the yield arrived at using a model of future risk free yields properly calibrated from the forward gilts market). It may also be appropriate to bring future withdrawals into account on a suitably prudent basis. For with-profits business, the assumptions for future investment returns should not capitalise future bonus loadings except where the with-profits policyholders share in risks other than the investment performance of the fund. Furthermore, the rate at which future profits are discounted should include an appropriate margin over a risk free rate of return. Calculations should also be carried out to demonstrate that the prospective calculation of the future profits arising from the in-force business supporting the application for the implicit item waiver would be sufficient to support the amount of the implicit item under each scenario described for use in determining the resilience capital requirement - where the waiver relates to an implicit item allocated to more than one fund, this should be demonstrated separately for that element of the implicit item allocated to each fund. For an implicit item allocated to a with-profits fund, proper allowance should be made for any shareholder transfers to ensure that the implicit item is not supported by future profits which will be required to support those transfers. To the extent, if any, that future profits are dependent on the levying of explicit expense related charges (for example as in the case of unit-linked business) the documentation submitted should include a demonstration of the prudence of the assumptions made as to the level at which future charges will be levied and expenses incurred. | |
| Other limitations on the extent to which waivers for implicit items will be granted to a realistic basis life firm | ||
| 24 | Where a waiver in respect of an implicit item is granted to a realistic basis life firm additional limits may apply by reference to a comparison of realistic excess capital and regulatory excess capital including allowance for the effect of the waiver. Where the capital resources waiver relates to an implicit item allocated partly or entirely to a with-profits fund, the waiver will contain a limitation to the effect that the regulatory excess capital for that with-profits fund, allowing for the effect of the waiver, may not exceed that fund's realistic excess capital. This limitation will apply on an ongoing basis so that, for example, in the case of an implicit item allocated to a with-profits fund, the amount of the implicit item would be limited to zero whenever the regulatory excess capital exceeded the realistic excess capital of that fund. | |
| Other charges to future profits | ||
| 25 | To avoid double counting, no account should be taken of any future surplus arising from assets corresponding to explicit items which have been counted towards the capital resources requirement such as shareholders funds, surplus carried forward or investment reserves. Deductions should be made in the calculation of future surpluses for the impact of any other arrangements which give rise to a charge over future surplus emerging (e.g. financial reinsurance arrangements, subordinated loan capital or contingent loan agreements). Deductions should also be made to the extent that any credit has been taken for the purposes of INSPRU 1.4.45 R (2) for the present value of future profits relating to non-profit business written in a non-profit fund. The information supplied to the PRA should identify the amount and reason for any adjustments made to the calculation of the prospective amount of future profits. | |
| 26 | The firm should confirm to the PRA that the calculations have been properly carried out and that there are no other factors that should be taken into account. | |
| Future profits - retrospective calculation | ||
| Overriding limit | ||
| 27 | The maximum amount of the implicit item relating to future profits permitted under the Consolidated Life Directive is 50% of the product of the estimated annual profit and the average period to run (not exceeding six years (ten years during the transitional period referred to in paragraph 5)) on the policies in the portfolio. Article 27(4) of the Consolidated Life Directive also imposes a further limit on the amount of the implicit item equal to 25% of the lower of: | |
| (1) | the firm'scapital resources; and | |
| (2) | the higher of its base capital resources requirement for long-term insurance business and its long-term insurance capital requirement. | |
| Once the transitional period set out in article 71(1) of the Consolidated Life Directive has expired in 2007 (see paragraph 5), the appropriate regulator will not allow a capital resources for more than the amount permitted by article 27(4) of the Directive. | ||
| Definition of profits | ||
| 28 | The estimated annual profit should be taken as the average annual surplus arising in the long-term insurance fund over the last five financial years up to the date of the most recent available valuation which has been submitted to the PRA prior to, or together with, the application. For this purpose, deficiencies arising should be treated as negative surpluses. Where a firm'sfinancial year has altered, the surplus arising in a period falling partly outside the relevant five year period should be assumed to accrue uniformly over the period in question for the purpose of estimating the profits arising within the five year period. When there has been a transfer of a block of business into the firm (or out of the firm) during the period, surplus arising from the transferred block should be included (or excluded) for the full five year period. Where a portion of a block of business is transferred, the surplus included (or excluded) should be a reasonable estimate of the surplus arising from the portion transferred. | |
| 29 | Where a firm has been carrying on long-term insurance business for less than 5 years, the total profits made during the past five years should be taken to be the aggregate of any surpluses that have arisen during the period in which long-term insurance business has been carried on less any deficiencies that may have arisen during that period. The resulting total should still be divided by five to obtain the estimated annual profit. | |
| Exceptional items | ||
| 30 | Substantial items of an exceptional nature should be excluded from the calculation of the estimated annual profit. Such items include profits arising from an exceptional change in the value at which assets are brought into account, where this is not reflected in a similar change in the amount of the liabilities, and profits arising from a change in the overall valuation approach between one year and another. An exceptional loss (i.e. a reduction of an exceptional nature in the surplus arising) may be excluded from the calculation only to the extent that it can be set against a profit or profits up to the amount of the loss and arising from a similar cause. It is not intended, however, that any adjustment should be made for the effect on surplus of a net strengthening of reserves for costs associated with an expansion of the business or for special capital expenditure, such as the purchase of computer systems. | |
| Double counting | ||
| 31 | The inclusion of investment income arising from the assets representing the explicit components of capital resources (as part of the estimated annual profit for the purpose of determining the future profits implicit item) would result in double-counting. If those assets were required to meet the effects of adverse developments, this would automatically result in the cessation of the contribution to profits from the associated investment income. It would clearly not be appropriate for the PRA to grant a capital resources waiver which would enable a firm to meet the capital resources requirement on the basis of counting both the capital values of the assets and the value of the income flow which they can be expected to generate. | |
| 32 | The definition of the estimated annual profit as the surplus arising in the long-term insurance fund ensures that any contribution to surplus arising from transfers from the profit and loss account, including investment income on shareholders' assets, is not included in the estimated annual profit. Thus double-counting should not arise in respect of shareholders' assets. Double-counting may arise, however, in respect of the investment income from the assets representing the explicit components of capital resources carried within the long-term insurance fund (e.g. surplus carried forward or investment reserves), but the amount of such investment income is not separately identified in the return. | |
| 33 | Where there is reason to suspect that the elimination of any such double-counting would reduce a firm'scapital resources to close to or below the required level, or would otherwise be significant, the PRA will request this information with a view to taking account of this factor in determining the amount of the implicit item. Additional information concerning investment income should be furnished with an application for a waiver, if a firm believes that any double-counting would fall into one of the categories mentioned above. | |
| Average period to run | ||
| 34 | The average number of years remaining to run on policies should be calculated on the basis of the weighted average of the periods for individual contracts of insurance, using as weights the actuarial present value of the benefits payable under the contracts. A separate weighted average should be calculated for each of the various categories of contract and the results combined to obtain the weighted average for the portfolio as a whole. Approximate methods of calculation, which the firm considers will give results similar to the full calculation, will be accepted. In particular, the PRA will normally accept the calculation of an average period to run for a specific category of contract on the basis of the average valuation factor for future benefits derived from data contained in the abstract of the valuation report in the regulatory returns. A firm will be asked to demonstrate the validity of the method adopted only where an abnormal distribution of the business in force gives grounds for doubt about its accuracy. | |
| 35 | Calculations will normally be requested only for the main categories of insurance business, accounting for not less than 90% of the mathematical reserves, except where there are grounds for expecting that the exclusion of certain categories of policies under this provision might have a significant effect on the resulting average period to run. Detailed calculations will not be required where a waiver is sought in respect of a low multiple of the annual profits, well within the average period to run for the firm. | |
| 36 | Where, for a particular category of business, a method of valuation is used which does not involve the calculation of the value of future benefits and which is significant for the firm in question, the calculation of the average period to run should be based on estimates of the value of future benefits. | |
| Premature termination of contracts | ||
| 37 | Allowance should be made for the premature termination of contracts of insurance, based on the actual experience of the firm over the last five years, or other appropriate period, and taking into account specific features of contracts such as options which can be expected to lead to premature termination (e.g. guaranteed surrender values on income bonds written as long-term insurance contracts and option dates on flexible whole-life contracts). The adjustment should be made separately for each of the main categories of business. The use of industry-wide rates of termination will be acceptable where a firm is satisfied that this will result in sufficient allowance being made having regard to the firm's own experience. Methods of calculation that involve a degree of approximation will be permitted. | |
| 38 | For certain types of contract, where the period left to run is most naturally defined as the term to a fixed maturity or expiry date, the allowance for premature termination should also take into account terminations resulting from death. | |
| Overall limit | ||
| 39 | The overall average period left to run calculated as described above should be limited to a maximum of six years under article 27(4) of the Consolidated Life Directive (or a maximum of ten years during the transitional period referred to in paragraph 5) before applying it to the estimated annual profit in order to determine the maximum value of the future profits implicit item. | |
| Definition of period to run | ||
| 40 | The definition of the period to run and the basis of the allowance for early termination should clearly be considered together. For certain types of contracts (e.g. pension contracts with a range of retirement ages or other options), there is inherent uncertainty about the likely term to run. In such circumstances any estimate for determining the amount of the future profits implicit item for which a waiver is sought should be based on prudent assumptions tending, if anything, to underestimate the average period to run. | |
| Zillmerising | ||
| 41 | The PRA does not normally expect to grant a waiverpermitting implicit items due to zillmerisation except in very exceptional circumstances. Zillmerisation is an allowance for acquisition costs that are expected, under prudent assumptions, to be recoverable from future premiums. Firms can make a direct adjustment to their reserves for zillmerisation, subject to the requirements on mathematical reserves set out in INSPRU 1.3.43 R, and this is the usual approach. However, where no such adjustment has been made, or where the maximum adjustment has not been made in the mathematical reserves, the PRA will consider an application for an implicit item waiver , if the amount is consistent with the amount that would have been allowed as an adjustment to mathematical reserves under INSPRU 1.3.43 R. | |
| Hidden reserves | ||
| 42 | The PRA will grant waivers permitting implicit items due to hidden reserves only in very exceptional circumstances. These items relate to hidden reserves resulting from the underestimation of assets. The rules for the valuation of assets and liabilities (see GENPRU 1.3) which apply to assets and liabilities other than mathematical reserves are based on the valuation used by the firm for the purposes of its external accounts, with adjustments for regulatory prudence such as concentration limits for large holdings, and would not normally be expected to contain hidden reserves. | |
| Case studies on "unduly burdensome" | ||
| 43 | Some examples of situations where the existing rules might be considered to be unduly burdensome are given below: | |
| • | A firm writes with-profits business. The firm's investment policy is affected by its published financial position. Application of the rules without an implicit item waiver would result in the firm adopting a lower equity backing ratio. It may be possible to demonstrate that, in the circumstances, it would be unduly burdensome to require the firm to incur costs (which might prejudice policyholders) resulting from the lower equity backing ratio, rather than take allowance for an implicit item. | |
| • | A firm has purchased a block of in-force business, on which the future profits may be reasonably estimated. However, this asset is given no value under the rules. It may be possible to demonstrate that it is unduly burdensome for the firm to recognise the cost of acquiring the assets whilst giving no value to the asset acquired. | |
| • | A firm has a block of in-force business, on which the future profits may be reasonably estimated. Application of the rules without an implicit item waiver would result in a need to obtain additional capital. It may be possible to demonstrate that it is unduly burdensome, having regard to the particular circumstances of the firm, to require it to incur the costs involved in the injection of further capital rather than take allowance for an implicit item. | |
| • | A firm has purchased matching assets for guaranteed annuity liabilities. The operation of the asset and liability valuation rules leads to statutory losses in certain circumstances in spite of good matching of assets and liabilities on a realistic basis of assessment. It may be possible to demonstrate that it is unduly burdensome to require the firm to incur the costs involved in the injection of further capital rather than take allowance for an implicit item. | |
| Conditions which will typically be applied to implicit items waivers | ||
| Limits | ||
| 44 | Where implicit itemswaivers are granted, the value cannot exceed (and will normally be less than) the monetary limits described in paragraph 27, except that during the transitional period the pre-Solvency I limits will apply. In addition, time limits will apply and waivers will normally only last for 12 months. | |
| Publicity | ||
| 45 | The PRA will publish the waiver. Public disclosure is standard practice unless the PRA is satisfied that publication is inappropriate or unnecessary (see section 138B of the Act). Any request that a direction not be published should be made to the PRA in writing with grounds in support. Disclosure of a waiver will normally be required in the firm's annual returns. | |
- 19/06/2014
- Past version of Capital before 19/06/2014
GENPRU 3
Cross sector groups
GENPRU 3.1
Application
- 01/01/2007
GENPRU 3.1.1
See Notes
(1) GENPRU 3.1 applies to every firm that is a member of a financial conglomerate other than:
(a) an incoming EEA firm;
(b) an incoming Treaty firm;
(c) a UCITS qualifier; and
(d) an ICVC.
(2) GENPRU 3.1 does not apply to a firm with respect to a financial conglomerate of which it is a member if the interest of the financial conglomerate in that firm is no more than a participation.
(3) GENPRU 3.1.25 R (Capital adequacy requirements: high level requirement), and GENPRU 3.1.35 R (Risk concentration and intra group transactions: the main rule) do not apply with respect to a third-country financial conglomerate.
Purpose
GENPRU 3.1.2
See Notes
GENPRU 3.1 implements the Financial Groups Directive. However, material on the following topics is to be found elsewhere in the Handbook as follows:
Introduction: identifying a financial conglomerate
GENPRU 3.1.3
See Notes
(1) In general the process in (2) to (8) applies for identifying financial conglomerates.
(2) Competent authorities that have authorised regulated entities should try to identify any consolidation group that is a financial conglomerate. If a competent authority is of the opinion that a regulated entity authorised by that competent authority is a member of a consolidation group which may be a financial conglomerate it should communicate its view to the other competent authorities concerned.
(3) A competent authority may start (as described in (2)) the process of deciding whether a group is a financial conglomerate even if it would not be the coordinator.
(4) A member of a group may also start that process by notifying one of the competent authorities that have authorised group members that its group may be a financial conglomerate, for example by notification under SUP 15.9.
(5) If a group member gives a notification in accordance with (4), that does not automatically mean that the group should be treated as a financial conglomerate. The process described in (6) to (9) still applies.
(6) The competent authority that would be coordinator will take the lead in establishing whether a group is a financial conglomerate once the process has been started as described in (2) and (3).
(7) The process of establishing whether a group is a financial conglomerate will normally involve discussions between the financial conglomerate and the competent authorities concerned.
(8) A financial conglomerate should be notified by its coordinator that it has been identified as a financial conglomerate and of the appointment of the coordinator. The notification should be given to the parent undertaking at the head of the group or, in the absence of a parent undertaking, the regulated entity with the largest balance sheet total in the most important financial sector. That notification does not of itself make a group into a financial conglomerate; whether or not a group is a financial conglomerate is governed by the definition of financial conglomerate as set out in GENPRU 3.1.
(9) GENPRU 3 Annex 3 is a questionnaire (together with its explanatory notes) that the appropriate regulator asks groups that may be financial conglomerates to fill out in order to decide whether or not they are.
(10) If a mixed financial holding company is subject to equivalent provisions under BIPRU 8 (Group risk consolidation) and under GENPRU 3 (Cross sector groups) and the appropriate regulator is the coordinator, the appropriate regulator may, on application by a firm and after consulting other competent authorities responsible for the supervision of subsidiaries, disapply such provisions of BIPRU 8 with regard to the mixed financial holding company and apply only the relevant provisions of GENPRU 3 to the mixed financial holding company.
Introduction: The role of other competent authorities
GENPRU 3.1.4
See Notes
A lead supervisor (called the coordinator) is appointed for each financial conglomerate. Article 10 of the Financial Groups Directive describes the criteria for deciding which competent authority is appointed as coordinator. Article 11 of the Financial Groups Directive sets out the tasks of the coordinator.
Definition of financial conglomerate: basic definition
GENPRU 3.1.5
See Notes
A financial conglomerate means a consolidation group that is identified as a financial conglomerate in accordance with the decision tree in GENPRU 3 Annex 4.
Definition of financial conglomerate: sub-groups
GENPRU 3.1.6
See Notes
A consolidation group is not prevented from being a financial conglomerate because it is part of a wider:
(1) consolidation group; or
(2) financial conglomerate; or
(3) group of persons linked in some other way.
Definition of financial conglomerate: the financial sectors: general
GENPRU 3.1.7
See Notes
For the purpose of the definition of financial conglomerate, there are two financial sectors as follows:
(1) the banking sector and the investment services sector, taken together; and
(2) the insurance sector.
GENPRU 3.1.8
See Notes
(1) This rule applies for the purpose of the definition of financial conglomerate and the financial conglomerate definition decision tree.
(2) Any mixed financial holding company is considered to be outside the overall financial sector for the purpose of the tests set out in the boxes titled Threshold Test 1, Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree.
(3) Determining whether the tests set out in the boxes titled Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree are passed is based on considering the consolidated and/or aggregated activities of the members of the consolidation group within the insurance sector and the consolidated and/or aggregated activities of the members of the consolidation group within the banking sector and the investment services sector.
Definition of financial conglomerate: adjustment of the percentages
GENPRU 3.1.9
See Notes
Once a financial conglomerate has become a financial conglomerate and subject to supervision in accordance with the Financial Groups Directive, the figures in the financial conglomerate definition decision tree are altered as follows:
(1) the figure of 40% in the box titled Threshold Test 1 is replaced by 35%;
(2) the figure of 10% in the box titled Threshold Test 2 is replaced by 8%; and
(3) the figure of six billion Euro in the box titled Threshold Test 3 is replaced by five billion Euro.
GENPRU 3.1.10
See Notes
The alteration in GENPRU 3.1.9 R only applies to a financial conglomerate during the period that:
(1) begins when the financial conglomerate would otherwise have stopped being a financial conglomerate because it does not meet one of the unaltered thresholds referred to in GENPRU 3.1.9 R; and
(2) covers the three years following that date.
Definition of financial conglomerate: balance sheet totals
GENPRU 3.1.11
See Notes
The calculations referred to in the financial conglomerate definition decision tree regarding the balance sheet must be made on the basis of the aggregated balance sheet total of the members of the consolidation group, according to their annual accounts. For the purposes of this calculation, undertakings in which a participation is held must be taken into account as regards the amount of their balance sheet total corresponding to the aggregated proportional share held by the consolidation group. However, where consolidated accounts are available, they must be used instead of aggregated accounts.
Definition of financial conglomerate: solvency requirement
GENPRU 3.1.12
See Notes
The solvency and capital adequacy requirements referred to in the financial conglomerate definition decision tree must be calculated in accordance with the provisions of the relevant sectoral rules.
Definition of financial conglomerate: discretionary changes to the definition
GENPRU 3.1.13
See Notes
Articles 3(3) to 3(6), Article 5(4) and Article 6(5) of the Financial Groups Directive allow competent authorities, on a case by case basis, to:
(1) change the definition of financial conglomerate and the obligations applying with respect to a financial conglomerate (which would include, where the appropriate regulator would be the coordinator under GENPRU 3.1.3G (6), permitting firms to apply, on an annual basis and subject to publication and notification to the relevant competent authorities, for a group of which it is a member not to be regarded as a financial conglomerate on the basis of Article 3(3) of the Financial Groups Directive (for a group that, in terms of the tests in GENPRU 3 Annex 4, does not meet Threshold Test 2 but meets Threshold Test 3) or Article 3(3a) of the Financial Groups Directive (for a group that, in terms of the tests in GENPRU 3 Annex 4, meets Threshold Test 2 but not Threshold Test 3);
(2) apply the scheme in the Financial Groups Directive to EEA regulated entities in specified kinds of group structures that do not come within the definition of financial conglomerate; and
(3) exclude a particular entity in the scope of capital adequacy requirements that apply with respect to a financial conglomerate.
Capital adequacy requirements: introduction
GENPRU 3.1.14
See Notes
The capital adequacy provisions of GENPRU 3.1 are designed to be applied to EEA-based financial conglomerates.
GENPRU 3.1.15
See Notes
GENPRU 3.1.25 R is a high level capital adequacy rule. It applies whether or not the appropriate regulator is the coordinator of the financial conglomerate concerned.
GENPRU 3.1.16
See Notes
GENPRU 3.1.29 R to GENPRU 3.1.31 R and GENPRU 3 Annex 1 implement the detailed capital adequacy requirements of the Financial Groups Directive. They only deal with a financial conglomerate for which the appropriate regulator is the coordinator. If another competent authority is coordinator of a financial conglomerate, those rules do not apply with respect to that financial conglomerate and instead that coordinator will be responsible for implementing those detailed requirements.
GENPRU 3.1.17
See Notes
Annex I of the Financial Groups Directive lays down three methods for calculating capital adequacy at the level of a financial conglomerate. Those three methods are implemented as follows:
(1) Method 1 calculates capital adequacy using accounting consolidation. It is implemented by GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 1 of GENPRU 3 Annex 1.
(2) Method 2 calculates capital adequacy using a deduction and aggregation approach. It is implemented by GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 2 of GENPRU 3 Annex 1.
(3) [deleted]
(4) Method 3 consists of a combination of Methods 1 and 2 from Annex I of the Financial Groups Directive and would be implemented by means of a requirement.
GENPRU 3.1.19
See Notes
Paragraph 5.7 of GENPRU 3 Annex 1 (Capital adequacy calculations for financial conglomerates) deals with a case in which there are no capital ties between entities in a financial conglomerate. In particular, the appropriate regulator , after consultation with the other relevant competent authorities and in accordance with Annex I of the Financial Groups Directive, will determine which proportional share of a solvency deficit in such an entity will have to be taken into account, bearing in mind the liability to which the existing relationship gives rise.
GENPRU 3.1.20
See Notes
(1) [deleted]
(2) [deleted]
GENPRU 3.1.21
See Notes
The Annex I method to be applied may bedecided by the coordinator after consultation with the relevant competent authorities and the financial conglomerate itself. Where the appropriate regulator acts as coordinator, the financial conglomerate itself may choose which of Method 1 or Method 2 from Annex I it will apply, unless the firm is subject to a requirement obliging the firm to apply a particular method.
Capital adequacy requirements: high level requirement
GENPRU 3.1.25
See Notes
(1) A firm that is a member of a financial conglomerate must at all times have capital resources of such an amount and type that results in the capital resources of the financial conglomerate taken as a whole being adequate.
(2) This rule does not apply with respect to any financial conglomerate until notification has been made that it has been identified as a financial conglomerate as contemplated by Article 4(2) of the Financial Groups Directive.
GENPRU 3.1.28
See Notes
(1) [deleted]
(2) [deleted]
Capital adequacy requirements: application of Method 1 or 2 from Annex I of the Financial Groups Directive
GENPRU 3.1.29
See Notes
If, with respect to a firm and a financial conglomerate of which it is a member, this ruleapplies under GENPRU 3.1.29A R to the firm with respect to that financial conglomerate as described in GENPRU 3.1.30 R, the firm must at all times have capital resources of an amount and type that ensures that the conglomerate capital resources of that financial conglomerate at all times equal or exceed its conglomerate capital resources requirement.
GENPRU 3.1.29A
See Notes
GENPRU 3.1.29 R applies to a firm with respect to the financial conglomerate of which it is a member if notification has been made in accordance with regulation 2 of the Financial Groups Directive Regulations that the financial conglomerate is a financial conglomerate and that the appropriate regulator is coordinator of that financial conglomerate.
- 10/06/2013
Capital adequacy requirements: use of requirement to apply Annex I of the Financial Groups Directive
GENPRU 3.1.30
See Notes
If GENPRU 3.1.29 R (application of Method 1 or 2 from Annex I of the Financial Groups Directive) applies to a firm with respect to the financial conglomerate of which it is a member, then with respect to the firm and the financial conglomerate:
(1) the definitions of conglomerate capital resources and conglomerate capital resources requirement that apply for the purposes of that rule are the ones from whichever of Part 1 or Part 2 of GENPRU 3 Annex 1 the firm has indicated to the appropriate regulator it will apply, unless the firm is subject to a requirement obliging the firm to apply a specific part of GENPRU 3 Annex 1, in which case GENPRU 3.1.31 R will apply; and
(2) the firm must indicate to the appropriate regulator in advance which Part of GENPRU 3 Annex 1 the firm intends to apply.
GENPRU 3.1.31
See Notes
If GENPRU 3.1.29 R (application of Method 1 or 2 from Annex I of the Financial Groups Directive) applies to a firm with respect to a financial conglomerate of which it is a member, and the firm is subject to a requirement obliging the firm to apply a specific part of GENPRU 3 Annex 1, the definitions of conglomerate capital resources and conglomerate capital resources requirement that apply for the purposes of that rule are the ones from whichever of Part 1 or Part 2 of GENPRU 3 Annex 1 is specified in the requirement.
Risk concentration and intra-group transactions: introduction
GENPRU 3.1.32
See Notes
GENPRU 3.1.35 R implements Article 7(4) and Article 8(4) of the Financial Groups Directive, which provide that where a financial conglomerate is headed by a mixed financial holding company, the sectoral rules regarding risk concentration and intra-group transactions of the most important financial sector in the financial conglomerate, if any, shall apply to that sector as a whole, including the mixed financial holding company.
GENPRU 3.1.33
See Notes
Articles 7(3) (Risk concentration) and 8(3) (Intra-group transactions) and Annex II (Technical application of the provisions on intra-group transactions and risk concentration) of the Financial Groups Directive say that Member States may apply at the level of the financial conglomerate the provisions of the sectoral rules on risk concentrations and intra-group transactions. GENPRU 3.1 does not take up that option, although the appropriate regulator may impose such obligations on a case by case basis.
Risk concentration and intra-group transactions: application
GENPRU 3.1.34
See Notes
GENPRU 3.1.35 R applies to a firm with respect to a financial conglomerate of which it is a member if:
(1) the condition in Articles 7(4) and 8(4) of the Financial Groups Directive is satisfied (the financial conglomerate is headed by a mixed financial holding company); and
(2) that financial conglomerate is a UK regulated EEA financial conglomerate.
Risk concentration and intra group transactions: the main rule
GENPRU 3.1.35
See Notes
A firm must ensure that the sectoral rules regarding risk concentration and intra-group transactions of the most important financial sector in the financial conglomerate referred to in GENPRU 3.1.34 R are complied with with respect to that financial sector as a whole, including the mixed financial holding company. The sectoral rules for these purposes are those identified in the table in GENPRU 3.1.36 R.
Risk concentration and intra-group transactions: Table of applicable sectoral rules
GENPRU 3.1.36
See Notes
Table: application of sectoral rules
This table belongs to GENPRU 3.1.35 R
This table belongs to GENPRU 3.1.35 R
| The most important financial sector | Applicable sectoral rules | |
| Risk concentration | Intra-group transactions | |
| Banking and investment services sector | the EUCRR | Part Four of the EUCRR |
| Insurance sector | None | Rule 9.39 of IPRU(INS) |
| Note | Any waiver granted to a member of the financial conglomerate, on a solo or consolidated basis, shall not apply in respect of the financial conglomerate for the purposes of GENPRU 3.1.36 R. | |
GENPRU 3.1.37
See Notes
(1) Where the sectoral rules for the banking and investment services sector are being applied, a mixed financial holding company must be treated as being a financial holding company.
(2) Where the rules for the insurance sector are being applied, a mixed financial holding company must be treated as being an insurance holding company.
The financial sectors: asset management companies and alternative investment fund managers
GENPRU 3.1.39
See Notes
(1) In accordance with Articles 30 and 30a of the Financial Groups Directive (Asset management companies and Alternative investment fund managers), this rule deals with the inclusion of an asset management company or an alternative investment fund manager that is a member of a financial conglomerate in the scope of regulation of financial conglomerates.
(2) An asset management company or an alternative investment fund manager is in the overall financial sector and is a regulated entity for the purpose of:
(a) GENPRU 3.1.29 R to GENPRU 3.1.36 R;
(b) GENPRU 3 Annex 1 (Capital adequacy calculations for financial conglomerates) and GENPRU 3 Annex 2 (Prudential rules for third country groups); and
(c) any other provision of the Handbookor PRA Rulebookrelating to the supervision of financial conglomerates.
(3) In the case of a financial conglomerate for which the appropriate regulator is the coordinator, all asset management companiesand all alternative investment fund managersmust be allocated to one financial sectorto which they belongfor the purposes in (2), being either the investment services sector or the insurance sector. But if that choice has not been made in accordance with (4) and notified to the appropriate regulator in accordance with (4)(d), an asset management companyor an alternative investment fund managermust be allocated to the smallest financial sector.
(4) The choice in (3):
(a) must be made by the undertaking in the financial conglomerate holding the position referred to in Article 4(2) of the Financial Groups Directive (group member to whom notice must be given that the group has been found to be a financial conglomerate);
(b) applies to all asset management companies and all alternative investment fund managers that are members of the financial conglomerate from time to time;
(c) cannot be changed; and
(d) must be notified to the appropriate regulator as soon as reasonably practicable after the notification in (4)(a).
(5) This rule applies even if:
(a) a UCITS management company is an IFPRU investment firm; or
GENPRU 3.2
Third-country groups
- 01/01/2007
Application
GENPRU 3.2.1
See Notes
GENPRU 3.2 applies to every firm that is a member of a third-country group. But it does not apply to:
(1) an incoming EEA firm; or
(2) an incoming Treaty firm; or
(3) a UCITS qualifier; or
(4) an ICVC.
Purpose
GENPRU 3.2.2
See Notes
GENPRU 3.2 implements in part Article 18 of the Financial Groups Directive and Article 127 of the CRD.
Equivalence
GENPRU 3.2.3
See Notes
The first question that must be asked about a third-country financial group is whether the EEA regulated entities in that third-country group are subject to supervision by a third-country competent authority, which is equivalent to that provided for by the Financial Groups Directive (in the case of a financial conglomerate) or the EEA prudential sectoral legislation for the banking sector or the investment services sector (in the case of a banking and investment group). Article 18(1) of the Financial Groups Directive sets out the process for establishing equivalence with respect to third-country financial conglomerates and Article 127(1) and (2) of the CRD does so with respect to third-country banking and investment groups.
Other methods: General
GENPRU 3.2.4
See Notes
If the supervision of a third-country group by a third-country competent authority does not meet the equivalence test referred to in GENPRU 3.2.3 G, the methods set out in the CRD and EUCRR will apply or competent authorities may apply other methods that ensure appropriate supervision of the EEA regulated entities in that third-country group in accordance with the aims of supplementary supervision under the Financial Groups Directive or consolidated supervision under the applicable EEA prudential sectoral legislation.
Supervision by analogy: introduction
GENPRU 3.2.5
See Notes
If the supervision of a third-country group by a third-country competent authority does not meet the equivalence test referred to in GENPRU 3.2.3 G, a competent authority may, rather than take the measures described in GENPRU 3.2.4 G, apply, by analogy, the provisions concerning supplementary supervision under the Financial Groups Directive or, as applicable, consolidated supervision under the applicable EEA prudential sectoral legislation, to the EEA regulated entities in the banking sector, investment services sector and (in the case of a financial conglomerate ) insurance sector.
GENPRU 3.2.6
See Notes
The appropriate regulator believes that it will only be right to adopt the option in GENPRU 3.2.5 G in response to very unusual group structures.
GENPRU 3.2.7
See Notes
GENPRU 3.2.8 R and GENPRU 3.2.9 R and GENPRU 3 Annex 2 set out rules to deal with the situation covered in GENPRU 3.2.5 G. Those rules do not apply automatically. Instead, they can only be applied with respect to a particular third-country group through the Part 4A permission of a firm in that third-country group.
Supervision by analogy: rules for third-country conglomerates
GENPRU 3.2.8
See Notes
If the Part 4A permission of a firm contains a requirement obliging it to comply with this rule with respect to a third-country financial conglomerate of which it is a member, it must comply, with respect to that third-country financial conglomerate, with the rules in Part 1 of GENPRU 3 Annex 2, as adjusted by Part 3 of that annex.
Supervision by analogy: rules for third-country banking and investment groups
GENPRU 3.2.9
See Notes
If the Part 4A permission of a firm contains a requirement obliging it to comply with this rule with respect to a third-country banking and investment group of which it is a member, it must comply, with respect to that third-country banking and investment group, with the rules in Part 2 of GENPRU 3 Annex 2, as adjusted by Part 3 of that annex.
GENPRU 3 Annex 1
Capital adequacy calculations for financial conglomerates (GENPRU 3.1.29R)
See Notes
1 Table: PART 1: Method of Annex I of the Financial Groups Directive (Accounting Consolidation Method)
2 Table: PART 2: Method 2 of Annex I of the Financial Groups Directive(Deduction and aggregation Method)
[deleted]
[deleted]
[deleted]
6 Table
7 Table
8 Table: PART 5: Principles applicable to all methods
9 Table: PART 6: Definitions used in this Annex
10 Table
11 Table: Paragraph 6.10: Application of sectoral consolidation rules
12 Table:
| Capital resources | 1.1 | The conglomerate capital resources of a financial conglomerate calculated in accordance with this Part are the capital of that financial conglomerate, calculated on an accounting consolidation basis, that qualifies under paragraph 1.2. | |
| 1.2 | The elements of capital that qualify for the purposes of paragraph 1.1 are those that qualify in accordance with the applicable sectoral rules, in accordance with the following: | ||
| (1) | the conglomerate capital resources requirement is divided up in accordance with the contribution of each financial sector to it; and | ||
| (2) | the portion of the conglomerate capital resources requirement attributable to a particular financial sector must be met by capital resources that are eligible in accordance with the applicable sectoral rules for that financial sector. | ||
| Capital resources requirement | 1.3 | The conglomerate capital resources requirement of a financial conglomerate calculated in accordance with this Part is equal to the sum of the capital adequacy and solvency requirements for each financial sector calculated in accordance with the applicable sectoral rules for that financial sector. | |
| Consolidation | 1.4 | The information required for the purpose of establishing whether or not a firm is complying with GENPRU 3.1.29 R (insofar as the definitions in this Part are applied for the purpose of that rule) must be based on the consolidated accounts of the financial conglomerate, together with such other sources of information as appropriate. | |
| 1.5 | The applicable sectoral rules that are applied under this Part are the applicable sectoral consolidation rules. Other applicable sectoral rules must be applied if required. | ||
| Capital resources | 2.1 | The conglomerate capital resources of a financial conglomerate calculated in accordance with this Part are equal to the sum of the following amounts (so far as they qualify under paragraph 2.3) for each member of the overall financial sector: (1)(for the person at the head of the financial conglomerate) its solo capital resources;(2)(for any other member):
(a)its solo capital resources; less(b)the book value of the financial conglomerate's investment in that member, to the extent not already deducted in the calculation of the solo capital resources for:(i)the person at the head of the financial conglomerate; or (ii)any other member. |
| 2.2 | The deduction in paragraph 2.1(2) must be carried out separately for each type of capital represented by the financial conglomerate's investment in the member concerned. | |
| 2.3 | The elements of capital that qualify for the purposes of paragraph 2.1 are those that qualify in accordance with the applicable sectoral rules. In particular, the portion of the conglomerate capital resources requirement attributable to a particular member of a financial sector must be met by capital resources that would be eligible under the sectoral rules that apply to the calculation of its solo capital resources. | |
| Capital resources requirement | 2.4 | The conglomerate capital resources requirement of a financial conglomerate calculated in accordance with this Part is equal to the sum of the solo capital resources requirement for each member of the financial conglomerate that is in the overall financial sector. |
| Partial inclusion | 2.5 | The capital resources and capital resources requirements of a member of the financial conglomerate in the overall financial sector must be included proportionally. If however the member is a subsidiary undertaking and it has a solvency deficit, they must be included in full. |
| Accounts | 2.6 | The information required for the purpose of establishing whether or not a firm is complying with GENPRU 3.1.29 R (insofar as the definitions in this Part are applied for the purpose of that rule) must be based on the individual accounts of members of the financial conglomerate, together with such other sources of information as appropriate. |
[deleted]
[deleted]
6 Table
| Types of financial conglomerate | 4.3 |
(1)This paragraph sets out how to determine the category of financial conglomerate.(2)If there is an EEA regulated entity at the head of the financial conglomerate, then:
(a)if that entity is in the banking sector or the investment services sector, the financial conglomerate is a banking and investment services conglomerate; or(b)if that entity is in the insurance sector, the financial conglomerate is an insurance conglomerate. (3)If (2) does not apply and the most important financial sector is the banking and investment services sector, it is a banking and investment services conglomerate.(4)If (2) and (3) does not apply, it is an insurance conglomerate. |
| A mixed financial holding company | 4.4 | A mixed financial holding company must be treated in the same way as: (1)a financial holding company (ifPart One, Title II, Chapter 2 of the EUCRR and the PRA Rulebook ) are applied; or(2)an insurance holding company (if the rules in
INSPRU 6.1 are applied).
|
| Transfer-ability of capital | 5.1 | Capital may not be included in if the effectiveness of the transferability and availability of the capital across the different members of the financial conglomerate is insufficient, given the objectives (as referred to in the third unnumbered sub-paragraph of paragraph 2(ii) of Annex I of the Financial Groups Directive (Technical principles)) of the capital adequacy rules for financial conglomerates. |
| Double counting | 5.2 | Capital must not be included in if: (1)
it would involve double counting or multiple use of the same capital; or
(2)it results from any inappropriate intra-group creation of capital. |
| Cross sectoral capital | 5.3 | In accordance with the second sub-paragraph of paragraph 2(ii) of Section I of Annex I of the Financial Groups Directive (Other technical principles and insofar as not already required in Parts 1-3): (1)the solvency requirements for each different financial sector represented in a financial conglomerate required by
GENPRU 3.1.29 R must be covered by own funds elements in accordance with the corresponding applicable sectoral rules; and(2)if there is a deficit of own funds at the financial conglomerate level, only cross sectoral capital (as referred to in that sub-paragraph) shall qualify for verification of compliance with the additional solvency requirement required by
GENPRU 3.1.29 R.
|
| Application of sectoral rules: General | 5.4 | The following adjustments apply to the applicable sectoral rules as they are applied by the rules in this annex. (1)The scope of those rules will be extended to cover any mixed financial holding company and each other member of the overall financial sector.(2)If any of those rules would otherwise not apply to a situation in which they are applied by GENPRU 3 Annex 1, those rules nevertheless still apply (and in particular, any of those rules that would otherwise have the effect of disapplying consolidated supervision(or, in the case of the insurance sector, supplementary supervision) do not apply).(3)(If it would not otherwise have been included) an ancillary insurance services undertaking is included in the insurance sector.(4)The scope of those rules is amended so as to remove restrictions relating to where members of the financial conglomerate are incorporated or have their head office, so that the scope covers every member of the financial conglomerate that would have been included in the scope of those rules if those members had their head offices in an EEA State.(5)(For the purposes of Parts 1 to 3) those rules must be adjusted, if necessary, when calculating the capital resources, capital resources requirements or solvency requirements for a particular financial sector to exclude those for a member of another financial sector.(6)Any waiver granted to a member of the financial conglomerate under those rules does not apply for the purposes of this annex.
|
| Application of sectoral rules: Insurance sector | 5.5 |
(1)This rule applies an adjustment to the applicable sectoral rules for the insurance sector as they are applied by the rules in this annex.(2)To the extent that:
(a)those rules merely require a report on whether or not a specified level of solvency is met (a soft limit); or(b)the requirements in those rules concern having certain net assets of an amount at or above certain levels; those requirements are restated so as to include an obligation at all times actually to have capital at or above that level (a hard limit), thereby turning a soft limit into a hard limit and turning a limit drafted by reference to assets and liabilities into a requirement that the level of capital be maintained at or above a specified level. If those rules apply both a hard and a soft limit, and the level of the soft limit is higher, that soft limit is applied under this annex, but translated into a hard limit in accordance with the earlier provisions of this rule. |
| Application of sectoral rules: Banking sector and investment services sector | 5.6 | In relation to a BIPRU firm that is a member of a financial conglomerate where there are no credit institutions or investment firms, the following adjustments apply to the applicable sectoral rules for the banking sector and the investment services sector as they are applied by the rules in this annex. (1)References in those rules to non-EEA sub-groups do not apply.(2)[deleted](3)Any investment firm consolidation waivers granted to members of the financial conglomerate do not apply.(4)(For the purposes of Part 3), without prejudice to the application of requirements in BIPRU 8 preventing the use of an advanced prudential calculation approach on a consolidated basis, any advanced prudential calculation approach permission that applies for the purpose of BIPRU 8 does not apply.(5)(For the purposes of Part 3), BIPRU 8.5.9 R and BIPRU 8.5.10 R do not apply.(6)(For the purposes of Part 3), where the financial conglomerate does not include a credit institution, the method in GENPRU 2 Annex 4 must be used for calculating the capital resources and BIPRU 8.6.8 R does not apply.
(Other than as above) the CRD and EUCRR apply for the banking sector and the investment services sector. |
| No capital ties | 5.7 |
(1)This rule deals with a financial conglomerate in which some of the members are not linked by capital ties at the time of the notification referred to in GENPRU 3.1.29A R (Capital adequacy requirements: Application ofMethod 1 or 2 from Annex I of the Financial Groups Directive).(2)[deleted](3)[deleted](4)If:
(a)[deleted](b)
GENPRU 3.1.29 R (Capital adequacy requirements: Application of Method 1 or 2from Annex I of the Financial Groups Directive) applies with respect to a financial conglomerate falling into (1); then:(c)the treatment of the links in (1) (including the treatment of any solvency deficit) is as provided for in whichever of Part 1 or Part 2 of GENPRU 3 Annex 1 the firm has, under GENPRU 3.1.30 R, indicated to the appropriate regulator it will apply or, if applicable, in the requirement referred to in GENPRU 3.1.31 R; and(d)
GENPRU 3.1.29 R
applies even if the applicable sectoral rules do not deal with how undertakings not linked by capital ties are to be dealt with for the purposes of consolidated supervision (or, in the case of the insurance sector, supplementary supervision). (5)[deleted] |
| Defining the financial sectors | 6.1 | For the purposes of Parts 1 and 2 of this annex: (1)an asset management company is allocated in accordance with GENPRU 3.1.39 R;(2)an alternative investment fund manager is allocated in accordance with GENPRU 3.1.39 R; and(3)a mixed financial holding company must be treated as being a member of the most important financial sector.
|
| Solo capital resources requirement: Banking sector and investment service sector | 6.2 |
(1)The solo capital resources requirement of an undertaking in the banking sector or the investment services sector must be calculated in accordance with this rule, subject to paragraphs 6.5 and 6.6.(2)The solo capital resources requirement of a building society is its
own funds requirements
.(3)The solo capital resources requirement of an
electronic money institution is the capital resources requirement that applies to it under the Electronic Money Regulations.(4)If there is a credit institution in the financial conglomerate, the solo capital resources requirement for any undertaking in the banking sector or the investment services sector is, subject to (2) and (3), calculated in accordance with the
EU CRR
for calculating the
own funds requirements
of a bank.(5)If:
(a)the financial conglomerate does not include a credit institution;(b)there is at least one
investment firm
in the financial conglomerate; and(c)all the
investment firms
in the financial conglomerate are limited licence firms or limited activity firms; the solo capital resources requirement for any undertaking in the banking sector or the investment services sector is calculated in accordance with the
EU
CRR
for calculating the
own funds requirements
of:(i)(if there is a limited activity firm in the financial conglomerate), an IFPRUlimited activity firm; or (6)If:the solo capital resources requirement for any undertaking in the banking sector or the investment services sector is calculated in accordance with the
EU
CRR
for calculating the
own funds requirements
of a
full-scope IFPRU investment firm
.(7)In relation to a BIPRU firm that is a member of a financial conglomerate where there are no credit institutions or investment firms, any
capital resources requirements
calculated under a BIPRU TP may be used for the purposes of the solo capital resources requirement in this rule in the same way that the
capital resources requirements
can be used under BIPRU 8. |
| Solo capital resources requirement: application of rules | 6.3 | Any exemption that would otherwise apply under any rules applied by paragraph 6.2 do not apply for the purposes of this Annex. |
| Solo capital resources requirement: Insurance sector | 6.4 |
(1)The solo capital resources requirement of an undertaking in the insurance sector must be calculated in accordance with this rule.(2)Subject to (3), the
solo capital resources requirement ofan undertaking in the insurance sector is the capital resources requirement identified in
INSPRU 6.1.34 R (1) to (8) as applying to that undertaking.(3)
INSPRU 6.1.34 R (1)(b) does not apply for the purposes of this annex.
|
| Solo capital resources requirement: EEA firms in the banking sector or investment services sector | 6.5 | The solo capital resources requirement for an EEA regulated entity (other than a
bank, building society, designated investment firm, IFPRU investment firm,
BIPRU firm, an insurer or an EEA insurer) that is subject to the solo capital adequacy sectoral rules for its financial sector of the competent authority that authorised it is equal to the amount of capital it is obliged to hold under those sectoral rules provided that the following conditions are satisfied: (1)(for the purposes of the banking sector and the investment services sector) those sectoral rules must correspond to the
appropriate regulator's
sectoral rules identified in paragraph 6.2 as applying to that financial sector;(2)the entity must be subject to those sectoral rules in (1); and(3)paragraph 6.3 applies to the entity and those sectoral rules.
|
| Solo capital resources requirement: non-EEA firms subject to equivalent regimes in the banking sector or investment services sector | 6.6 | The solo capital resources requirement for a recognised third country credit institution or a recognised third country investment firm is the amount of capital resources that it is obliged to hold under the sectoral rules for its financial sector that apply to it in the state or territory in which it has its head office provided that: (1)there is no reason for the firm applying the rules in this annex to believe that the use of those sectoral rules would produce a lower figure than would be produced under paragraph 6.2; and(2)paragraph 6.3 applies to the entity and those sectoral rules.
|
| Solo capital resources requirement: mixed financial holding company | 6.7 | The solo capital resources requirement of a mixed financial holding company is a notional capital requirement. It is the capital adequacy requirement that applies to regulated entities in the most important financial sector under the table in paragraph 6.10. |
| Solo capital resources requirement: the insurance sector | 6.8 | References to capital requirements in the provisions of GENPRU 3 Annex 1 defining solo capital resources requirement must be interpreted in accordance with paragraph 5.4. |
| Applicable sectoral consolidation rules | 6.9 | The applicable sectoral consolidation rules for a financial sector are the appropriate regulator's sectoral rules about capital adequacy and solvency on a consolidated basis that are applied in the table in paragraph 6.10. |
| Financial sector | Sectoral rules |
| Banking sector | Part One, Title II, Chapter 2 of the EUCRR and the PRA Rulebook |
| Insurance sector | INSPRU 6.1. |
| Investment services sector |
(in relation to a designated investment firm or IFPRU investment firm which is a member of a financial conglomerate for which the PRA is the coordinator) Part One, Title II, Chapter 2 of the EUCRR and the PRA Rulebook; (in relation to an IFPRU investment firm which is a member of a financial conglomerate for which the FCA is the coordinator) Part One, Title II, Chapter 2 of the EUCRR and IFPRU 8.1; (in relation to a BIPRU firm that is a member of a financial conglomerate where there are no credit institutions or investment firms for which the FCA is the coordinator) BIPRU 8 and BIPRU TP |
| Part 5 | 1 | This Part 6 is subject to Part 5 of this Annex. |
GENPRU 3 Annex 2
Prudential rules for third country groups (GENPRU 3.2.8R to GENPRU 3.2.9R)
- 01/01/2007
See Notes
1 Table: PART 1: Third-country financial conglomerates
2 Table: PART 2: Third-country banking and investment groups
3 Table: PART 3: Adjustment of scope
| 1.1 | This Part of this annex sets out the rules with which a firm must comply under GENPRU 3.2.8 R with respect to a financial conglomerate of which it is a member. |
| 1.2 | A firm must comply, with respect to the financial conglomerate referred to in paragraph 1.1, with GENPRU 3.1.29 R as applied under paragraph 1.3. |
| 1.3 | For the purposes of paragraph 1.2: (1)[deleted](2) the definitions of conglomerate capital resources and conglomerate capital resources requirement that apply for the purposes of that rule are the ones from whichever of Part 1 or Part 2 of GENPRU 3 Annex 1 is specified in the requirement referred to in GENPRU 3.2.8 R; and(3)the rules so applied (including those in GENPRU 3 Annex 1) are adjusted in accordance with paragraph 3.1.
|
| 1.4 | If the condition in Articles 7(4) and 8(4) of the Financial Groups Directive is satisfied (the financial conglomerate is headed by a mixed financial holding company) with respect to the financial conglomerate referred to in paragraph 1.1 the firm must also comply with GENPRU 3.1.35 R (as adjusted in accordance with paragraph 3.1) with respect to that financial conglomerate. |
| 1.5 | A firm must comply with the following with respect to the financial conglomerate referred to in paragraph 1.1: (1) SYSC 12 (as it applies to financial conglomerates and as adjusted under paragraph 3.1); and(2) GENPRU 3.1.25 R.
|
| 2.1 | This Part of this annex sets out the rules with which a firm must comply under GENPRU 3.2.9 R with respect to a third-country banking and investment group of which it is a member. | |
| 2.2 | A firm must comply with one of the sets of rules specified in paragraph 2.3 as adjusted under paragraph 3.1 with respect to the third-country banking and investment group referred to in paragraph 2.1. | |
| 2.3 | The rules referred to in paragraph 2.2 are : |
|
| 2.4 | The set of rules from paragraph 2.3 that apply with respect to a particular third-country banking and investment group (as referred to in paragraph 2.1) are those that would apply if they were adjusted in accordance with paragraph 3.1. | |
| 2.5 | The sectoral rules applied by Part 2 of this annex cover all prudential rules applying on a consolidated basis including those relating to large exposures. | |
| 2.6 | A firm must comply with SYSC 12 (as it applies to banking and investment groups and as adjusted under paragraph 3.1) with respect to the third-country banking and investment group referred to in paragraph 2.1. | |
| 3.1 | The adjustments that must be carried out under this paragraph are that the scope of the rules referred in Part 1 or Part 2 of this annex, as the case may be, are amended: (1)so as to remove any provisions disapplying those rules for third-country groups;(2)so as to remove all limitations relating to where a member of the third-country group is incorporated or has its head office; and(3)so that the scope covers every member of the third-country group that would have been included in the scope of those rules if those members had their head offices in, and were incorporated in, an EEA State.
|
GENPRU 3 Annex 3
Guidance Notes for Classification of Groups
- 01/01/2007
See Notes
This annex consists only of one or more forms. Forms are to be found through the following address:
Classification of Groups (GENPRU 3.1.3 G) - genpru_ch3_annex3G.pdf
Purpose and scope
The form is designed to identify groups and sub-groups that are likely to be financial conglomerates under the Financial Groups Directive. A group may be a financial conglomerate if it contains both insurance and banking/investment businesses and meets certain threshold tests. The appropriate regulator needs to identify conglomerates with their head offices in the EEA and those with their head offices outside the EEA, although this does not necessarily mean that the latter will be subject to EEA conglomerate supervision.
This form's purpose is to enable the appropriate regulator to obtain sufficient information so as to be able to determine how likely a group/sub-group is to be a financial conglomerate. In certain cases this can only be determined after consultation with the other EU relevant competent authorities. A second purpose of the form is therefore to identify any groups and sub-groups that may need such consultation so that this can be made as soon as possible. This should allow firms time to prepare to comply.
The third purpose of the form is to gain information from firms on the most efficient way to implement the threshold calculations in detail (consistently with the directive). We have, therefore, asked for some additional information in part 4 of the form.
A copy of this form will can be found on the appropriate regulator's Financial Groups Website with current contact details.
Please include workings showing the method employed to determine the percentages in part 2 (for the threshold conditions) and giving details of all important assumptions / approximations made in doing the calculations.
The definition of financial conglomerate includes not only conventional groups made up of parent-subsidiary relationships but groups linked by control and "consolidation Article 12(1) relationships". If this is the case for your group, please submit along with this form a statement that this is the case. Please include in that statement an explanation of how you have included group members not linked by capital ties in the questionnaire calculations.
A consolidation Article 12(1) relationship arises between undertakings in the circumstances set out in Article 12(1) of the Seventh Company Law Directive. These are set out in the Handbook Glossary (in the definition of consolidation Article 12(1) relationship). Broadly speaking, undertakings come within this definition if they do not form a conventional group but:
General guidance
We would like this to be completed based on the most senior parent in the group, and, if applicable, for the company heading the most senior conglomerate group in the EEA. If appropriate, please also attach a list of all other likely conglomerate sub-groups.
Please use the most recent accounts for the top level company in the group together with the corresponding accounts for all subsidiaries and participations that are included in the consolidated accounts. Please indicate the names of any significant subsidiaries with a different year-end from the group's year-end.
Please note the following:
Threshold tests
For the purpose of completing section 2 of the form relating to the threshold tests, the following guidance should be used. However, if you consider that for your group there is a more appropriate calculation then you may use this calculation so long as the method of computation is submitted with the form.
Calculating balance sheet totals
Generally, use total (gross) assets for the balance sheet total of a group/entity. However, investments in other entities that are part of the group will need to be deducted from the sector that has made the investment and the balance sheet total of the entity is added to the sector in which it operates.
Our expectation of how this may be achieved efficiently is as follows:
Solvency (capital adequacy) requirements
Generally, the solvency requirements should be according to sectoral rules of the appropriate regulator that would apply to the type of entity. However, you can use EEA rules or local rules in the circumstances set out in Part 6 of GENPRU 3 Annex 1. But if this choice makes a significant difference, either with respect to whether the group is a financial conglomerate or with respect to which sector is the biggest, you should consult with the appropriate regulator . Non-regulated financial entities should have proxy requirements calculated on the basis of the most appropriate sector. If sub-groups submit single sector consolidated returns then the solvency requirement may be taken from those returns.
Our expectation of how this may be achieved efficiently is as follows:
Market share measures
These are not defined by the directive. The aim is to identify any standard industry approaches to measuring market share in individual EU countries by sector, or any data sources which are commonly used as a proxy.
Article I.
Article II. Threshold tests
Test F2
B/S of banking/investment + insurance sector = result %
B/S total
Test F3/F4/F5
B/S of insurance sector
B/S of banking/investment sector + insurance sector = A%
B/S of banking/investment sector
B/S of banking/investment sector + insurance sector = B%
Solvency requirement of insurance sector
Solvency requirement of banking/investment sector +insurance sector = C%
Solvency requirement of banking/investment sector
Solvency requirement of banking/investment sector +insurance sector = D%
The relevant percentage for the insurance sector is:
(A% + C%)/2 = I %
The relevant percentage for the banking/investment sector is:
(B% + D%)/2 = BI %
The smallest sector is the sector with the smallest relevant percentage.
Article III. If I% < BI% then F3 is insurance, F4 = A%, and F5 = C%
Article IV. If BI% < I% then F3 is banking/investment, F4 = B% and F5 = D%
Classification of Groups (GENPRU 3.1.3 G) - genpru_ch3_annex3G.pdf
Purpose and scope
The form is designed to identify groups and sub-groups that are likely to be financial conglomerates under the Financial Groups Directive. A group may be a financial conglomerate if it contains both insurance and banking/investment businesses and meets certain threshold tests. The appropriate regulator needs to identify conglomerates with their head offices in the EEA and those with their head offices outside the EEA, although this does not necessarily mean that the latter will be subject to EEA conglomerate supervision.
This form's purpose is to enable the appropriate regulator to obtain sufficient information so as to be able to determine how likely a group/sub-group is to be a financial conglomerate. In certain cases this can only be determined after consultation with the other EU relevant competent authorities. A second purpose of the form is therefore to identify any groups and sub-groups that may need such consultation so that this can be made as soon as possible. This should allow firms time to prepare to comply.
The third purpose of the form is to gain information from firms on the most efficient way to implement the threshold calculations in detail (consistently with the directive). We have, therefore, asked for some additional information in part 4 of the form.
A copy of this form will can be found on the appropriate regulator's Financial Groups Website with current contact details.
Please include workings showing the method employed to determine the percentages in part 2 (for the threshold conditions) and giving details of all important assumptions / approximations made in doing the calculations.
The definition of financial conglomerate includes not only conventional groups made up of parent-subsidiary relationships but groups linked by control and "consolidation Article 12(1) relationships". If this is the case for your group, please submit along with this form a statement that this is the case. Please include in that statement an explanation of how you have included group members not linked by capital ties in the questionnaire calculations.
A consolidation Article 12(1) relationship arises between undertakings in the circumstances set out in Article 12(1) of the Seventh Company Law Directive. These are set out in the Handbook Glossary (in the definition of consolidation Article 12(1) relationship). Broadly speaking, undertakings come within this definition if they do not form a conventional group but:
(a)are managed on a unified basis; or(b)have common management.
General guidance
We would like this to be completed based on the most senior parent in the group, and, if applicable, for the company heading the most senior conglomerate group in the EEA. If appropriate, please also attach a list of all other likely conglomerate sub-groups.
Please use the most recent accounts for the top level company in the group together with the corresponding accounts for all subsidiaries and participations that are included in the consolidated accounts. Please indicate the names of any significant subsidiaries with a different year-end from the group's year-end.
Please note the following:
(a)Branches should be included as part of the parent entity.(b)Include in the calculations overseas entities owned by the relevant group or sub-group.(c)There are only two sectors for this purpose: banking/investment and insurance.(d)You will need to assign non-regulated financial entities to one of these sectors:
•
banking/investment activities are listed in - Annex 1 to the Capital Requirements Directive 2013/36/EU•
insurance activities are listed in - IPRU Insurers Annex 11.1 and 11.2.•Any operator of a UCITS scheme, insurance intermediary, mortgage broker and mixed financial holding company does not fall into the directive definitions of either financial sector or insurance sector and should be treated for these purposes as being outside the financial sector. They should therefore be ignored for the purposes of these calculations.
Threshold tests
For the purpose of completing section 2 of the form relating to the threshold tests, the following guidance should be used. However, if you consider that for your group there is a more appropriate calculation then you may use this calculation so long as the method of computation is submitted with the form.
Calculating balance sheet totals
Generally, use total (gross) assets for the balance sheet total of a group/entity. However, investments in other entities that are part of the group will need to be deducted from the sector that has made the investment and the balance sheet total of the entity is added to the sector in which it operates.
Our expectation of how this may be achieved efficiently is as follows:
(i)Off-balance-sheet items should be excluded.(ii)Where off-balance sheet treatment of funds under management and on-balance sheet treatment of policy holders' funds may distort the threshold calculation, groups should consult the appropriate regulator on the appropriateness of using other measures under article 3.5 of the Financial Groups Directive.(iii)If consolidated accounts exist for a sub-group consisting of financial entities from only one of the two sectors, these consolidated accounts should be used to measure the balance-sheet total of the sub-group (i.e. total assets less investments in entities in the other sector). If consolidated accounts do not exist, intra-group balances should be netted out when calculating the balance sheet total of a single sector (but cross-sector intra-group balances should not be netted out).(iv)Where consolidated accounts are used, minority interests should be excluded and goodwill should be included.(v)Where accounting standards differ between entities, groups should consult the
appropriate regulator
if they believe this is likely materially to affect the threshold calculation.(vi)Where there is a subsidiary or participation in the opposite sector from its parent (i.e. insurance sector for a banking/investment firm parent and vice versa), the balance sheet amount of the subsidiary or participation should be allocated to its sector using its individual accounts.(vii)The balance-sheet total of the parent entity/sub-group is measured as total assets of the parent/sub-group less the book value of its subsidiaries or participations in the other sector (i.e. the value of the subsidiary or participation in the parent's consolidated accounts is deducted from the parent's consolidated assets).(viii)The cross-sector subsidiaries or participations referred to above, valued according to their own accounts, are allocated pro-rata, according to the aggregated share owned by the parent/sub-group, to their own sector.(ix)If the cross-sector entities above themselves own group entities in the first sector (i.e. that of the top parent/sub-group) these should (in accordance with the methods above) be excluded from the second sector and added to the first sector using individual accounts.
Solvency (capital adequacy) requirements
Generally, the solvency requirements should be according to sectoral rules of the appropriate regulator that would apply to the type of entity. However, you can use EEA rules or local rules in the circumstances set out in Part 6 of GENPRU 3 Annex 1. But if this choice makes a significant difference, either with respect to whether the group is a financial conglomerate or with respect to which sector is the biggest, you should consult with the appropriate regulator . Non-regulated financial entities should have proxy requirements calculated on the basis of the most appropriate sector. If sub-groups submit single sector consolidated returns then the solvency requirement may be taken from those returns.
Our expectation of how this may be achieved efficiently is as follows:
(i)If you complete a solvency return for a sub-group consisting of financial entities from only one of the two sectors, the total solvency requirement for the sub-group should be used.(ii)Solvency requirements taken must include any deductions from available capital so as to allow the appropriate aggregation of requirements.(iii)Where there is a regulated subsidiary or participation in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be from its individual regulatory return. If there is an identifiable contribution to the parent's solvency requirement in respect of the cross-sector subsidiary or participation, the parent's solvency requirement may be adjusted to exclude this.(iv)Where there is an unregulated financial undertaking in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be one of the following:
(a)as if the entity were regulated by the
appropriate regulator
under the appropriate sectoral rules;(b)using EU minimum requirements for the appropriate sector; or(c)using non-EU local requirements* for the appropriate sector.
Please note on the form which of these options you have used, according to the country and sector, and whether this is the same treatment as in your latest overall group solvency calculation.(v)For banking/investment requirements, use the total amount of capital required.(vi)For insurance requirements, use the total amount of capital required.Market share measures
These are not defined by the directive. The aim is to identify any standard industry approaches to measuring market share in individual EU countries by sector, or any data sources which are commonly used as a proxy.
Article I.
Article II. Threshold tests
Test F2
B/S of banking/investment + insurance sector = result %
B/S total
Test F3/F4/F5
B/S of insurance sector
B/S of banking/investment sector + insurance sector = A%
B/S of banking/investment sector
B/S of banking/investment sector + insurance sector = B%
Solvency requirement of insurance sector
Solvency requirement of banking/investment sector +insurance sector = C%
Solvency requirement of banking/investment sector
Solvency requirement of banking/investment sector +insurance sector = D%
The relevant percentage for the insurance sector is:
(A% + C%)/2 = I %
The relevant percentage for the banking/investment sector is:
(B% + D%)/2 = BI %
The smallest sector is the sector with the smallest relevant percentage.
Article III. If I% < BI% then F3 is insurance, F4 = A%, and F5 = C%
Article IV. If BI% < I% then F3 is banking/investment, F4 = B% and F5 = D%
GENPRU 3 Annex 4
(see GENPRU 3.1.5R)
- 01/01/2007
See Notes
Footnote: The conditions are that the EEA regulated entity at the head of the consolidation group:
(1)is a parent undertaking of a member of the consolidation group in the overall financial sector;(2)has a participation in a member of the consolidation group that is in the overall financial sector; or(3)has a consolidation Article 12(1) relationship with a member of the consolidation group that is in the overall financial sector.