Capital

Part

GENPRU General Prudential sourcebook

Chapter

Capital

Printed on: 19/12/2024

Rulebook at: 19/06/2014

GENPRU 2

Capital

GENPRU 2.1

Calculation of capital resources requirements

31/12/2006

Application

GENPRU 2.1.1A

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

The scope of application of this section is not restricted to firms that are subject to the relevant EU Directives.

01/04/2013

GENPRU 2.1.3

(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.

01/04/2013

GENPRU 2.1.4

The adequacy of a firm's capital resources needs to be assessed in relation to all the activities of the firm and the risks to which they give rise.

01/04/2013

GENPRU 2.1.5

The requirements in this section apply to a firm on a solo basis.

01/04/2013

Purpose

GENPRU 2.1.6

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's capital 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)).

01/04/2013

GENPRU 2.1.7

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.

01/04/2013

GENPRU 2.1.8A

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

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.

01/04/2013

GENPRU 2.1.10

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 .

01/04/2013

GENPRU 2.1.11

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).

01/04/2013

Additional capital requirements

GENPRU 2.1.12

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)).

01/04/2013

Main requirement: Insurers

GENPRU 2.1.13

(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.

01/04/2013

GENPRU 2.1.14

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.

01/04/2013

GENPRU 2.1.15

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's CRR 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.

01/04/2013

GENPRU 2.1.16

Insurers commonly use different terminology for the various GENPRU requirements. For example, the MCR is traditionally known as the required minimum margin.

01/04/2013

Calculation of the CRR for an insurer

GENPRU 2.1.17

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.

01/04/2013

GENPRU 2.1.18

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:

(1) the MCR in GENPRU 2.1.24A R; and

(2) the ECR in GENPRU 2.1.38 R.

01/04/2013

GENPRU 2.1.19

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;

(2) an insurer which has no with-profits insurance liabilities; and

(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.

01/04/2013

GENPRU 2.1.20

GENPRU 2.1.18 R also applies to an insurer of a type listed in GENPRU 2.1.19R (3) if:

(1) the insurer makes an election that GENPRU 2.1.18 R is to apply to it; and

(2) that election is made by written notice given to the PRA in a way that complies with the requirements for written notice in Notifications 7 (Form and method of notification) of the PRA Rulebook.

19/06/2014

GENPRU 2.1.21

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.

01/04/2013

GENPRU 2.1.22

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.

01/04/2013

GENPRU 2.1.23

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.

01/04/2013

Calculation of the MCR (Insurer only)

GENPRU 2.1.24

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

(2) the general insurance capital requirement.

01/04/2013

GENPRU 2.1.24A

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

(2) the long-term insurance capital requirement.

01/04/2013

GENPRU 2.1.25

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.

01/04/2013

GENPRU 2.1.26

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:

(a) the long-term insurance capital requirement; and

(b) the resilience capital requirement;

unless the sum of:

(3) the general insurance capital requirement; and

(4) the sum of:

(a) the long-term insurance capital requirement; and

(b) the resilience capital requirement;

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.

01/04/2013

GENPRU 2.1.27

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.

01/04/2013

GENPRU 2.1.28

The calculation of the resilience capital requirement is set out in INSPRU 3.1 (Market Risk in insurance).

01/04/2013

Calculation of the base capital resources requirement for an insurer

GENPRU 2.1.29

The amount of an insurer's base 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.

01/04/2013

Table: Base capital resources requirement for an insurer

GENPRU 2.1.30

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

01/04/2013

GENPRU 2.1.31

(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.

01/04/2013

GENPRU 2.1.32

Any increases in the base capital resources requirement referred to in GENPRU 2.1.31 G will be published on the PRA website.

01/04/2013

GENPRU 2.1.33

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.

01/04/2013

Calculation of the general insurance capital requirement (Insurer only)

GENPRU 2.1.34

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.

01/04/2013

GENPRU 2.1.35

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).

01/04/2013

Calculation of the long-term insurance capital requirement (Insurer only)

GENPRU 2.1.36

An insurer must calculate its long-term insurance capital requirement as the sum of:

(1) the insurance death risk capital component;

(2) the insurance health risk and life protection reinsurance capital component;

(3) the insurance expense risk capital component; and

(4) the insurance market risk capital component.

01/04/2013

GENPRU 2.1.37

The calculation of each of the capital components is set out in INSPRU 1.1 (Capital resources requirement and technical provisions for insurance business).

01/04/2013

Calculation of the ECR (Insurer only)

GENPRU 2.1.38

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

(2) the with-profits insurance capital component.

01/04/2013

GENPRU 2.1.39

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.

01/04/2013

GENPRU 2.2

Capital resources

31/12/2006

Application

GENPRU 2.2.1A

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

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.

01/04/2013

GENPRU 2.2.3

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).

01/04/2013

Principles underlying the definition of capital resources

GENPRU 2.2.8

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.

01/04/2013

Tier one capital

GENPRU 2.2.9

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.

01/04/2013

GENPRU 2.2.10

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.

01/04/2013

Upper and lower tier two capital

GENPRU 2.2.11

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.

01/04/2013

Tier three capital

GENPRU 2.2.12

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).

01/04/2013

Non-standard capital instruments

GENPRU 2.2.13

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.

01/04/2013

Deductions from capital

GENPRU 2.2.14

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.

01/01/2014

GENPRU 2.2.16

A full list of deductions from capital resources is shown in the capital resources table applicable to the firm.

01/04/2013

Calculation of capital resources: Insurers

GENPRU 2.2.22

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.

01/01/2014

Table: Approaches to calculating capital resources

GENPRU 2.2.23

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

01/04/2013

Limits on the use of different forms of capital: General

GENPRU 2.2.24

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's capital resources. These rules are called the capital resources gearing rules.

01/04/2013

Limits on the use of different forms of capital: Use of higher tier capital in lower tiers

GENPRU 2.2.25

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.

01/04/2013

GENPRU 2.2.26

An item of tier one capital which is included in a firm's tier 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).

01/04/2013

GENPRU 2.2.26A

A dated item of tier one capital which is included in a BIPRU firm's tier 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).

01/04/2013

Limits on the use of different forms of capital: Limits relating to tier one capital applicable to insurers

GENPRU 2.2.29

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.

01/04/2013

GENPRU 2.2.30

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.

01/04/2013

Limits on the use of different forms of capital: Limits relating to tier one capital: Purpose of the requirements

GENPRU 2.2.31

The purpose of the requirements in GENPRU 2.2.29 R and GENPRU 2.2.30AR (1) is to ensure that the firm's tier 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's tier one capital comprises items of capital of the highest quality.

01/04/2013

Limits on the use of different forms of capital: Insurers

GENPRU 2.2.32

At least 50% of an insurer's MCR 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).

01/04/2013

GENPRU 2.2.33

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).

01/04/2013

GENPRU 2.2.34

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.

01/04/2013

GENPRU 2.2.34A

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.

01/04/2013

GENPRU 2.2.35

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.

01/04/2013

GENPRU 2.2.36

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.

01/04/2013

GENPRU 2.2.37

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.

01/04/2013

GENPRU 2.2.38

At least 75% of an insurer's MCR 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.

01/04/2013

GENPRU 2.2.39

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.

01/04/2013

GENPRU 2.2.40

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.

01/04/2013

GENPRU 2.2.41

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.

01/04/2013

Notification of issuance of capital instruments

GENPRU 2.2.61A

This section applies to a firm intending to issue a capital instrument on or after 1 March 2012 for inclusion in its capital resources.

01/04/2013

GENPRU 2.2.61B

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 R

01/04/2013

GENPRU 2.2.61C

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 .

01/04/2013

GENPRU 2.2.61D

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

(2) provide the information required by GENPRU 2.2.61BR (1) to (4)

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.

01/04/2013

GENPRU 2.2.61E

The capital instruments to which GENPRU 2.2.61B R does not apply are:

(1) ordinary shares which:

(a) are the most deeply subordinated capital instrument issued by the firm;

(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.

01/04/2013

GENPRU 2.2.61F

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:

(1) provide the information set out at GENPRU 2.2.61BR (1) to (3); and

(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.

01/04/2013

GENPRU 2.2.61G

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's capital 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.

01/04/2013

GENPRU 2.2.61H

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.

01/04/2013

Tier one capital: General

GENPRU 2.2.62

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

(4) it is not excluded by any of the rules in GENPRU 2.2.

01/04/2013

GENPRU 2.2.63

The categories referred to in GENPRU 2.2.62R (1) are:

(1) permanent share capital;

(2) eligible partnership capital;

(3) eligible LLP members' capital;

(4) sole trader capital;

(5) (in the case of an insurer)a perpetual non-cumulative preference share;

(6) [deleted]

(7) (in the case of an insurer) an innovative tier one instrument; and

(8) (in the case of a BIPRU firm) hybrid capital.

01/04/2013

General conditions for eligibility as tier one capital

GENPRU 2.2.64

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:

(a) the firm is under no obligation to pay a coupon; or

(b) (if the firm is obliged to pay the coupon) the coupon is payable in the form of an item of capital that is:

(i) in the case of a BIPRU firm, core tier one capital; and

(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:

(i) GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption);

(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:

(i) eligible for inclusion within the firm's tier two capital resources; and

(ii) not eligible for inclusion within the firm's tier one capital resources; and

(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)).

01/04/2013

GENPRU 2.2.65

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).

01/04/2013

Guidance on certain of the general conditions for eligibility as tier one capital

GENPRU 2.2.66

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.

01/04/2013

GENPRU 2.2.67

GENPRU 2.2.64R (2) is stricter than the Companies Act definition of fully paid, which only requires an undertaking to pay.

01/04/2013

GENPRU 2.2.67A

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.

01/04/2013

GENPRU 2.2.68

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.

01/04/2013

GENPRU 2.2.69

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.

01/04/2013

Redemption of tier one instruments

GENPRU 2.2.70

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;

(b) unless it has given notice to the appropriate regulator in accordance with GENPRU 2.2.74 R; and

(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.

01/04/2013

GENPRU 2.2.71

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.

01/04/2013

GENPRU 2.2.72

A firm must not redeem a tier one instrument in accordance with a term included under GENPRU 2.2.71 R.

01/04/2013

GENPRU 2.2.73

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.

01/04/2013

GENPRU 2.2.74

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.

01/04/2013

GENPRU 2.2.74A

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.

01/04/2013

GENPRU 2.2.75

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.

01/04/2013

Step-ups and redeemable tier one instruments: Insurer only

GENPRU 2.2.76

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".

01/04/2013

Meaning of redemption

GENPRU 2.2.77

(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's capital resources.

01/04/2013

GENPRU 2.2.78

(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).

01/04/2013

GENPRU 2.2.79

This section generally uses the term repay and redeem interchangeably.

01/04/2013

Loss absorption

GENPRU 2.2.80

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]

(3) (in the case of any other firm) it is:

(a) in economic terms; and

(b) in its characteristics as capital (including loss absorbency, permanency, ranking for repayment and fixed costs);

substantially the same as called-up share capital falling into (1).

01/01/2014

GENPRU 2.2.81

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).

01/04/2013

GENPRU 2.2.82

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)).

01/04/2013

Core tier one capital: permanent share capital

GENPRU 2.2.83

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)).

01/01/2014

Core tier one capital: additional information

GENPRU 2.2.84

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.

01/01/2014

GENPRU 2.2.84A

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.

01/04/2013

Core tier one capital: profit and loss account and other reserves: Losses

GENPRU 2.2.85A

(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's trading 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

Dividends must be deducted from reserves as soon as they are foreseeable.

01/04/2013

GENPRU 2.2.87A

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.

01/04/2013

Core tier one capital: profit and loss account and other reserves: Capital contributions

GENPRU 2.2.88

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.

01/04/2013

GENPRU 2.2.89

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.

01/04/2013

Core tier one capital: profit and loss account and other reserves: Valuation

GENPRU 2.2.91

Profit and loss account and other reserves should be valued in accordance with the rules in GENPRU 1.3 (Valuation).

01/04/2013

Core tier one capital: Share premium account

GENPRU 2.2.101

(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.

(4) Paragraph(3) applies to a firm that is not incorporated under the Companies Act 2006if its share premium account is subject to substantially the same or greater restraints on use than a share premium account falling into (3).

01/04/2013

Core tier one capital: externally verified interim net profits

GENPRU 2.2.102

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.

01/04/2013

GENPRU 2.2.103

A firm may include interim profits before a formal decision has been taken only if these profits have been verified, in accordance with the relevant Auditing Practices Board's Practice Note, by persons responsible for the auditing of the accounts.

01/04/2013

Core tier one capital: valuation differences (insurer only)

GENPRU 2.2.104

GENPRU 2.2.104 R to GENPRU 2.2.107 R only apply to an insurer.

01/04/2013

GENPRU 2.2.105

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's capital resources in accordance with the capital resources table.

01/04/2013

GENPRU 2.2.106

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.

01/04/2013

GENPRU 2.2.107

(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 business classes, 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.

01/04/2013

Core tier one capital: fund for future appropriations (insurer only)

GENPRU 2.2.108

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.

01/04/2013

Other tier one capital: perpetual non-cumulative preference shares (insurer only)

GENPRU 2.2.109

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.

01/04/2013

GENPRU 2.2.110

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.

01/04/2013

Other tier one capital: innovative tier one capital: general (insurer only)

GENPRU 2.2.113

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.

01/04/2013

Other tier one capital: innovative tier one capital: redemption (insurer only)

GENPRU 2.2.114

If, in the case of an insurer, a tier one instrument:

(1) is redeemable; and

(2) a reasonable person would think that:

(a) the firm is likely to redeem it; or

(b) the firm is likely to have an economic incentive to redeem it;

that tier one instrument is an innovative tier one instrument.

01/04/2013

GENPRU 2.2.115

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.

01/04/2013

Other tier one capital: loss absorption

GENPRU 2.2.116

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;

(b) a person (including, but not limited to, a holder of the instrument) is not able to petition for the winding up or administration of the firm or for any similar procedure in relation to the firm on the grounds that the firm is or may become unable to pay any such liability; and

(c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).

01/04/2013

GENPRU 2.2.117

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.

01/04/2013

GENPRU 2.2.118

(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.

01/04/2013

GENPRU 2.2.119

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).

01/04/2013

Other tier one capital: innovative tier one capital: coupons (insurer only)

GENPRU 2.2.120

In the case of an insurer, a tier one instrument with a cumulative or mandatory coupon is an innovative tier one instrument.

01/04/2013

Other tier one capital: innovative tier one capital: step-ups (insurer only)

GENPRU 2.2.121

If, in the case of an insurer:

(1) a potential tier one instrument is or may become subject to a step-up; and

(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.

01/04/2013

GENPRU 2.2.122

See GENPRU 2.2.146 R to GENPRU 2.2.154 G for further rules and guidance on step-ups.

01/04/2013

Tier one capital: Conversion ratio

GENPRU 2.2.138

(1) This rule applies to a potential tier one instrument if:

(a) it is redeemable by the firm (ignoring GENPRU 2.2.77 R (Meaning of redemption));

(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's tier 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.

01/04/2013

GENPRU 2.2.139

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.

01/04/2013

GENPRU 2.2.140

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.

01/04/2013

GENPRU 2.2.141

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.

01/04/2013

GENPRU 2.2.142

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.

01/04/2013

GENPRU 2.2.143

(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.

01/04/2013

GENPRU 2.2.144

(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).

01/04/2013

Tier one capital: Requirement to have sufficient unissued stock

GENPRU 2.2.145

(1) This rule applies to a potential tier one instrument of a firm where either:

(a) the redemption proceeds; or

(b) any coupon on that capital item;

can be satisfied by the issue of another capital instrument.

(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.

01/04/2013

Step-ups: calculating the size of a step-up

GENPRU 2.2.146

(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.

01/04/2013

Step-ups: Limits on the amount of step-ups on tier one and two capital

GENPRU 2.2.147

(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.

01/04/2013

GENPRU 2.2.148

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.

01/04/2013

GENPRU 2.2.149

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.

01/04/2013

GENPRU 2.2.150

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%;

(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%).

01/04/2013

GENPRU 2.2.151

(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.

01/04/2013

GENPRU 2.2.152

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's tier 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

(4) the result of the step-up on the instrument to which this rule applies is that the coupon on that instrument and the coupon on the existing stock is the same.

01/04/2013

GENPRU 2.2.153

(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.

01/04/2013

GENPRU 2.2.154

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.

01/04/2013

Deductions from tier one: Intangible assets

GENPRU 2.2.155

A firm must deduct from its tier one capital resources the value of intangible assets.

01/04/2013

GENPRU 2.2.156A

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

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.

01/04/2013

GENPRU 2.2.158

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.

01/04/2013

General conditions for eligibility as tier two capital instruments

GENPRU 2.2.159

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);

(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's capital 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;

(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.

01/04/2013

General conditions for eligibility as tier two capital instruments: Additional remedies

GENPRU 2.2.161

A capital instrument may be included in a firm's tier 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).

01/04/2013

GENPRU 2.2.162

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).

01/04/2013

General conditions for eligibility as tier two capital instruments: Alternative governing laws

GENPRU 2.2.163

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.

01/04/2013

General conditions for eligibility as tier two capital instruments: Standard form documentation

GENPRU 2.2.164

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.

01/04/2013

Guidance on the general conditions for eligibility as tier two capital instruments

GENPRU 2.2.165

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.

01/04/2013

GENPRU 2.2.166

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.

01/04/2013

GENPRU 2.2.167

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.

01/04/2013

GENPRU 2.2.168

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.

01/04/2013

Tier two capital instruments: Connected transactions

GENPRU 2.2.169

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.

01/04/2013

GENPRU 2.2.170

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).

01/04/2013

Amendment of tier two instruments

GENPRU 2.2.171

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.

01/04/2013

Redemption of tier two instruments

GENPRU 2.2.172

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.

01/04/2013

GENPRU 2.2.173

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).

01/04/2013

GENPRU 2.2.174

In relation to a tier two instrument, a firm must notify the appropriate regulator :

(1) in the case of an insurer, six Months; and

(2) in the case of a BIPRU firm, one Month;

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.

01/04/2013

Tier two capital: step-ups

GENPRU 2.2.175

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.

01/04/2013

Upper tier two capital: General

GENPRU 2.2.176

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).

01/04/2013

GENPRU 2.2.177

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's upper 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.

01/04/2013

GENPRU 2.2.178

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.

01/04/2013

GENPRU 2.2.179

(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.

01/04/2013

Upper tier two capital: Loss absorption

GENPRU 2.2.180

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;

(b) a person (including but not limited to a holder of the instrument) is not able to petition for the winding up or administration of the firm or for any similar procedure in relation to the firm on the grounds that the firm is or may become unable to pay any such liability; and

01/04/2013

Upper tier two capital: Legal opinions

GENPRU 2.2.181

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.

01/04/2013

Upper tier two capital: Guidance

GENPRU 2.2.182

GENPRU 2.2.180 R is an example of the general principle in GENPRU 2.2.177R (3).

01/04/2013

GENPRU 2.2.183

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.

01/04/2013

GENPRU 2.2.184

The guidance in GENPRU 2.2.119 G (Employee may give legal opinion) also applies for the purpose of GENPRU 2.2.181 R.

01/04/2013

Lower tier two capital

GENPRU 2.2.194

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.

01/04/2013

GENPRU 2.2.195

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).

01/04/2013

GENPRU 2.2.196

(1) For the purposes of calculating the amount of a lower tier two instrument which may be included in a firm's capital 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.

01/04/2013

GENPRU 2.2.197

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 .

01/04/2013

The effect of swaps on debt capital

GENPRU 2.2.198

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").

01/04/2013

GENPRU 2.2.199

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).

01/04/2013

GENPRU 2.2.200

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 capital rules 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.

01/04/2013

GENPRU 2.2.201

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).

01/04/2013

Deductions from total capital: Inadmissible assets (insurers only)

GENPRU 2.2.250

GENPRU 2.2.250 R to GENPRU 2.2.253 G only apply to an insurer.

01/04/2013

GENPRU 2.2.251

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).

01/04/2013

GENPRU 2.2.252

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).

01/04/2013

GENPRU 2.2.253

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.

01/04/2013

Deductions from total capital: Adjustments for related undertakings

GENPRU 2.2.254

GENPRU 2.2.254 R to GENPRU 2.2.258 G only apply to an insurer.

01/04/2013

GENPRU 2.2.255

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.

01/04/2013

GENPRU 2.2.256

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).

01/04/2013

GENPRU 2.2.257

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).

01/04/2013

GENPRU 2.2.258

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).

01/04/2013

Other capital resources: Unpaid share capital or initial funds and calls for supplementary contributions (Insurer only)

GENPRU 2.2.266

GENPRU 2.2.266 G to GENPRU 2.2.269 G only apply to an insurer.

01/04/2013

GENPRU 2.2.267

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).

01/04/2013

GENPRU 2.2.268

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's capital resources, once the paid-up part amounts to 25% of that share capital or fund, up to 50% of total capital resources.

01/04/2013

GENPRU 2.2.269

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's capital 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's capital resources.

01/04/2013

Other requirements: insurers carrying on with-profits business (Insurer only)

GENPRU 2.2.270

GENPRU 2.2.270 R to GENPRU 2.2.275 G only apply to an insurer.

01/04/2013

GENPRU 2.2.270A

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

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's capital 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's Principles 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).

01/04/2013

GENPRU 2.2.272

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.

01/04/2013

GENPRU 2.2.273

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's capital 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.

01/04/2013

GENPRU 2.2.274

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.

01/04/2013

GENPRU 2.2.275

(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's capital 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.

01/04/2013

GENPRU 2.3

Application of GENPRU 2 to Lloyd's

31/12/2006

Application of GENPRU 2.1

GENPRU 2.3.1

GENPRU 2.1 applies to the Society in accordance with INSPRU 8.1.2 R.

01/04/2013

GENPRU 2.3.2

GENPRU 2.1.38 R to GENPRU 2.2.39 G apply to managing agents in accordance with INSPRU 8.1.4 R.

01/04/2013

GENPRU 2.3.3

GENPRU 2.1.13 R requires the Society to ensure, in relation to each member's insurance business, that capital resources equal to or in excess of the member's capital 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.

01/04/2013

GENPRU 2.3.4

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.

01/04/2013

Calculation of the MCR

GENPRU 2.3.5

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.

01/04/2013

GENPRU 2.3.6

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.

01/04/2013

GENPRU 2.3.7

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.

01/04/2013

GENPRU 2.3.8

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.

01/04/2013

Calculation of the base capital resources requirement

GENPRU 2.3.9

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.

01/04/2013

Calculation of the general insurance capital requirement

GENPRU 2.3.10

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.

01/04/2013

GENPRU 2.3.11

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.

01/04/2013

GENPRU 2.3.12

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).

01/04/2013

GENPRU 2.3.13

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).

01/04/2013

GENPRU 2.3.14

For the purpose of GENPRU 2.3.13 R the Society may make appropriate approximations, taking reasonable care to avoid underestimating the Society GICR.

01/04/2013

GENPRU 2.3.15

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.

01/04/2013

Application of GENPRU 2.2

GENPRU 2.3.16

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:

(1) for managing agents, INSPRU 8.1.4 R; and

(2) for the Society, INSPRU 8.1.2 R.

01/04/2013

GENPRU 2.3.17

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:

(a) each member's capital resources; and

(b) its own capital resources.

01/04/2013

GENPRU 2.3.18

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.

01/04/2013

GENPRU 2.3.19

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:

(1) the capital resources requirements for the members in aggregate; and

(2) the aggregate capital resources supporting the insurance business of all the members.

01/04/2013

GENPRU 2.3.20

GENPRU 2.2.74 R does not apply to the Society or to managing agents.

01/04/2013

GENPRU 2.3.21

In this section (GENPRU 2.3), "the aggregate capital resources supporting the insurance business of all the members" are:

(1) the aggregate of all the members'capital resources calculated under GENPRU 2.3.25 R; and

(2) the Society's capital resources excluding callable contributions.

01/04/2013

Calculation of capital resources

GENPRU 2.3.22

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

(2) the Society may also recognise and value callable contributions, pursuant to GENPRU 2.3.24 R.

01/04/2013

GENPRU 2.3.23

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.

01/04/2013

GENPRU 2.3.24

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.

01/04/2013

GENPRU 2.3.25

The Society must calculate each member's capital 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's funds at Lloyd's after deducting liabilities in compliance with GENPRU 1.5.18 R.

01/04/2013

GENPRU 2.3.26

In order to comply with GENPRU 2.1.13 R the Society must ensure at all times that:

(1) each member's capital resources requirement is covered by:

(a) that member's capital resources, calculated according to GENPRU 2.3.25 R; and

(b) to the extent that (a) is insufficient, by the Society's own capital resources; and

(2) the Society GICR is covered by the aggregate capital resources supporting the insurance business of all the members.

01/04/2013

GENPRU 2.3.27

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's capital resources fall short of the member's capital resources requirement.

01/04/2013

GENPRU 2.3.28

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:

(1) 1/3 of the long-term insurance capital requirement for the members in aggregate; and

(2) the base capital resources requirement;

allocated between the members in proportion to the result for each member of GENPRU 2.3.7R (2).

01/04/2013

GENPRU 2.3.29

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:

(1) 1/3 of the general insurance capital requirement for the members in aggregate;

(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.

01/04/2013

GENPRU 2.3.30

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:

(1) 1/3 of the general insurance capital requirement for the members in aggregate;

(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.

01/04/2013

Characteristics of tier one capital

GENPRU 2.3.31

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's insurance 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;

(3) it otherwise complies with GENPRU 2.2.64R (5) to GENPRU 2.2.64R (10).

01/04/2013

Adjustments for related undertakings

GENPRU 2.3.32

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.

01/04/2013

GENPRU 2.3.33

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.

01/04/2013

Modification of GENPRU 2 Annex 7R for Lloyd's

GENPRU 2.3.34

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.

01/04/2013

GENPRU 2.3.35

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.

01/04/2013

GENPRU 2 Annex 1

Capital resources table for an insurer

31/12/2006

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

GENPRU 2 Annex 7

Admissible assets in insurance

31/12/2006

(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

GENPRU 2 Annex 8

Guidance on applications for waivers relating to Implicit items

31/12/2006

G Implicit items under the Act

The capital resources table does not permit implicit items to be included in the calculation of a firm's capital 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's capital 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's capital 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's tier 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 items waiver 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.

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

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.

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).

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

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

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

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

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

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.

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.

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's waiver application, the lower figure should be used in the return.

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.

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

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's capital 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's long-term insurance fund or funds and between the firm's with-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.

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.

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.

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

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

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).

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

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

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

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

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.

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

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's capital 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

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's financial 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.

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

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

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.

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.

Where there is reason to suspect that the elimination of any such double-counting would reduce a firm's capital 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

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.

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.

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

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.

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

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

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

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

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"

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

Where implicit items waivers 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

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