INSPRU 1
Capital resources requirements and technical provisions for insurance business
INSPRU 1.1
Application
- 31/12/2006
INSPRU 1.1.1
See Notes
INSPRU 1.1 applies to an insurer unless it is:
(1) a non-directive friendly society; or
(2) an incoming EEA firm; or
(3) an incoming Treaty firm
- 31/12/2006
INSPRU 1.1.2
See Notes
(1) This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.
(2) Where a firm carries on both long-term insurance business and general insurance business, this section applies separately to each type of business.
- 31/12/2006
INSPRU 1.1.3
See Notes
For a non-EEA insurer with a branch in the United Kingdom whose insurance business in the United Kingdom is not restricted to reinsurance (other than an EEA-deposit insurer, a Swiss general insurer or a UK-deposit insurer):
(1) the part of this section headed "Capital requirements for insurers" (INSPRU 1.1.43 G to INSPRU 1.1.92B G) applies to its world-wide activities;
(2) the parts of this section headed:
(b) "Reinsurance and analogous non-reinsurance financing agreements: risk transfer principle" (INSPRU 1.1.19A R to INSPRU 1.1.19F G);
(c) "Assets of a value sufficient to cover technical provisions and other liabilities" (INSPRU 1.1.20 R to INSPRU 1.1.29 G);
apply separately in respect of its world-wide activities and its activities carried on from a branch in the United Kingdom; and(3) the part of this section headed "Localisation" (INSPRU 1.1.30 R to INSPRU 1.1.33 R) does not apply (see INSPRU 1.5 (Internal contagion risk)).
- 31/12/2006
INSPRU 1.1.4
See Notes
For an EEA-deposit insurer or a Swiss general insurer:
(1) the parts of this section headed:
(b) "Reinsurance and analogous non-reinsurance financing agreements: risk transfer principle" (INSPRU 1.1.19A R to INSPRU 1.1.19F G);
(c) "Assets of a value sufficient to cover technical provisions and other liabilities" (INSPRU 1.1.20 R to INSPRU 1.1.29 G);
apply in respect of the activities of the firm carried on from a branch in the United Kingdom; and(2) the parts of this section headed "Capital requirements for insurers" (INSPRU 1.1.43 G to INSPRU 1.1.92B G) and "Localisation" (INSPRU 1.1.30 R to INSPRU 1.1.33 R) do not apply.
- 31/12/2006
INSPRU 1.1.5
See Notes
For a UK-deposit insurer:
(1) the part of this section headed "Capital requirements for insurers" (INSPRU 1.1.43 G to INSPRU 1.1.92B G) applies to its world-wide activities;
(2) the parts of this section headed:
(b) "Reinsurance and analogous non-reinsurance financing agreements: risk transfer principle" (INSPRU 1.1.19A R to INSPRU 1.1.19F G);
(c) "Assets of a value sufficient to cover technical provisions and other liabilities" (INSPRU 1.1.20 R to INSPRU 1.1.29 G);
apply separately in respect of its world-wide activities and its activities carried on from branches in EEA States; and(3) the part of this section headed "Localisation" (INSPRU 1.1.30 R to INSPRU 1.1.33 R) does not apply (see INSPRU 1.5 (Internal contagion risk)).
- 31/12/2006
INSPRU 1.1.6
See Notes
This section may apply in cases where a firm has its head office in another EEA State but is neither an incoming EEA firm nor an incoming Treaty firm; this could arise in the case of a non-directive mutual.
- 31/12/2006
Purpose
INSPRU 1.1.7
See Notes
INSPRU 1.1 has the aim of reducing the risk that a firm may fail to meet its liabilities to its policyholders as a result of insurance risk, that is, the risk that arises from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities.
- 31/12/2006
INSPRU 1.1.8
See Notes
This section requires that the technical provisions that firms establish are adequate to meet their liabilities to policyholders under contracts of insurance. It also requires that firms hold assets of a value sufficient to cover their liabilities, including technical provisions, and that there is suitable matching of assets and liabilities. Technical provisions are the on-balance sheet provisions made by a firm in respect of liabilities arising under or in connection with contracts of insurance. There are different rules and guidance applicable to the calculation of technical provisions for general insurance business and for long-term insurance business.
- 31/12/2006
INSPRU 1.1.9
See Notes
This section implements requirements of the Insurance Directives for both general insurance business and long-term insurance business with regard to the technical provisions. The relevant articles of the Directives include:
(1) article 15 of the First Non-Life Directive, as substituted by article 17 of the Third Non-Life Directive; and
(2) article 20 of the Consolidated Life Directive (this Directive consolidates the provisions of the previous First, Second and Third Life Directives).
- 31/12/2006
INSPRU 1.1.10
See Notes
This section also sets out detailed rules and guidance on the calculation of the following elements of a firm'scapital resources requirement (CRR) (see GENPRU 2.1):
(1) the general insurance capital requirement; and
- 31/12/2006
INSPRU 1.1.11
See Notes
These requirements are dealt with in the part of this section headed "Capital requirements for insurers" (see INSPRU 1.1.43 G to INSPRU 1.1.91 R). That part of this section also contains rules about the calculation of the enhanced capital requirement for firms carrying on general insurance business, including the calculation of the insurance-related capital requirement. The calculation of theasset-related capital requirement, which also forms part of the calculation of the ECR for firms carrying on general insurance business is set out in INSPRU 2.2.
- 31/12/2006
Establishing technical provisions
INSPRU 1.1.12
See Notes
For general insurance business, a firm must establish adequate technical provisions:
(2) otherwise, in accordance with GENPRU 1.3.4 R.
- 31/12/2006
INSPRU 1.1.13
See Notes
For general insurance business, the technical provisions include outstanding claims provisions, unearned premiums provisions, unexpired risk provisions and equalisation provisions. These provisions take into account the expected ultimate cost of claims, including those not yet incurred, related expenses and include an allowance for smoothing claims (the equalisation provision).
- 31/12/2006
INSPRU 1.1.14
See Notes
Discounting (that is discounting for the time value of money) general insurance businesstechnical provisions may be carried out only in limited circumstances and on a prudent basis (see GENPRU 2.2.107 R and paragraph 48 of the insurance accounts rules). The fact that the expected liabilities are generally not discounted helps to protect against risk from inherent uncertainty in the timing, but not necessarily the amount, of claims.
- 31/12/2006
INSPRU 1.1.15
See Notes
For some categories of general insurance business, equalisation provisions are required. These ensure that a firm retains additional assets to provide some extra protection against uncertainty as to the amount of claims. Equalisation provisions are particularly suitable for volatile business, where claims in any future year may be subject to significant adverse deviation from recent or average expected claims experience, or where trends in claims experience may be subject to change. Such volatile claims experience arises in a number of types of business, for example, property, marine and aviation, nuclear, certain non-proportional reinsurance treaty business, and credit insurance. The equalisation provisions help to equalise fluctuations in loss ratios in future years (see INSPRU 1.4 (Equalisation provisions)).
- 31/12/2006
INSPRU 1.1.16
See Notes
For long-term insurance business, a firm must establish adequate technical provisions in respect of its long-term insurance contracts as follows:
(1)
mathematical reserves in accordance with the rules and guidance in INSPRU 1.2 relating to such reserves, and with due regard to generally accepted actuarial practice; and
(2) for liabilities in respect of such contracts that have fallen due, in accordance with GENPRU 1.3.4 R.
- 31/12/2006
INSPRU 1.1.17
See Notes
Rules and guidance for calculating mathematical reserves are set out in INSPRU 1.2. Firms are advised by the actuarial function (see SUP 4) on the methods and assumptions to be used in calculating the mathematical reserves. The standards and guidance issued by the Board for Actuarial Standards to assist actuaries appointed to the actuarial function are important sources of evidence as to generally accepted actuarial practice, as referred to in INSPRU 1.1.16R (1).
- 31/12/2006
INSPRU 1.1.18
See Notes
For long-term insurance business, the technical provisions include the mathematical reserves. These are actuarial estimates of a firm's liabilities in respect of future benefits due to policyholders, including bonuses already declared. The mathematical reserves may be reduced by the actuarial value of that component of future premiums attributable to meeting future liabilities (see INSPRU 1.2 (Mathematical reserves)).
- 31/12/2006
INSPRU 1.1.19
See Notes
For long-term insurance business, the mathematical reserves are typically valued on a discounted basis but include valuation margins intended to provide protection against adverse deviations in experience (see INSPRU 1.2).
- 31/12/2006
Reinsurance and analogous non-reinsurance financing agreements: risk transfer principle
INSPRU 1.1.19A
See Notes
(1) A firm may only take credit for reinsurance if and to the extent that there has been an effective transfer of risk from the firm to a third party.
(2) In INSPRU 1.1.19A R to INSPRU 1.1.19F G, references to reinsurance and contracts of reinsurance include:
(b) analogous non-reinsurance financing agreements.
- 31/12/2006
INSPRU 1.1.19B
See Notes
For the purposes of INSPRU 1.1.19AR (2)(b), analogous non-reinsurance financing agreements include contingent loans, securitisations and any other arrangements in respect of contracts of insurance that are analogous to contracts of reinsurance in terms of the risks transferred and the finance provided.
- 31/12/2006
INSPRU 1.1.19C
See Notes
There are a number of ways in which a firm may be able to take credit for reinsurance under the rules in GENPRU and INSPRU. Examples include:
(1) treating the reinsurer's share of technical provisions as an admissible asset in accordance with GENPRU 2 Annex 7;
(2) reducing its solvency requirements in accordance with the deduction for reinsurance allowed in the calculation of the general insurance capital requirement or the long-term insurance capital requirement under INSPRU 1.1; and
(3) bringing into account amounts receivable under the contract when valuing cash flows for the purpose of a prospective valuation of mathematical reserves under INSPRU 1.2. In particular, a contingent loan or other analogous non-reinsurance financing agreement may then give rise to an addition to capital resources as a positive valuation difference in accordance with GENPRU 2.2.105 R.
- 31/12/2006
INSPRU 1.1.19D
See Notes
The amount of credit taken by a firm for a risk transferred should be measured by applying the standard methods for determining the regulatory balance sheet set out in INSPRU. For example, where credit is being taken so as to reduce technical provisions, the amount of that credit should reflect the difference in technical provisions that arises from changing the assumptions used to reflect the risk transferred.
- 31/12/2006
INSPRU 1.1.19E
See Notes
For the purposes of INSPRU 1.1.19AR (1), the transfer of risk from the firm to the third party should be effective in all circumstances in which the firm may wish to rely upon the transfer. Examples of factors which the firm should take into account in assessing whether the transaction effectively transfers risk and the extent of that transfer include:
(1) whether the documentation associated with the reinsurance reflects the economic substance of the transaction;
(2) whether the extent of the risk transfer is clearly defined and incontrovertible;
(3) whether the transaction contains any terms or conditions the fulfilment of which is outside the direct control of the firm. Such terms or conditions may include those which:
(a) would allow the third party unilaterally to cancel the transaction, except for the non-payment of monies due from the firm to the third party under the contract; or
(b) would increase the effective cost of the transaction to the firm in response to an increased likelihood of the third party experiencing losses under the transaction; or
(c) would oblige the firm to alter the risk that had been transferred with the purpose of reducing the likelihood of the third party experiencing losses under the transaction; or
(d) would allow for the termination of the transaction due to an increased likelihood of the third party experiencing losses under the transaction; or
(e) could prevent the third party from being obliged to pay out in a timely manner any monies due under the transaction; or
(f) could allow the maturity of the transaction to be reduced;
(4) whether the transaction is legally effective and enforceable in all relevant jurisdictions.
- 31/12/2006
INSPRU 1.1.19F
See Notes
A firm should also take into account circumstances in which the benefit to the firm of the transfer of risk could be undermined. For instance, where the firm, with a view to reducing potential or actual losses to third parties, provides support to the transaction, including support beyond its contractual obligations (implicit support). Another example of a situation where the firm should consider whether it should take reduced credit for a transaction is where it has invested in the bonds issued by an ISPV with which it has reinsured risks.
- 31/12/2006
Assets of a value sufficient to cover technical provisions and other liabilities
INSPRU 1.1.20
See Notes
A firm which is not a composite firm must hold admissible assets of a value at least equal to the amount of:
(1) the technical provisions that it is required to establish under INSPRU 1.1.12 R or INSPRU 1.1.16 R; and
but excluding, where the firm is not a pure reinsurer,
property-linked liabilities and index-linked liabilities and the assets held to cover them under INSPRU 3.1.57 R and INSPRU 3.1.58 R.- 31/12/2007
INSPRU 1.1.21
See Notes
A composite firm must ensure that:
(1) it holds admissible assets separately identified in accordance with INSPRU 1.5.18 R of a value at least equal to the amount of:
(b) its other long-term insurance liabilities;
but excluding, where the firm is not a pure reinsurer,
property-linked liabilities and index-linked liabilities and the assets held to cover them under INSPRU 3.1.57 R and INSPRU 3.1.58 R; and(2) it holds other admissible assets (other than those excluded under (1)) of a value at least equal to the amount of:
(b) its other general insurance liabilities.
- 31/12/2007
INSPRU 1.1.22
See Notes
INSPRU 1.5 (Internal-contagion risk) sets out the rules and guidance on identifying and holding in a separate fund long-term insurance assets.
- 31/12/2006
INSPRU 1.1.23
See Notes
When valuing assets for the purposes of INSPRU 1.1.20 R and INSPRU 1.1.21 R, a firm should bear in mind:
(1) that the technical provisions and other long-term insurance liabilities or general insurance liabilities should be covered by admissible assets (see GENPRU 2 Annex 7); and
(2) the market and counterparty limits set out in INSPRU 2.1 (Credit risk in insurance). INSPRU 2.1 requires that a firm restrict to prudent levels its exposure to reinsurer and other counterparties, and, in particular, that for the purpose of its balance sheet, a firm must not take into account any exposure which exceeds the large exposure limits.
- 31/12/2006
INSPRU 1.1.24
See Notes
Rules and guidance on the valuation of assets are set out in GENPRU 1.3 (Valuation), including the treatment of shares in, and debts due from, related undertakings in GENPRU 1.3.43 R to GENPRU 1.3.54 G. INSPRU 3.1 (Market risk in insurance) addresses market risk and sets out the matching requirements for linked assets and liabilities. INSPRU 3.1 also sets out rules and guidance on the matching by currency of assets and liabilities, to reduce a firm's exposure to currency market risk.
- 31/12/2006
INSPRU 1.1.25
See Notes
For the purpose of determining the value of assets available to meet technical provisions and other long-term insurance liabilities in accordance with INSPRU 1.1.20 R, INSPRU 1.1.21 R, INSPRU 1.1.27 R and INSPRU 1.1.28 R, no value is to be attributed to:
(1) debts owed by reinsurers; or
(2)
claims; or
(3) tax recoveries; or
(4) claims against compensation funds;
to the extent already offset in the calculation of technical provisions.- 31/12/2006
INSPRU 1.1.26
See Notes
Certain debts and claims are excluded from INSPRU 1.1.20 R, INSPRU 1.1.21 R, INSPRU 1.1.27 R and INSPRU 1.1.28 R to avoid double-counting. The rules and guidance in INSPRU 1.2 (Mathematical reserves) set out how a firm may offset debts and claims against liabilities in calculating the mathematical reserves required for long-term insurance business.
- 31/12/2006
INSPRU 1.1.27
See Notes
A firm carrying on long-term insurance business must ensure that it has admissible assets in each of its with-profits funds of a value sufficient to cover:
- 31/12/2006
INSPRU 1.1.28
See Notes
In addition to complying with INSPRU 1.1.27 R, a realistic basis life firm must also ensure that the realistic value of assets for each of its with-profits funds is at least equal to the realistic value of liabilities of that fund.
- 31/12/2006
INSPRU 1.1.29
See Notes
INSPRU 1.1.27 R and INSPRU 1.1.28 R support the funding of policyholder benefits by requiring firms to maintain admissible assets in with-profits funds to cover the technical provisions and other long-term insurance liabilities relating to all the business in that fund and, in the case of a realistic basis life firm, realistic assets to cover the realistic liabilities of the with-profits insurance contracts written in the fund.
- 31/12/2006
Localisation (UK firms only)
INSPRU 1.1.30
See Notes
(1) Subject to (2), a UK firm must hold admissible assets held pursuant to INSPRU 3.1.53 R:
(a) (where the admissible assets cover technical provisions in pounds sterling), in any EEA State; and
(b) (where the admissible assets cover technical provisions in any currency other than pounds sterling), in any EEA State or in the country of that currency.
(2) In the case of a community co-insurance operation and a relevant insurer, the admissible assets covering technical provisions must be held in any EEA State.
- 31/12/2006
INSPRU 1.1.31
See Notes
INSPRU 1.5 (Internal contagion risk) sets out the rules and guidance on localisation for firms other than UK firms.
- 31/12/2006
INSPRU 1.1.32
See Notes
- 31/12/2006
INSPRU 1.1.33
See Notes
For the purposes of INSPRU 1.1.30 R:
(1) a tangible asset is to be treated as held in the country or territory where it is situated;
(2) an admissible asset consisting of a claim against a debtor is to be treated as held in any country or territory where it can be enforced by legal action;
(3) a
security which is listed is to be treated as held in any country or territory where there is a regulated market on which the security is dealt; and
- 31/12/2008
Matching of assets and liabilities
INSPRU 1.1.34
See Notes
(1) Subject to (4), the assets held by a firm to cover its technical provisions and other long-term insurance liabilities or general insurance liabilities (see INSPRU 1.1.20 R and INSPRU 1.1.21 R) must:
(a) have characteristics of safety, yield and marketability which are appropriate to the type of business carried on by the firm;
(b) be diversified and adequately spread; and
(c) comply with (2).
(2) The assets referred to in (1) must, in addition to meeting the criteria set out in (1)(a) and (b), be of a sufficient amount, and of an appropriate currency and term, to ensure that the cash inflows from those assets will meet the expected cash outflows from the firm's insurance liabilities as they become due.
(3) For the purpose of (2), a firm must take into consideration in determining expected cash outflows any options which exist in the firm'scontracts of insurance.
(4) (1) does not apply to:
(a) a pure reinsurer; or
(b) assets held to cover index-linked liabilities or property-linked liabilities, except that where the linked long-term contract of insurance in question includes a guarantee of investment performance or some other guaranteed benefit, (1) will nevertheless apply to assets held to cover that guaranteed element.
- 31/12/2006
INSPRU 1.1.34A
See Notes
INSPRU 1.1.34 R is not applied to pure reinsurers because they are subject under INSPRU 3.1.61A R to the "prudent person" investment principles from the Reinsurance Directive.
- 31/12/2006
INSPRU 1.1.35
See Notes
A firm should take account of the amount, currency and timing of its expected cash outflows in determining whether the assets it holds to cover its technical provisions and other long-term insurance liabilities or general insurance liabilities meet the requirements of INSPRU 1.1.34R (2).
- 31/12/2006
INSPRU 1.1.36
See Notes
For the purpose of INSPRU 1.1.34R (2), the relevant cash inflows are those which the firm reasonably expects to receive from the admissible assets which it holds to cover its technical provisions and other long-term insurance liabilities or general insurance liabilities. A firm may receive cash inflows as a result of:
(1) selling assets or closing out transactions;
(2) holding assets that generate dividends, interest or other income; and
(3) receiving future premiums for existing business.
- 31/12/2006
INSPRU 1.1.37
See Notes
- 31/12/2006
INSPRU 1.1.38
See Notes
A firm should compare cash inflows and outflows based on current expectations of amounts and timings. Current market expectations of future asset values, interest rates and currency exchange rates should be used. Where inflows are received in a currency different from that in which outflows are to be paid, account should be taken of the cost of converting the currency received.
- 31/12/2006
INSPRU 1.1.39
See Notes
- 31/12/2006
INSPRU 1.1.40
See Notes
INSPRU 1.1.20 R lays down a general requirement for a firm that carries on long-term insurance business to hold admissible assets that are of a value sufficient to cover its technical provisions and other long-term insurance liabilities. The INSPRU 1.1.34R (2) requirement to match liabilities with assets that allow cash outflows to be met with suitable inflows as the outflows become due may mean that a firm has to hold assets of a value greater than would otherwise be required by the general rule in INSPRU 1.1.20 R.
- 31/12/2006
Premiums for new business
INSPRU 1.1.41
See Notes
A firm must not enter into a long-term insurance contract unless it is satisfied on reasonable actuarial assumptions that:
(1) the premiums receivable and the investment income expected to be earned from those premiums; and
(2) the reinsurance arrangements made in respect of the risk or risks covered by that new contract are sufficient to enable it, when taken together with the firm's other resources, to:
(b) hold admissible assets of a value at least equal to the amount of the technical provisions and other long-term insurance liabilities as required by INSPRU 1.1.20 R to INSPRU 1.1.28 R; and
(c) maintain adequate overall financial resources as required by the overall financial adequacy rule.
- 31/12/2006
INSPRU 1.1.42
See Notes
For the purposes of INSPRU 1.1.41 R, the adequacy of premiums may be assessed in the context of a firm's total portfolio of business and its other resources. It thus does not prevent a firm writing loss leaders nor writing contracts which might incur large losses, but only if the firm can meet the losses that might reasonably arise, including those that would arise from an event specifically insured against.
- 31/12/2006
Capital requirements for insurers
INSPRU 1.1.43
See Notes
(1)
GENPRU 2.1.13 R requires a firm to maintain capital resources equal to or in excess of its capital resources requirement (CRR). GENPRU 2.1 sets out the overall framework of the CRR; in particular, GENPRU 2.1.17 R requires that for a firm carrying on general insurance business the CRR is equal to the minimum capital requirement (MCR). GENPRU 2.1.18 R requires that for realistic basis life firms the CRR is the higher of the MCR and the ECR. GENPRU 2.1.23 R requires that for regulatory basis only life firms the CRR is equal to the MCR.
(2) For non-life firms the MCR represents the minimum capital requirement (or margin of solvency) prescribed by the Insurance Directives. GENPRU 2.1.24 R provides that, for a firm carrying on general insurance business, the MCR in respect of that business is the higher of the base capital resources requirement for general insurance business applicable to that firm and the general insurance capital requirement. GENPRU 2.1.24A R provides that, for a firm carrying on long-term insurance business which is a realistic basis life firm, the MCR in respect of that business is the higher of the base capital resources requirement for long-term insurance business applicable to that firm and the long-term insurance capital requirement.GENPRU 2.1.25 R provides that, for a firm carrying on long-term insurance business which is a regulatory basis only life firm, the MCR in respect of that business is the higher of the base capital resources requirement for long-term insurance business applicable to that firm and the sum of the long-term insurance capital requirement and the resilience capital requirement. As specified in GENPRU 2.1.14 R, a firm carrying on both general insurance business and long-term insurance business must apply GENPRU 2.1.13 R (referred to in paragraph (1) above) separately to its general insurance business and its long-term insurance business.
(3) The calculation of the general insurance capital requirement is set out in INSPRU 1.1.44 G to INSPRU 1.1.72 R below. INSPRU 1.1.73 to INSPRU 1.1.79 R set out the calculation of the insurance-related capital requirement for non-life firms. The calculation of the long-term insurance capital requirement is set out in INSPRU 1.1.80 G to INSPRU 1.1.91 R below.
- 31/12/2006
General insurance capital requirement
INSPRU 1.1.44
See Notes
In relation to the MCR (see INSPRU 1.1.43 G), GENPRU 2.1.34 R requires a firm to calculate its general insurance capital requirement (GICR) as the highest of the premiums amount, the claims amount, and the brought forward amount. The elements for this computation are set out in INSPRU 1.1 as follows:
- 31/12/2006
The premiums amount
INSPRU 1.1.45
See Notes
The premiums amount is:
(1) 18% of the gross adjusted premiums amount; less 2% of the amount, if any, by which the gross adjusted premiums amount exceeds 57.5 million; multiplied by
(2) the reinsurance ratio set out in INSPRU 1.1.54 R.
- 31/12/2009
INSPRU 1.1.46
See Notes
Rules and guidance as to how the gross adjusted premiums amount is to be calculated are set out in INSPRU 1.1.56 R to INSPRU 1.1.59 G.
- 31/12/2006
The claims amount
INSPRU 1.1.47
See Notes
The claims amount is:
(1) 26% of the gross adjusted claims amount; less 3% of the amount, if any, by which the gross adjusted claims amount exceeds 40.3 million; multiplied by
(2) the reinsurance ratio set out in INSPRU 1.1.54 R.
- 31/12/2009
INSPRU 1.1.48
See Notes
Rules and guidance as to how the gross adjusted claims amount is to be calculated are set out in INSPRU 1.1.60 R to INSPRU 1.1.65 G.
- 31/12/2006
INSPRU 1.1.49
See Notes
(1) Under the Insurance Directives the Euro amounts specified in INSPRU 1.1.45R (1) and INSPRU 1.1.47R (1) are 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) No provision for the index-linking of these amounts is made by the Reinsurance Directive. However, to ensure consistency as between pure reinsurers, mixed insurers and other insurers, the
FSA
intends to amend the Euro amounts specified in INSPRU 1.1.45R (1) and INSPRU 1.1.47R (1) for all such firms when an index-linked increase is required by the Insurance Directives.
- 31/12/2006
INSPRU 1.1.50
See Notes
For the purposes of INSPRU 1.1.45R (1) and INSPRU 1.1.47R (1), 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.
- 31/12/2006
The brought forward amount
INSPRU 1.1.51
See Notes
(1) Subject to (2) and (3), the brought forward amount is the general insurance capital requirement (GICR) for the prior financial year, multiplied, if the ratio is less than one, by the ratio (expressed as a percentage) of:
(a) the (calculated net of ) for outstanding at the end of the prior , determined in accordance with INSPRU 1.1.12 R; to
(b) the technical provisions (calculated net of reinsurance) for claims outstanding at the beginning of the prior financial year, determined in accordance with INSPRU 1.1.12 R.
(2) If the amount of the technical provisions (calculated net of reinsurance) in (1)(a) and (b) is in both cases zero, the brought forward amount is the general insurance capital requirement (GICR) for the prior financial year, multiplied, if the ratio is less than one, by the ratio (expressed as a percentage) of:
(a) the technical provisions (calculated gross of reinsurance) for claims outstanding at the end of the prior financial year, determined in accordance with INSPRU 1.1.12 R; to
(b) the technical provisions (calculated gross of reinsurance) for claims outstanding at the beginning of the prior financial year, determined in accordance with INSPRU 1.1.12 R.
(3) If the amount of the technical provisions (calculated gross of reinsurance) in (2)(a) and (b) is in both cases zero, the brought forward amount is the general insurance capital requirement (GICR) for the prior financial year.
- 31/12/2007
INSPRU 1.1.52
See Notes
The brought forward amount is the same as the GICR for the prior financial year, except where claims outstanding have fallen during that financial year. If the technical provisions (calculated net of reinsurance) have fallen, the brought forward amount is itself reduced by the same percentage fall. If the technical provisions (calculated net of reinsurance) are zero at the beginning and end of that financial year and the technical provisions gross of reinsurance have fallen, the brought forward amount is reduced by the percentage fall in technical provisions gross of reinsurance.
- 31/12/2007
Reinsurance ratio used in calculating the premiums amount and the claims amount
INSPRU 1.1.54
See Notes
The reinsurance ratio referred to in INSPRU 1.1.45R (2) and INSPRU 1.1.47R (2) is:
(1) if the ratio lies between 50% and 100%, the ratio (expressed as a percentage) of:
(a) the claims incurred (net of reinsurance) in the financial year in question and the two previous financial years; to
(b) the gross claims incurred in that three-year period;
(2) 50%, if the ratio calculated in (a) and (b) of (1) is 50% or less; and
(3) 100%, if the ratio calculated in (a) and (b) of (1) is 100% or more.
- 31/12/2006
INSPRU 1.1.54A
See Notes
For the treatment of amounts recoverable from ISPVs when calculating the reinsurance ratio, see INSPRU 1.1.92A R and INSPRU 1.1.92B G.
- 31/12/2006
INSPRU 1.1.55
See Notes
Rules and guidance as to how the net and gross claims are to be calculated are set out in INSPRU 1.1.66 R to INSPRU 1.1.71 R.
- 31/12/2006
Gross adjusted premiums amount used in calculating the premiums amount
INSPRU 1.1.56
See Notes
For the purpose of INSPRU 1.1.45 R, the gross adjusted premiums amount is the higher of the gross written premiums and gross earned premiums (as adjusted in accordance with INSPRU 1.1.66 R) for the financial year in question, adjusted by:
(1) except for a pure reinsurer which became a firm in run-off before 31 December 2006 and whose
Part IV permission
has not subsequently been varied to add back the regulated activity of effecting contracts of insurance, increasing by 50% the amount included in respect of the premiums for general insurance businessclasses 11, 12 and 13;
(2) deducting 66.7% of the premiums for actuarial health insurance that meets the conditions set out in INSPRU 1.1.72 R; and
(3) multiplying the resulting figure by 12 and dividing by the number of months in the financial year. For the purposes of this calculation, the number of months in the financial year is the number of complete calendar months in the financial year plus any fractions of a month at the beginning and the end of the financial year.
- 31/12/2006
INSPRU 1.1.57
See Notes
A firm may use statistical methods in order to allocate premiums in respect of the classes 11, 12 and 13 for the purposes of INSPRU 1.1.56 R.
- 31/12/2006
INSPRU 1.1.58
See Notes
General insurance business
classes 11, 12 and 13 are, respectively, the marine liability, aviation liability and general liability insurance classes.
- 31/12/2006
INSPRU 1.1.59
See Notes
Where the firm did not carry on insurance business in the financial year in question, the gross adjusted premiums amount, and therefore the premiums amount, is nil.
- 31/12/2006
Gross adjusted claims amount used in calculating the claims amount
INSPRU 1.1.60
See Notes
For the purpose of INSPRU 1.1.47 R and subject to INSPRU 1.1.62 R, the gross adjusted claims amount is the amount of gross claims incurred (as determined in accordance with INSPRU 1.1.66 R) over the reference period (as specified in INSPRU 1.1.63 R) and adjusted by:
(1) except for a pure reinsurer which became a firm in run-off before 31 December 2006 and whose
Part IV permission
has not subsequently been varied to add back the regulated activity of effecting contracts of insurance, increasing by 50% the amount included in respect of the claims incurred for 11, 12 and 13;
(2) deducting 66.7% of the claims for actuarial health insurance that meets the conditions set out in INSPRU 1.1.72 R; and
(3) multiplying the resulting figure by 12 and dividing by the number of months in the reference period. For the purposes of this calculation, the number of months in the reference period is the number of complete calendar months in the reference period plus any fractions of a month at the beginning and the end of the reference period.
- 31/12/2006
INSPRU 1.1.61
See Notes
A firm may use statistical methods in order to allocate claims in respect of classes 11, 12 and 13 for the purposes of INSPRU 1.1.60 R.
- 31/12/2006
INSPRU 1.1.62
See Notes
For the purposes of INSPRU 1.1.47 R, in relation to general insurance businessclass 18, the amount of claims incurred used to calculate the gross adjusted claims amount must be the amount of costs recorded in the firm's books in the reference period as borne by the firm (whether or not borne in the reference period) in respect of the assistance given.
- 31/12/2006
INSPRU 1.1.63
See Notes
(1) Except in those cases where paragraph (2) applies, the reference period to be used in INSPRU 1.1.60 R and INSPRU 1.1.62 R must be:
(b) the period the firm had been in existence at the end of the financial year in question, if shorter.
(2) In the case of a firm which underwrites only one or more of the general insurance business risks of credit, storm, hail or frost (including other business written in connection with such risks), the reference period to be used must be:
(b) the period the firm had been in existence at the end of the financial year in question, if shorter.
- 31/12/2006
INSPRU 1.1.64
See Notes
The classification of the risks referred to in INSPRU 1.1.63R (2) is as follows: credit - as included in general insurance businessclass 14; storm - as included in general insurance businessclass 8; hail - as included in general insurance businessclass 9; and frost - as included in general insurance businessclass 9.
- 31/12/2006
INSPRU 1.1.65
See Notes
Where the firm did not carry on insurance business in the reference period, the gross adjusted claims amount, and therefore the claims amount, is nil.
- 31/12/2006
Accounting for premiums and claims
INSPRU 1.1.66
See Notes
For the purposes of INSPRU 1.1.54 R, INSPRU 1.1.56 R, INSPRU 1.1.60 R and INSPRU 1.1.62 R, amounts of premiums and claims must be:
(1) determined in accordance with the insurance accounts rules or the Friendly Societies (Accounts and Related Provisions) Regulations 1994, as appropriate; and
(2) adjusted for transfers that were approved by the relevant authority (or became effective where approval by an authority was not required) before the end of the financial year in question:
(a) to exclude any amount included in, or adjustment made to, premiums and claims to reflect the consideration for a transfer of contracts of insurance to or from the firm;
(b) to exclude premiums and claims which arose from contracts of insurance that have been transferred by the firm to another body; and
(c) to account for premiums and claims which arose from contracts of insurance that have been transferred to the firm from another body as if they were receivable by or payable by the firm.
- 31/12/2006
INSPRU 1.1.67
See Notes
To ensure that all rights and obligations under a contract of insurance are transferred, a number of alternative mechanisms could be used. These are: an insurance business transfer under Part VII of the Act; under earlier United Kingdom insurance legislation; under equivalent foreign legislation; or by novation of contracts. The term "relevant authority" in paragraph (2) of INSPRU 1.1.66 R may refer to whatever body has responsibility in a country, whether within or outside the EEA, for the approval of transfers of portfolios of contracts of insurance; the body may be a supervisory authority for financial services as such or it may be a judicial authority which has the necessary responsibility.
- 31/12/2006
INSPRU 1.1.68
See Notes
INSPRU 1.1.66R (2)(b) requires a firm, for the purpose of calculating its GICR, to account for contracts of insurance transferred by it to another body as if it had never written those contracts. All amounts of premiums and claims arising in respect of those contracts are excluded, including amounts that arose in the financial year in question or previous financial years.
- 31/12/2006
INSPRU 1.1.69
See Notes
Conversely, INSPRU 1.1.66R (2)(c) requires a firm, for the purpose of calculating its GICR, to account for contracts of insurance transferred to it by another body as if it had been responsible for those contracts from inception and not merely from the date of transfer. All amounts of premiums and claims that arose from those contracts are included even where they arose prior to the date of transfer and were, in fact, receivable by or payable by the other body.
- 31/12/2006
INSPRU 1.1.70
See Notes
- 31/12/2006
INSPRU 1.1.71
See Notes
Where there has been a significant change in the business portfolio of the firm since the end of the financial year in question, for example, a line of business has been transferred to another firm, or the firm no longer carries on a particular class of insurance business, the gross adjusted premiums amount and the gross adjusted claims amount must both be recalculated to take into account the impact of this change. The recalculation must take into account the requirements of the insurance accounts rules or the Friendly Societies (Accounts and Related Provisions) Regulations 1994, as appropriate.
- 31/12/2006
Actuarial health insurance
INSPRU 1.1.72
See Notes
The conditions referred to in INSPRU 1.1.56R (2) and INSPRU 1.1.60R (2) are that:
(1) the health insurance is underwritten on a similar technical basis to that of life insurance;
(2) the premiums paid are calculated on the basis of sickness tables according to the mathematical method applied in insurance;
(3) a provision is set up for increasing age;
(4) an additional premium is collected in order to set up a safety margin of an appropriate amount;
(5) it is not possible for the firm to cancel the contract after the end of the third year of insurance; and
(6) the contract provides for the possibility of increasing premiums or reducing payments even for current contracts.
- 31/12/2006
Enhanced capital requirement for general insurance business
INSPRU 1.1.72A
See Notes
This section sets out the requirement for firms carrying on general insurance business, other than non-directive insurers, to calculate their ECR. The ECR for firms carrying on general insurance business is an indicative measure of the capital resources that a firm may need to hold based on risk sensitive calculations applied to its business profile. For firms carrying on general insurance business, the
FSA
will use the ECR as a benchmark for its consideration of the appropriateness of the firm's own capital assessment. For firms where an ECR is not calculated, the MCR will provide a benchmark for the firm's own capital assessment.
- 31/12/2006
INSPRU 1.1.72B
See Notes
A firm carrying on general insurance business, other than a non-directive insurer, must calculate the amount of its ECR.
- 31/12/2006
INSPRU 1.1.72C
See Notes
A firm to which INSPRU 1.1.72B R applies must calculate its ECR in respect of its general insurance business as the sum of:
(1) the asset-related capital requirement; and
(2) the insurance-related capital requirement; less
- 31/12/2006
INSPRU 1.1.72D
See Notes
Details of the calculation of the asset-related capital requirement are set out in INSPRU 2.2.10 R to INSPRU 2.2.16 R. Details of the calculation of the insurance-related capital requirement are set out in INSPRU 1.1.76 R to INSPRU 1.1.79 R.
- 31/12/2006
Insurance-related capital requirement
INSPRU 1.1.73
See Notes
[intentionally blank]
- 31/12/2006
INSPRU 1.1.74
See Notes
The insurance-related capital requirement is a measure of the capital that a firm should hold against the risk of:
(1) an adverse movement in the value of a firm's liabilities, to recognise that there may be substantial volatility in claims and other technical provisions made by the firm. Such variations may be due to inflationary increases, interest rate changes, movements in the underlying provisions themselves, changes in expense costs, inadequate rate pricing or premium collections (or both) from intermediaries differing from projected assumptions; and
- 31/12/2006
INSPRU 1.1.75
See Notes
The insurance-related capital requirement is calculated by applying capital charge factors, expressed as a percentage, to the value of the net written premiums and the technical provisions in respect of different classes of business. Firms should refer to GENPRU 1.3.4 R which sets out how a firm must recognise and value assets and liabilities.
- 31/12/2006
Calculation of the insurance-related capital requirement
INSPRU 1.1.76
See Notes
- 31/12/2006
INSPRU 1.1.77
See Notes
(1) The value of:
(a) the net written premiums; and
(b) the technical provisions;
in respect of each class of business listed in the table in INSPRU 1.1.79 R must be multiplied by the corresponding capital charge factor.(2) If any amount which is to be multiplied by a capital charge factor is a negative amount, that amount shall be treated as zero.
(3) The amounts resulting from multiplying the net written premiums in respect of each such class of business by the corresponding capital charge factor must be aggregated.
(4) The amounts resulting from multiplying the technical provisions in respect of each such class of business by the corresponding capital charge factor must be aggregated.
(5) The insurance-related capital requirement is the sum of the amounts calculated in accordance with (3) and (4).
- 31/12/2006
INSPRU 1.1.78
See Notes
In INSPRU 1.1.77 R references to technical provisions comprise:
(1) outstanding claims;
(3) provisions for incurred but not enough reported (IBNER) claims;
(5) unexpired risk reserves;
in each case net of reinsurance receivables.- 31/12/2006
INSPRU 1.1.79
See Notes
Table: Insurance-related Capital Charge Factors
| Class of Business | Net Written Premium capital charge factor | Technical provision capital charge factor |
| Reporting Group: Direct and facultative business | ||
| Direct and facultative accident and health | 5.0% | 7.5% |
| Direct and facultative personal lines motor business | 10.0% | 9.0% |
| Direct and facultative household and domestic all risks | 10.0% | 10.0% |
| Direct and facultative personal lines financial loss | 25.0% | 14.0% |
| Direct and facultative commercial motor business | 10.0% | 9.0% |
| Direct and facultative commercial lines property | 10.0% | 10.0% |
| Direct and facultative commercial lines liability | 14.0% | 14.0% |
| Direct and facultative commercial lines financial loss | 25.0% | 14.0% |
| Direct and facultative aviation | 32.0% | 14.0% |
| Direct and facultative marine | 22.0% | 17.0% |
| Direct and facultative goods in transit | 12.0% | 14.0% |
| Direct and facultative miscellaneous | 25.0% | 14.0% |
| Reporting Group: Non-Proportional Treaty | ||
| Non-proportional accident & health | 35.0% | 16.0% |
| Non-proportional motor | 10.0% | 14.0% |
| Non-proportional transport | 16.0% | 15.0% |
| Non-proportional aviation | 61.0% | 16.0% |
| Non-proportional marine | 38.0% | 17.0% |
| Non-proportional property | 53.0% | 12.0% |
| Non-proportional liability (non-motor) | 14.0% | 14.0% |
| Non-proportional financial lines | 39.0% | 14.0% |
| Non-proportional aggregate cover | 53.0% | 12.0% |
| Reporting Group: Proportional Treaty | ||
| Proportional accident & health | 12.0% | 16.0% |
| Proportional motor | 10.0% | 12.0% |
| Proportional transport | 12.0% | 15.0% |
| Proportional aviation | 33.0% | 16.0% |
| Proportional marine | 22.0% | 17.0% |
| Proportional property | 23.0% | 12.0% |
| Proportional liability (non-motor) | 14.0% | 14.0% |
| Proportional financial lines | 25.0% | 14.0% |
| Proportional aggregate cover | 23.0% | 12.0% |
| Reporting Group: Miscellaneous Reinsurance | ||
| Miscellaneous reinsurance accepted business | 39.0% | 14.0% |
- 31/12/2006
Long-term insurance capital requirement
INSPRU 1.1.80
See Notes
GENPRU 2.1.13 R requires an insurer to maintain capital resources equal to or in excess of its capital resources requirement. GENPRU 2.1.18 R defines the capital resources requirement for a firm to which that rule applies (a realistic basis life firm) as the higher of the MCR and the ECR. For other firms carrying on long-term insurance business (regulatory basis only life firms), the capital resources requirement is equal to the MCR. Except where the base capital resources requirement is the higher requirement, the MCR in respect of long-term insurance business is the sum of the long-term insurance capital requirement (LTICR) and the resilience capital requirement or, in the case of a realistic basis life firm, the LTICR (see GENPRU 2.1.24A R,GENPRU 2.1.25 R and GENPRU 2.1.26 R). GENPRU 2.1.36 R defines the LTICR as the sum of the insurance death risk, health risk and life protection reinsurance, expense risk, and market risk capital components (see INSPRU 1.1.81 R to INSPRU 1.1.91 R). Rules and guidance about the resilience capital requirement are set out in INSPRU 3.1.9 G to INSPRU 3.1.26 R.
- 31/12/2006
Insurance death risk capital component
INSPRU 1.1.81
See Notes
The insurance death risk capital component is the aggregate of the amounts which represent the fractions specified by INSPRU 1.1.82 R of the capital at risk, defined in INSPRU 1.1.83 R, for each category of contracts of insurance (as specified in INSPRU 1.1.81A R), in respect of those contracts where the capital at risk is not a negative figure, multiplied by the higher of:
(1) 50%; and
(2) the ratio as at the end of the financial year in question of:
(a) the aggregate capital at risk in respect of that category of contracts net of reinsurance cessions; to
(b) the aggregate capital at risk in respect of that category of contracts gross of reinsurance cessions.
- 31/12/2006
INSPRU 1.1.81A
See Notes
For the purpose of INSPRU 1.1.81 R, the categories of contracts of insurance are as follows:
- 31/12/2006
INSPRU 1.1.82
See Notes
For the purpose of INSPRU 1.1.81 R, the fraction is:
(1) for long-term insurance businessclasses I, II and IX, except for a pure reinsurer:
(a) 0.1% for temporary insurance on death where the original term of the contract is three years or less;
(b) 0.15% for temporary insurance on death where the original term of the contract is five years or less but more than three years; and
(c) 0.3% in any other case;
(2) 0.3% for long-term insurance businessclasses III, VII and VIII, except for a pure reinsurer; and
(3) 0.1% for a pure reinsurer.
- 31/12/2006
INSPRU 1.1.83
See Notes
For the purpose of INSPRU 1.1.81 R, the capital at risk is:
(1) where the benefit under a contract of insurance payable as a result of death includes periodic or deferred payments, the present value of the benefits payable; and
(2) in any other case, the amount payable as a result of death;
less, in either case, the mathematical reserves for the contract.- 31/12/2006
INSPRU 1.1.83A
See Notes
INSPRU 1.1.81 R does not apply to:
(1) a pure reinsurer; or
(2) a mixed insurer;
in respect of life protection reinsurance business.- 31/12/2006
INSPRU 1.1.84
See Notes
The insurance death risk capital component only relates to the risk of death. There is a separate risk component for insured health risks (class IV) which also applies to the risk of death covered in the life protection reinsurance business of pure reinsurers and mixed insurers. Tontines (class V) and capital redemption operations (class VI) also have separate risk components. There is no specified risk margin for other insured risks.
- 31/12/2006
INSPRU 1.1.84A
See Notes
For the treatment of amounts recoverable from ISPVs when calculating the insurance death risk capital component in accordance with INSPRU 1.1.81 R, see INSPRU 1.1.92A R and INSPRU 1.1.92B G.
- 31/12/2006
Insurance health risk and life protection reinsurance capital component
INSPRU 1.1.85
See Notes
The insurance health risk and life protection reinsurance capital component is the highest of:
(3) the brought forward amount (determined in accordance with INSPRU 1.1.51 R); in respect of:
(b) risks falling in general insurance businessclasses 1 or 2 that are written as part of a long-term insurance contract; and
- 31/12/2006
INSPRU 1.1.86
See Notes
For the purposes of INSPRU 1.1.85 R, in the case of contracts of insurance falling in long-term insurance businessclass IV, condition (3) as set out in INSPRU 1.1.72 R (actuarial health insurance) is modified to: "either the reserves include a provision for increasing age, or the business is conducted on a group basis.".
- 31/12/2006
INSPRU 1.1.87
See Notes
The insurance health risk and life protection reinsurance capital component only applies to permanent health insurance (long-term insurance businessclass IV), accident and sickness insurance (general insurance business classes 1 and 2) and the life protection reinsurance business of pure reinsurers and mixed insurers.
- 31/12/2006
Insurance expense risk capital component
INSPRU 1.1.88
See Notes
The insurance expense risk capital component is:
(1) in respect of long-term insurance businessclasses III, VII and VIII, an amount equivalent to 25% of the net administrative expenses in the financial year in question relevant to the business of each of those classes, in so far as the firm bears no investment risk and the allocation to cover management expenses in the contract of insurance does not have a fixed upper limit which is effective as a limit for a period exceeding 5 years from the commencement of the contract;
(2) in respect of any tontine (long-term insurance businessclass V), 1% of the assets of the tontine;
(3) in the case of any other long-term insurance business, 1% of the "adjusted mathematical reserves" (as defined in INSPRU 1.1.89A R).
- 31/12/2006
INSPRU 1.1.88A
See Notes
- 31/12/2006
Insurance market risk capital component
INSPRU 1.1.89
See Notes
The insurance market risk capital component is 3% of the "adjusted mathematical reserves" (as defined in INSPRU 1.1.89A R) for all insurance liabilities except those of a kind which:
(1) arise from contracts of insurance falling in long-term insurance businessclasses III, VII or VIII to the extent that the firm does not bear any investment risk; or
(3) for a pure reinsurer or a mixed insurer, arise from contracts of insurance falling within:
(a) its life protection reinsurance business; or
- 31/12/2006
Adjusted mathematical reserves
INSPRU 1.1.89A
See Notes
(1) For the purpose of INSPRU 1.1.88 R and INSPRU 1.1.89 R, the "adjusted mathematical reserves" is the aggregate of the amounts which result from the performance of the calculation in INSPRU 1.1.90 R for each category of insurance liability specified in (2).
(2) The categories of insurance liability referred to in (1) are:
(a) for the purpose of INSPRU 1.1.88 R, those categories described in INSPRU 1.1.91R (1), (2), (3), (4) and (5); and
(b) for the purpose of INSPRU 1.1.89 R, those categories described in INSPRU 1.1.91R (1), (2), (4) and (5).
- 31/12/2006
INSPRU 1.1.90
See Notes
The calculation referred to in INSPRU 1.1.89AR (1) is the multiplication of the amount of the mathematical reserves (gross of reinsurance cessions) in respect of a category of insurance liability by the higher of:
(1) 85% or, in the case of a pure reinsurer, 50%; and
(2) the ratio as at the end of the financial year in question of:
(a) the mathematical reserves in respect of that category of insurance liability net of reinsurance cessions; to
(b) the mathematical reserves in respect of that category of insurance liability gross of reinsurance cessions.
- 31/12/2006
INSPRU 1.1.91
See Notes
For the purpose of INSPRU 1.1.89A R and INSPRU 1.1.90 R, the categories of insurance liability are as follows:
(1) liabilities of a kind which arise from contracts of insurance falling in long-term insurance businessclasses I, II or IX;
(2) liabilities of a kind which arise from contracts of insurance falling in long-term insurance businessclasses III, VII or VIII to the extent that the firm bears an investment risk;
(3) liabilities of a kind which arise from contracts of insurance falling in long-term insurance businessclasses III, VII or VIII to the extent that the firm bears no investment risk and where the allocation to cover management expenses in the contract of insurance has a fixed upper limit which is effective as a limit for a period exceeding 5 years from the commencement of the contract;
(4) liabilities of a kind which arise from contracts of insurance falling in long-term insurance businessclass IV; and
(5) liabilities of a kind which arise from contracts of insurance falling in long-term insurance businessclass VI.
- 31/12/2006
INSPRU 1.1.92
See Notes
Where a firm has written a unit-linked contract, the firm's liability under the contract may consist of a unit liability, where the firm bears no investment risk, and other liabilities for which the firm bears an investment risk, and for which a separate reserve is held. INSPRU 1.1.91R (2) and (3) require a firm to analyse its liabilities under unit-linked contracts between those for which it bears an investment risk and those for which it does not. INSPRU 1.1.88 R and INSPRU 1.1.89 R taken together result in a capital requirement for any liabilities for which the firm bears an investment risk of 4% of "adjusted mathematical reserves" (1% for expense risk and 3% for market risk).
- 31/12/2006
Insurance special purpose vehicles
INSPRU 1.1.92A
See Notes
A firm must not treat any amounts recoverable from an ISPV as reinsurance for the purposes of the calculation of:
(1) the reinsurance ratio in accordance with INSPRU 1.1.54 R; or
- 31/12/2006
INSPRU 1.1.92B
See Notes
A firm may treat amounts recoverable from an ISPV as reinsurance for these purposes if it obtains a waiver of INSPRU 1.1.92A R under section 148 of the Act. The conditions that will need to be met, in addition to the statutory tests under section 148(4) of the Act, before the
FSA
will consider granting such a waiver are set out in INSPRU 1.6.13 G to INSPRU 1.6.18 G
- 31/12/2006
Application of INSPRU 1.1 to Lloyd's
INSPRU 1.1.93
See Notes
- 31/12/2006
INSPRU 1.1.94
See Notes
- 31/12/2008
INSPRU 1.1.95
See Notes
The Society must calculate the brought forward amount for the members in aggregate in accordance with INSPRU 1.1.51 R, using the result of GENPRU 2.3.6 R for the prior financial year and the aggregate of all members'technical provisions for the relevant periods.
- 31/12/2006
INSPRU 1.1.96
See Notes
For the purposes of INSPRU 1.1.66 R and further to that rule, in the case of Lloyd's members, amounts of premiums and claims must be adjusted for approved reinsurance to close to exclude any amount included in, or adjustment made to, premiums and claims to reflect the consideration for an approved reinsurance to close.
- 31/12/2006
INSPRU 1.2
Mathematical reserves
- 31/12/2006
Application
INSPRU 1.2.1
See Notes
INSPRU 1.2 applies to a long-term insurer unless it is:
(1) a non-directive friendly society; or
(2) an incoming EEA firm; or
(3) an incoming Treaty firm
- 31/12/2006
Purpose
INSPRU 1.2.2
See Notes
This section follows on from the overall requirement on firms to establish adequate technical provisions (see INSPRU 1.1.16 R). The mathematical reserves form the main component of technical provisions for long-term insurance business. INSPRU 1.2 sets out rules and guidance as to the methods and assumptions to be used in calculating the mathematical reserves. The rules and guidance set out the minimum basis for mathematical reserves. Methods and assumptions that produce reserves that are demonstrably equal to or greater than the minimum basis may also be used, though they must meet the basic requirements for methods and assumptions set out in INSPRU 1.2.7 R to INSPRU 1.2.27 G.
- 31/12/2006
INSPRU 1.2.3
See Notes
This section applies to all firms carrying on long-term insurance business and implements some of the requirements contained in article 20 of the Consolidated Life Directive. The implementation is designed to ensure that a firm'smathematical reserves in respect of long-term insurance contracts meet the minimum requirements set by the Consolidated Life Directive. A firm may use a prospective or a retrospective method to value its mathematical reserves (see INSPRU 1.2.7 R).
- 31/12/2006
INSPRU 1.2.4
See Notes
The required procedures are summarised in the flowchart in INSPRU 1 Annex 1.
- 31/12/2006
INSPRU 1.2.5
See Notes
Firms to which GENPRU 2.1.18 R applies are required to calculate a with-profits insurance capital component (see GENPRU 2.1.38 R). In order to calculate its with-profits insurance capital component, such a firm is required to carry out additional calculations of its liabilities on a realistic basis (see INSPRU 1.3), which it is required to report to the
FSA
(see Forms 18,19). A firm that reports its liabilities on a realistic basis is referred to in
GENPRU and INSPRUas a realistic basis life firm. Such firms are subject to different rules relating to the calculation of mathematical reserves (see INSPRU 1.2.46 R and INSPRU 1.2.76 R) compared with those that apply to firms that report on a regulatory basis only (regulatory basis only life firms).
- 23/03/2007
INSPRU 1.2.6
See Notes
A number of the rules in this section require a firm to take into account its regulatory duty to treat customers fairly. In this section, references to such a duty are to a firm's dutyto pay due regard to the interests of its customers and to treat them fairly (see
Principle 6 in PRIN). This duty is owed to both policyholders and potential policyholders.
- 31/12/2006
Basic valuation method
INSPRU 1.2.7
See Notes
(1) Subject to (2), a firm must establish its mathematical reserves using a prospective actuarial valuation on prudent assumptions of all future cash flows expected to arise under, or in respect of, each of its long-term insurance contracts.
(2) But a firm may use a retrospective actuarial valuation where:
(a) a prospective method cannot be applied to a particular type of contract; or
(b) the firm can demonstrate that the resulting amount of the mathematical reserves would be no lower than would be required by a prudent prospective actuarial valuation.
- 31/12/2006
INSPRU 1.2.8
See Notes
A prospective valuation sets the mathematical reserves at the present value of future net cash flows. A retrospective method typically sets the mathematical reserves at the level of premiums received (and accumulated with investment return), less claims and expenses paid. A prospective valuation is preferred because it takes account of circumstances that might have arisen since the premium rate was set and of changes in the perception of future experience. Circumstances in which a retrospective valuation might be appropriate include:
(1) where the assumptions initially made in determining the premium rate were sufficiently prudent at inception and have not been overtaken by subsequent events; and
(2) where the liability depends on the emerging experience.
- 31/12/2006
INSPRU 1.2.9
See Notes
Except in INSPRU 1.2.71R (1), INSPRU 1.2 does not apply to final bonuses. In addition, for realistic basis life firms only, INSPRU 1.2 does not apply to other discretionary benefits, including future annual bonuses.
- 31/12/2006
Methods and assumptions
INSPRU 1.2.10
See Notes
In the actuarial valuation under INSPRU 1.2.7 R, a firm must use methods and prudent assumptions which:
(1) are appropriate to the business of the firm;
(2) are consistent from year to year without arbitrary changes (see INSPRU 1.2.11 G);
(3) are consistent with the method of valuing assets (see GENPRU 1.3);
(4) include appropriate margins for adverse deviation of relevant factors (see INSPRU 1.2.12 G);
(5) recognise the distribution of profits (that is, emerging surplus) in an appropriate way over the duration of each contract of insurance;
(7) are in accordance with generally accepted actuarial practice.
- 31/12/2006
INSPRU 1.2.11
See Notes
INSPRU 1.2.10R (2) prohibits only arbitrary changes in methods and assumptions, that is, changes made without adequate reasons. Any such changes would hinder comparisons over time as to the amount of the mathematical reserves and so obscure trends in solvency and the emergence of surplus.
- 31/12/2006
INSPRU 1.2.12
See Notes
The relevant factors referred to in INSPRU 1.2.10R (4) may include, but are not limited to, factors such as future investment returns, expenses, mortality, morbidity, options, persistency and reinsurance (see also INSPRU 1.2.13 R to INSPRU 1.2.19 G).
- 31/12/2006
Margins for adverse deviation
INSPRU 1.2.13
See Notes
The appropriate margins for adverse deviation required by INSPRU 1.2.10R (4) must be sufficiently prudent to ensure that there is no significant foreseeable risk that liabilities to policyholders in respect of long-term insurance contracts will not be met as they fall due.
- 31/12/2006
INSPRU 1.2.14
See Notes
The margins for adverse deviation are a prudential margin in respect of the risks that arise under a long-term insurance contract.
- 31/12/2006
INSPRU 1.2.15
See Notes
INSPRU 1.2.13 R sets the normal standard of prudence required for margins. INSPRU 1.2.16 G suggests benchmarks against which a firm should compare the margins it has set in accordance with INSPRU 1.2.10R (4) and INSPRU 1.2.13 R. INSPRU 1.2.17 G gives guidance where a market risk premium is not readily obtainable.
- 31/12/2006
INSPRU 1.2.16
See Notes
When setting the margins for adverse deviation required by INSPRU 1.2.10R (4) in relation to a particular contract, a firm should consider, where appropriate:
(1) the margin for adverse deviation included in the premium for similar long-term insurance contracts, if any, newly issued by the firm; and
(2) where a sufficiently developed and diversified market for transferring a risk exists, the risk premium that would be required by an unconnected party to assume the risk in respect of the contract.
The margin for adverse deviation of a risk should generally be greater than or equal to the relevant market price for that risk.
The margin for adverse deviation of a risk should generally be greater than or equal to the relevant market price for that risk.
- 31/12/2006
INSPRU 1.2.17
See Notes
Where a risk premium is not readily available, or cannot be determined, an external proxy for the risk should be used, such as adjusted industry mortality tables. Where there is a considerable range of possible outcomes, the PRA
FSA
expects firms to use stochastic techniques to evaluate these risks. In time, for example, longevity risk, where this constitutes a significant risk for the firm, may fall into this category.
- 31/12/2006
INSPRU 1.2.18
See Notes
The margins for adverse deviation should be recognised as profit only as the firm itself is released from risk over the duration of the contract.
- 31/12/2006
INSPRU 1.2.19
See Notes
Further detailed rules and guidance on margins for adverse deviation are included in INSPRU 1.2.32 G to INSPRU 1.2.89 G. In particular, the cross-references for the different assumptions used in calculating the mathematical reserves are as follows:
The rules and guidance on margins for adverse deviation in respect of future investment returns, which are also required in the calculation of mathematical reserves, are set out in INSPRU 3.1.28 R to INSPRU 3.1.48 G.
The rules and guidance on margins for adverse deviation in respect of future investment returns, which are also required in the calculation of mathematical reserves, are set out in INSPRU 3.1.28 R to INSPRU 3.1.48 G.
- 31/12/2006
Record keeping
INSPRU 1.2.20
See Notes
A firm must make, and retain for an appropriate period, a record of:
(1) the methods and assumptions used in establishing its mathematical reserves, including the margins for adverse deviation, and the reasons for their use; and
(2) the nature of, reasons for, and effect of, any change in approach, including the amount by which the change in approach increases or decreases its mathematical reserves.
- 31/12/2006
INSPRU 1.2.21
See Notes
SYSC 14.1.53 R requires firms to maintain accounting and other records for a minimum of three years, or longer as appropriate. For the purposes of INSPRU 1.2.20 R, a period of longer than three years will be appropriate for a firm'slong-term insurance business. In determining an appropriate period, a firm should have regard to:
(2) the nature and term of the firm's long-term insurance business; and
(3) any additional provisions or statutory requirements applicable to the firm or its records.
- 31/12/2006
Valuation of individual contracts
INSPRU 1.2.22
See Notes
(1) Subject to (2) and (3), a firm must determine the amount of the mathematical reserves separately for each long-term insurance contract.
(2) Approximations or generalisations may be made:
(a) in the case of non-attributable expenses, in relation to a group of contracts with the same or similar expense risk characteristics, provided that the mathematical reserves in respect of such expenses established by the firm in relation to that group of contracts have a minimum value of at least zero; and
(b) in any other case, where they are likely to provide the same, or a higher, result than a determination made in accordance with (1).
(3) A firm must set up additional mathematical reserves on an aggregated basis for general risks that are not specific to individual contracts.
(4) For the purpose of (2), non-attributable expenses are expenses which are not directly attributable to a particular long-term insurance contract.
- 31/12/2006
INSPRU 1.2.23
See Notes
INSPRU 1.2.22 R to INSPRU 1.2.89 G set out rules and guidance for the separate prospective valuation of each contract. These may be applied instead to groups of contracts where the conditions set out in INSPRU 1.2.22R (2)(a) or (b) are satisfied. Guidance on non-attributable expenses and the application of INSPRU 1.2.22R (2)(a) is provided in INSPRU 1.2.54A G.
- 31/12/2006
Negative mathematical reserves
INSPRU 1.2.24
See Notes
A firm may calculate a negative value for the mathematical reserves in respect of a long-term insurance contract provided that:
(1) this is based on assumptions which meet the general requirements for prudent assumptions as set out in INSPRU 1.2.10 R and INSPRU 1.2.13 R;
(2) the contract does not have a surrender value which at the actuarial valuation date is guaranteed; and
(3) the total mathematical reserves established by the firm have a minimum value of at least:
(a) where the firm's long-term insurance contracts include linked long-term contracts, the sum of the surrender values of all its linked long-term contracts at the actuarial valuation date; and
(b) in any other case, zero.
- 31/12/2006
INSPRU 1.2.25
See Notes
(1) A separate prospective valuation for each contract may identify contracts for which the value of future cash inflows under and in respect of the contract exceeds that of outflows. In these circumstances, the firm may calculate the mathematical reserves for that contract as having a negative value and treat that value as available to off-set mathematical reserves for other contracts which have a positive value when establishing the overall mathematical reserves.
(2) In complying with INSPRU 1.1.34 R or INSPRU 3.1.61A R, as applicable, with respect to the matching of assets and liabilities, insurers should consider the suitability for offset of contracts whose mathematical reserves are negative against liabilities on other contracts and only offset them if it is prudent to do so. While INSPRU 1.2.24 R applies at a firm level, it may be relevant when assessing the prudence of the offset of contracts whose mathematical reserves are negative to consider the fact that contracts with negative mathematical reserves written outside a with-profits fund are not, for the purpose of INSPRU 1.1.27 R, permitted to be offset against contracts with positive mathematical reserves written within that with-profits fund.
- 31/12/2008
INSPRU 1.2.25A
See Notes
In addition, the Consolidated Life Directive requires that no contract should be valued at less than its guaranteed surrender value (see INSPRU 1.2.62A G). As a result, no contract with a guaranteed surrender value to which the Consolidated Life Directive applies should be valued as if it were an asset. Although the Reinsurance Directive does not require this treatment of contracts with guaranteed surrender values to be applied to pure reinsurers, the
FSA's
policy is that there should be equal treatment in this respect. INSPRU 1.2.62 R makes further provision relating to the mathematical reserves to be established in respect of such contracts. When considering the impact that the amount payable on surrender may have on the valuation of a contract, a firm should have regard to INSPRU 1.2.71 R.
- 31/12/2008
Avoidance of future valuation strain
INSPRU 1.2.26
See Notes
(1) A firm must establish mathematical reserves for a contract of insurance which are sufficient to ensure that, at any subsequent date, the mathematical reserves then required are covered solely by:
(a) the assets covering the current mathematical reserves; and
(b) the resources arising from those assets and from the contract itself.
(2) For the purposes of (1), the firm must assume that:
(a) the assumptions adopted for the current valuation of liabilities remain unaltered and are met; and
(b) discretionary benefits and charges will be set so as to fulfil its regulatory duty to treat its customers fairly.
(3) Subject to (4), (1) may be applied to a group of similar contracts instead of to the individual contracts within that group.
(4) (1) must be applied to a group of contracts in relation to which mathematical reserves in respect of non-attributable expenses are established for that group of contracts in accordance with INSPRU 1.2.22R (2)(a), instead of to the individual contracts within that group.
- 31/12/2006
INSPRU 1.2.27
See Notes
The valuation of each contract, or group of similar contracts, should allow for the possibility, where it exists, that contracts may be surrendered (wholly or in part), lapsed or made paid-up at any time. The valuation assumptions include margins for adverse deviation (see INSPRU 1.2.13 R). INSPRU 1.2.26 R requires mathematical reserves to be established such that, if future experience is in line with the valuation assumptions, there would be no future valuation strain.
- 31/12/2006
Cash flows to be valued
INSPRU 1.2.28
See Notes
In a prospective valuation, a firm must:
(1) include in the cash flows to be valued the following:
(c) benefits payable (see INSPRU 1.2.29 R); and
(d) subject to (2), amounts to be received or paid in respect of the long-term insurance contracts under contracts of reinsurance or analogous non-reinsurance financing agreements (see INSPRU 1.2.77A R to INSPRU 1.2.89 G); but
(2) exclude from those cash flows amounts recoverable from an ISPV.
- 31/12/2006
INSPRU 1.2.28A
See Notes
A firm may include amounts recoverable from an ISPV in the cash flows to be valued in a prospective valuation if it obtains a waiver of INSPRU 1.2.28 R under section 148 of the Act. The conditions that will need to be met, in addition to the statutory tests under section 148(4) of the Act, before the
FSA
will consider granting such a waiver are set out in INSPRU 1.6.13 G to INSPRU 1.6.18 G.
- 31/12/2006
INSPRU 1.2.29
See Notes
For the purpose of
INSPRU 1.2.28R (1)(c)
, benefits payable include:
(1) all guaranteed benefits including guaranteed surrender values and paid-up values;
(2) vested, declared and allotted bonuses to which the policyholder is entitled;
(3) all options available to the policyholder under the terms of the contract; and
- 23/03/2007
INSPRU 1.2.30
See Notes
All cash flows are to be valued using prudent assumptions in accordance with generally accepted actuarial practice. Cash flows may be omitted from the valuation calculations provided the reserves obtained as a result of leaving those cash flows out of the calculation are not less than would have resulted had all cash flows been included (see INSPRU 1.2.22R (2)(b)). Provision for future expenses in respect of with-profits insurance contracts (excluding accumulating with-profits policies) may be made implicitly, using the net premium method of valuation (see INSPRU 1.2.43 R below). For the purposes of
INSPRU 1.2.28R (1)(b)
, any charges included in expenses should be determined in accordance with the firm's regulatory duty to treat its customers fairly.
- 23/03/2007
INSPRU 1.2.31
See Notes
INSPRU 1.2.29R (4) requires regulatory basis only life firms to make allowance for any future annual bonus that a firm would expect to grant, assuming future experience is in line with the assumptions used in the calculation of the mathematical reserves. final bonuses do not have to be taken into consideration in these calculations except in relation to accumulating with-profits policies (see INSPRU 1.2.9 R). The calculations required for accumulating with-profits policies are set out in INSPRU 1.2.71R (1). For realistic basis life firms, except for accumulating with-profits policies, the mathematical reserves may be calculated without taking into account discretionary benefits, including both annual bonuses and final bonuses. For such firms full allowance for discretionary benefits is made in the calculation of the realistic value of liabilities (see INSPRU 1.3.105R (5)).
- 31/12/2006
Valuation assumptions: detailed rules and guidance
INSPRU 1.2.32
See Notes
More detailed rules and guidance about the valuation of cash flows are set out in INSPRU 1.2.33 R to INSPRU 1.2.89 G.
- 31/12/2006
Valuation rates of interest
INSPRU 1.2.33
See Notes
In calculating the present value of future net cash flows, a firm must determine the rates of interest to be used in accordance with INSPRU 3.1.28 R to INSPRU 3.1.47 R.
- 31/12/2006
INSPRU 1.2.34
See Notes
The rules in INSPRU 3.1.28 R to INSPRU 3.1.47 R set out the approach firms must take in setting margins for adverse deviation in the interest rates assumed in calculating the mathematical reserves. This includes a margin to allow for adverse deviation in market risk and, where relevant, credit risk. The requirements set out in INSPRU 3.1.28 R to INSPRU 3.1.47 R protect against the market risk that the return actually achieved on assets may fall below the market yields on assets at the actuarial valuation date.
- 31/12/2006
Future premiums
INSPRU 1.2.35
See Notes
INSPRU 1.2.46 R and INSPRU 1.2.47 G apply to the valuation of with-profits insurance liabilities for a realistic basis life firm. INSPRU 1.2.38 R to INSPRU 1.2.45 G apply to a regulatory basis only life firm.
- 31/12/2006
INSPRU 1.2.36
See Notes
For non-profit insurance contracts no specific method of valuation for future premiums is required by INSPRU. However, the method of valuation used should be sufficiently prudent taking into account, in particular, the risk of voluntary discontinuance by the policyholder.
- 31/12/2006
Future premiums: firms reporting only on a regulatory basis
INSPRU 1.2.37
See Notes
- 31/12/2006
INSPRU 1.2.38
See Notes
(1) This rule applies to with-profits insurance contracts except accumulating with-profits policies written on a recurring single premium basis.
(2) The value attributed to a premium due in any future financial year (a future premium) must not exceed the lower of the value of:
(a) the actual premium payable under the contract; and
(b) the net premium.
(3) The net premium may be increased for deferred acquisition costs in accordance with INSPRU 1.2.43 R.
- 31/12/2006
INSPRU 1.2.39
See Notes
The valuation method for future premiums in INSPRU 1.2.38 R retains the difference, if any, between the gross premium and the net premium as an implicit margin available to finance future bonuses, expenses and other costs. It thus helps to protect against the risk that adequate resources may not be available in the future to meet those costs. Where expenses are not directly attributable to a particular contract, a firm may establish mathematical reserves in respect of such expenses in relation to a group of contracts with the same or similar expense risk characteristics in accordance with INSPRU 1.2.22R (2)(a).
- 31/12/2006
INSPRU 1.2.40
See Notes
Where the terms of a contract of insurance have changed since it was first entered into, a firm must apply one of the methods in INSPRU 1.2.41 R in determining the net premium for the purpose of INSPRU 1.2.38R (2)(b).
- 31/12/2006
INSPRU 1.2.41
See Notes
A firm must treat the change referred to in INSPRU 1.2.40 R as if either:
(1) it had been included in the original contract but came into effect from the time the change became effective; or
(2) the original contract were cancelled and replaced by a new contract (with an initial premium paid on the new contract equal to the liability under the original contract immediately prior to the change); or
(3) it gave rise to two separate contracts where:
(a) all premiums are payable under the first contract and that contract provides only for such benefits as those premiums could have purchased from the firm at the date the change became effective; and
(b) no premiums are payable under the second contract and that contract provides for all the other benefits.
- 31/12/2006
INSPRU 1.2.42
See Notes
INSPRU 1.2.41 R permits three alternative methods. However, the third method is only possible where a meaningful comparison can be made between the terms of the contract (as changed) and the terms upon which the firm was effecting its new contracts of insurance at the time the contract was changed.
- 31/12/2006
Future net premiums: adjustment for deferred acquisition costs
INSPRU 1.2.43
See Notes
(1) The amount of any increase to the net premium for deferred acquisition costs must not exceed the equivalent of the recoverable acquisition expenses spread over the period of premium payments and calculated in accordance with the rates of interest, mortality and morbidity assumed in calculating the mathematical reserves.
(2) For the purpose of (1), recoverable acquisition expenses means the amount of expenses, after allowing for the effects of taxation, which it is reasonable to expect will be recovered from future premiums payable under the contract.
(3) The recoverable acquisition expenses in (1) must not exceed the lower of:
(b) 3.5% of the relevant capital sum.
(4) Recoverable acquisition expenses may be calculated as the average for a group of similar contracts weighted by the relevant capital sum for each contract.
- 31/12/2006
INSPRU 1.2.44
See Notes
INSPRU 1.2.43 R allows a firm to spread acquisition costs over the lifetime of a contract of insurance, but only if it is reasonable to expect those costs to be recoverable from future premium income from that contract. Further prudence is provided by the limitation of recoverable acquisition expenses to 3.5% of the relevant capital sum. This adjustment for acquisition costs is sometimes termed a Zillmer adjustment.
- 31/12/2006
INSPRU 1.2.45
See Notes
In determining the extent, if any, to which it is reasonable to expect acquisition costs to be recoverable from future premium income, the firm should make prudent assumptions as to levels of voluntary discontinuance by policyholders.
- 31/12/2006
Future premiums: firms also reporting with-profits insurance liabilities on a realistic basis
INSPRU 1.2.46
See Notes
(1) Subject to (2), for a realistic basis life firm, the future premiums to be valued in the calculation of the mathematical reserves for its with-profits insurance contracts must not be greater than the gross premiums payable by the policyholder.
(2) This rule does not apply to accumulating with-profits policies written on a recurring single premium basis (see INSPRU 1.2.48 R).
- 31/12/2006
INSPRU 1.2.47
See Notes
The gross premium is the full amount of premium payable by the policyholder to the firm. The gross premium method contrasts with the net premium method which is required from regulatory basis only life firms (see INSPRU 1.2.37 R to INSPRU 1.2.45 G).
- 31/12/2006
Future premiums: accumulating with-profits policies
INSPRU 1.2.48
See Notes
(1) This rule applies to accumulating with-profits policies written on a recurring single premium basis.
- 31/12/2006
INSPRU 1.2.49
See Notes
INSPRU 1.2.48 R prohibits a firm from taking credit for recurring single premiums under accumulating with-profits policies. As there is no contractual commitment to pay any future premiums the amount and timing of which are uncertain, the recognition of any potential margins would not be prudent. Where the payment of a future premium would give rise to a liability in excess of the premium a provision should be established.
- 31/12/2006
Expenses
INSPRU 1.2.50
See Notes
(1) A firm must make provision for expenses, either implicitly or explicitly, in its mathematical reserves of an amount which is not less than the amount expected, on prudent assumptions, to be incurred in fulfilling its long-term insurance contracts.
(2) For the purpose of (1), expenses must be valued:
(a) after taking account of the effect of taxation;
(b) having regard to the firm's actual expenses in the last 12 months before the actuarial valuation date and any increases in expenses expected to occur in the future;
(c) after making prudent assumptions as to the effects of inflation on future increases in prices and earnings; and
(d) at no less than the level that would be incurred if the firm were to cease to transact new business 12 months after the actuarial valuation date.
- 31/12/2006
INSPRU 1.2.51
See Notes
For with-profits insurance contracts where the net premium valuation method applies, an implicit provision arises because the future premiums valued are limited to the net premium adjusted as permitted by INSPRU 1.2.43 R. This excludes the allowance within the gross premium for expenses (other than recoverable acquisition expenses). It also excludes other margins within the actual premium that are a prudential margin in respect of the risks that arise under the contract or that are needed to provide for future discretionary benefits. To the extent that these other margins are not needed for the purpose for which they were originally established, they may also constitute an implicit provision for expenses.
- 31/12/2006
INSPRU 1.2.52
See Notes
An implicit provision may also arise for other types of long-term insurance contract where, for example, no value is attributed to future premiums, but the firm is entitled to make deductions from future regular premiums before allocating them to secure policyholder benefits.
- 31/12/2006
INSPRU 1.2.53
See Notes
A firm should only reduce the provision for future expenses to take account of expected taxation recoveries related to those expenses where recovery is reasonably certain, and after taking into account the assumption that the firm ceases to transact new business 12 months after the actuarial valuation date. An appropriate adjustment for discounting should be made where receipt of the taxation recoveries is not expected until significantly after the expenses are incurred.
- 31/12/2006
INSPRU 1.2.54
See Notes
The firm's actual expenses in the 12 months prior to the actuarial valuation date may serve as a guide to the assumptions for future expenses, taking into consideration the mix of acquisition and renewal expenses. The expense assumptions should not be reduced to account for expected future improvements in efficiency until such efficiency improvements result in a reduced level of actual expenditure. However, the assumptions should take account of all factors which might increase costs including earnings and price inflation.
- 31/12/2006
INSPRU 1.2.54A
See Notes
(1)
A firm should attribute to an individual contract at least those expenses which are directly attributable to that contract including expenses which vary with the volume of business for that type of contract. Commission payments, charges to a fund on a 'per policy' basis and investment management fees are generally directly attributable. For expenses of the fund which are calculated directly based on actual expenses (and not calculated in accordance with a management services agreement), the attributable expenses will also include those costs which vary with the volume of business for that product, for example, salaries and accommodation costs of staff in a processing centre, printing and postage of communications to policyholders and associated computer services.
(2) Non-attributable expenses may include overheads which are relatively insensitive to the volume of business for the type of contract in question and an apportionment of group overheads. Examples of expenses that firms may consider non-attributable include salaries of head office staff involved in monitoring products and drafting standard communications to policyholders and allocated overheads for centralised functions such as human resources, finance and IT. Where non-attributable expenses arise in relation to a homogeneous risk group of contracts sharing the same or similar expense risk characteristics, a firm may determine the reserve for those expenses at the level of that risk group, provided that the reserve so established has a minimum value of at least zero (see INSPRU 1.2.22R (2)(a)). In identifying its homogeneous risk groups, a firm should consider all risks that impact on the level of expenses borne by contracts including persistency risk and expense inflation risk. For example, business that is subject to bulk lapse risk, such as any large group contract that would give rise to a reduction in surplus on lapse, should be considered as forming a homogeneous risk group of its own. A firm must document and justify its approach to identifying homogeneous risk groups in accordance with the record-keeping requirements of INSPRU 1.2.20 R. This approach to reserving for expenses ensures that prudent reserves are established in respect of both directly attributable and non-attributable expenses arising in relation to the firm'slong-term insurance business.
- 31/12/2006
INSPRU 1.2.54B
See Notes
In valuing cash flows in respect of commissions, a firm may wish to take into account any contractual arrangements for the "clawback" or repayment of commissions already paid in the event of voluntary discontinuance of a contract of insurance. In deciding how to treat such arrangements in determining the mathematical reserves for a contract of insurance, the firm must use assumptions which meet the general requirements for prudent assumptions as set out in INSPRU 1.2.10 R and INSPRU 1.2.13 R. For example, the firm should establish prudent margins for adverse deviation in respect of the credit risk of the intermediary by whom the commission would be repayable.
- 31/12/2006
INSPRU 1.2.55
See Notes
The provisions for expenses (whether implicit or explicit) required by INSPRU 1.2.50 R must be sufficient to cover all the expenses of running off the firm's existing long-term insurance business including:
(1) all discontinuance costs (for example, redundancy costs and closure costs) that would arise if the firm were to cease transacting new business 12 months after the actuarial valuation date in circumstances where (and to the extent that) the discontinuance costs exceed the projected surplus available to meet such costs;
(2) all costs of continuing to service the existing business taking into account the loss of economies of scale from, and any other likely consequences of, ceasing to transact new business at that time; and
(3) the lower of:
(a) any projected valuation strain from writing new business for the 12 months following the actuarial valuation date to the extent the actual amount of that strain exceeds the projected surplus on prudent assumptions from existing business in the 12 months following the actuarial valuation date; and
(b) any projected new business expense overrun from writing new business for the 12 months following the actuarial valuation date to the extent the projected expenses exceed the expenses that the new business can support on a prudent basis.
- 31/12/2006
INSPRU 1.2.56
See Notes
The provision for future expenses, whether implicit or explicit, should include a prudent margin for adverse deviation in the level and timing of expenses (see INSPRU 1.2.13 R to INSPRU 1.2.19 G). The margin should cover the risk of underestimating expenses whether due to, for example, initial under-calculation or subsequent increases in the amount of expenses. In setting the amount of the margin, the firm should take into account the extent to which:
(1) an appropriately validated method based on reliable data is used to allocate expenses as between attributable and non-attributable expenses or between acquisition and non-acquisition expenses and by product type, by distribution channel or by homogeneous risk group, as appropriate;
(2) the volume of existing and new business and its distribution by product type or distribution channel is stable or predictable;
(3) costs vary in the short, medium or long term dependent upon the volume of existing or new business and its distribution by product type or distribution channel; and
(4) cost control is well-managed.
- 31/12/2006
INSPRU 1.2.57
See Notes
In setting the margin, the firm should also take into account:
(1) the length of the period over which it is necessary to project costs;
(2) the extent to which it is reasonable to expect inflation to be stable or predictable over that period; and
(3) whether, if inflation is higher than expected, it is reasonable to expect that the excess would be offset by increases in investment returns.
- 31/12/2006
INSPRU 1.2.58
See Notes
Where a firm has entered into an agreement with any other person for the sharing or reimbursement of costs, in setting the margin it should take into account the potential impact of that agreement and of its discontinuance.
- 31/12/2006
Mortality and Morbidity
INSPRU 1.2.59
See Notes
A firm must set the assumptions for mortality and morbidity using prudent rates of mortality and morbidity that are appropriate to the country or territory of residence of the person whose life or health is insured.
- 31/12/2006
INSPRU 1.2.60
See Notes
The rates of mortality or morbidity should contain prudent margins for adverse deviation (see INSPRU 1.2.13 R to INSPRU 1.2.19 G). In setting those rates, a firm should take account of:
(1) the systems and controls applied in underwriting long-term insurance contracts and whether they provide adequate protection against anti-selection (that is, selection against the firm) including:
(a) adequately defining and identifying non-standard risks; and
(b) where such risks are underwritten, allocating to them an appropriate weighting;
(2) the nature of the contractual exposure to mortality or morbidity risk including:
(a) whether lower mortality increases or decreases the firm's liability;
(b) the period of cover and whether risk charges can be varied during that period and, if so, how quickly; and
(c) whether the options in the contract give rise to a significant risk of anti-selection (for example, opportunities for voluntary discontinuance, guaranteed renewal at the option of the policyholder and rights for conversion of benefits);
(3) the credibility of the firm's actual experience as a basis for projecting future experience including:
(a) whether there is sufficient data (especially for medical or financial risks and for new types of benefit or new methods of distribution); and
(b) whether the data is reliable and has been appropriately validated;
(4) the availability and reliability of:
(a) any published tables of mortality or morbidity for the country or territory of residence of the person whose life or health is insured; and
(b) any other information as to the industry-wide insurance experience for that country or territory;
(5) anticipated or possible future trends in experience including, but only where they increase the liability:
(a) anticipated improvements in mortality;
(b) changes arising from improved detection of morbidity (including critical illnesses);
(c) diseases the impact of which may not yet be reflected fully in current experience; and
(d) changes in market segmentation (such as impaired life annuities) which, in the light of developing experience, may require different assumptions for different parts of the policy class.
- 31/12/2006
INSPRU 1.2.61
See Notes
An additional provision for diseases covered by INSPRU 1.2.60G (5)(c) may be needed, in particular for unit-linked policies. In determining whether such a provision is needed a firm may take into consideration any ability to increase product charges commensurately (provided that such increase does not infringe on its regulatory duty to treat its customers fairly), but a provision would still be required for the period until such an increase could be brought into effect.
- 31/12/2006
Options
INSPRU 1.2.62
See Notes
When a firm establishes its mathematical reserves in respect of a long-term insurance contract, the firm must include an amount to cover any increase in liabilities which might be the direct result of its policyholder exercising an option under, or by virtue of, that contract of insurance. Where the surrender value of a contract is guaranteed, the amount of the mathematical reserves for that contract at any time must be at least as great as the value guaranteed at that time.
- 31/12/2006
INSPRU 1.2.62A
See Notes
A contract has a guaranteed surrender value where the policy wording states that a surrender value is payable and either provides for a minimum amount payable on surrender or sets out a method for calculating such an amount. For example, where a unit-linked contract provides for a surrender value equal to the value of the units allocated to the contract, the firm must establish mathematical reserves for that contract greater than or equal to the value of the units allocated at the valuation date.
- 31/12/2006
INSPRU 1.2.63
See Notes
An option exists where a policyholder is given a choice between alternative forms of benefit, for example, a choice between receiving a cash benefit upon maturity or an annuity at a guaranteed rate. In some cases, the contract may designate one or other of these alternatives as the principal benefit and any other as an option. This designation, in itself, is not one of substance in the context of reserving since it does not affect the policyholder's choices. Other forms of option include:
(1) the right to convert to a different contract on guaranteed terms;
(2) the right to increase cover on guaranteed terms;
(3) the right to a specified amount on surrender; and
(4) the right to a paid up value.
- 31/12/2006
INSPRU 1.2.64
See Notes
The firm should provide for the benefit which the firm anticipates the policyholder is most likely to choose. Past experience may be used as a guide, but only if this is likely to give a reasonable estimate of future experience. For example, past experience of the take-up of a cash payment option instead of an annuity would not be a reliable guide, if, in the past, market rates exceeded those guaranteed in the annuity but no longer do so. Similarly, past experience on the take-up of options may not be relevant in the light of the assumptions made in respect of future interest rates and mortality rates in the valuation of the benefits.
- 31/12/2006
INSPRU 1.2.65
See Notes
Many options are long-term and need careful consideration. Improving longevity, for example, can increase the value of guaranteed annuity options vesting further in the future. firms also need to have regard to the fact that policyholder behaviour can change in the future as policyholders become more aware of the value of their options. The impact on policyholder behaviour of possible changes in taxation should also be considered.
- 31/12/2006
INSPRU 1.2.66
See Notes
In accordance with INSPRU 1.2.7 R and INSPRU 1.2.13 R, take-up rates for guaranteed annuity options should be assessed on a prudent basis with assumptions that include margins for adverse deviation (see INSPRU 1.2.13 R to INSPRU 1.2.19 G) that take account of current experience and the potential for future change. The firm should reserve for option take-up at least at a prudent margin over current experience for options shortly to vest. For longer term options where the option becomes increasingly valuable in the future due to projected mortality improvements, increased take-up rates should be assumed. In view of the growing uncertainty over take-up rates for projections further in the future, for guaranteed annuity option dates 20 years or more ahead at least a 95% take-up rate assumption should be made.
- 31/12/2006
INSPRU 1.2.67
See Notes
Where there is considerable variation in the cost of the option depending on conditions at the time the option is exercised, and where that variation constitutes a material risk for the firm, it will generally be appropriate to use stochastic modelling. In this case prices from the asset model used in the stochastic approach should be benchmarked to relevant market asset prices before determining the value of the option. Where stochastic modelling is not undertaken, market option prices should be used to determine suitable assumptions for the valuation of the option. If no market exists for a particular option, a firm should take the value of the nearest equivalent benefit or right for which a market exists and document the way in which it has adjusted that valuation to reflect the original option.
- 31/12/2006
INSPRU 1.2.68
See Notes
Where the option offers a choice between two non-discretionary financial benefits (such as between a guaranteed cash sum or a guaranteed annuity value, or between a unit value and a maturity guarantee) and where there is a wide range of possible outcomes, the firm should normally model such liabilities stochastically. In carrying out such modelling firms should take into account the likely choices to be made by policyholders in each scenario. Firms should make and retain a record of the development and application of the model.
- 31/12/2006
INSPRU 1.2.69
See Notes
The value of a contract with an option is greater than the value of a similar contract without the option, that is, the option has value whether it is expected to be exercised or not. Although in theory a firm can rebalance its investments to match the expected cost of the option to the firm (including the time value of the option), this takes time to achieve and the market may move more quickly than the firm is able to respond. Also, there are likely to be transaction costs. Firms should take these aspects into consideration in setting up mathematical reserves.
- 31/12/2006
INSPRU 1.2.70
See Notes
(1) Where a policyholder may opt to be paid a cash amount, or a series of cash payments, the mathematical reserves for the contract of insurance established under INSPRU 1.2.7 R must be sufficient to ensure that the payment or payments could be made solely from:
(a) the assets covering those mathematical reserves; and
(b) the resources arising from those assets and from the contract itself.
(2) In (1) references to a cash amount or a series of cash payments include the amount or amounts likely to be paid on a voluntary discontinuance.
(3) For the purposes of (1), the firm must assume that:
(a) the assumptions adopted for the current valuation remain unaltered and are met; and
(4) (1) may be applied to a group of similar contracts instead of to the individual contracts within that group except where the cash amount or series of cash payments is the amount or amounts likely to be paid on a voluntary discontinuance.
- 31/12/2006
INSPRU 1.2.71
See Notes
For the purposes of INSPRU 1.2.70 R, a firm must assume that the amount of a cash payment secured by the exercise of an option is:
(1) in the case of an accumulating with-profits policy, the lower of:
(a) the amount which the policyholder would reasonably expect to be paid if the option were exercised, having regard to the representations made by the firm and including any expectations of a final bonus; and
(b) that amount, disregarding all discretionary adjustments;
(2) in the case of any other policy, the amount which the policyholder would reasonably expect to be paid if the option were exercised, having regard to the representations made by the firm, without taking into account any expectations regarding future distributions of profits or the granting of discretionary additions in respect of an established surplus.
- 31/12/2006
INSPRU 1.2.72
See Notes
INSPRU 1.2.71R (1) applies only to accumulating with-profits policies; INSPRU 1.2.71R (2) applies to any other type of policy, including non-profit insurance contracts. In INSPRU 1.2.71R (1)(a) a firm must take into consideration, for example, a market value adjustment where such an adjustment has been described in representations made to policyholders by the firm. However, any discretionary adjustment, such as a market value adjustment, must not be included in the amount calculated in INSPRU 1.2.71R (1)(b).
- 31/12/2006
Persistency assumptions
INSPRU 1.2.73
See Notes
[intentionally blank]
- 31/12/2006
INSPRU 1.2.74
See Notes
[intentionally blank]
- 31/12/2006
INSPRU 1.2.75
See Notes
[intentionally blank]
- 31/12/2006
INSPRU 1.2.76
See Notes
A firm may make assumptions about voluntary discontinuance rates in the calculation of the mathematical reserves provided that those assumptions meet the general requirements for prudent assumptions as set out in INSPRU 1.2.10 R and INSPRU 1.2.13 R.
- 31/12/2006
INSPRU 1.2.77
See Notes
The prudential margin in respect of assumptions of voluntary discontinuance should be validated both in relation to recent experience and to variations in future experience that might arise as a result of reasonably foreseeable changes in conditions. In particular, where estimates of experience are being made well into the future, the assumptions should contain margins that take into account the increased risk of adverse experience arising from changed circumstances. firms should also consider the possibility of anti-selection by policyholders and of variations in persistency experience for different classes and cohorts of business.
- 31/12/2006
Reinsurance
INSPRU 1.2.77A
See Notes
In INSPRU 1.2.78 G to INSPRU 1.2.89 G references to:
(1)
reinsurance and contracts of reinsurance include analogous non-reinsurance financing agreements, including contingent loans, securitisations and any other arrangements in respect of contracts of insurance that are analogous to contracts of reinsurance in terms of the risks transferred and the finance provided;
(2) reinsured risks, in relation to a contract of reinsurance entered into by a firm, means that part of:that have been transferred to the reinsurer under that contract of reinsurance; and
(3)
reinsurance cash outflows include any reduction in policy liabilities recognised as covered under a contract of reinsurance or any reduction of any debt to the firm under or in respect of a contract of reinsurance.
- 31/12/2006
INSPRU 1.2.78
See Notes
The prospective valuation of future cash flows to determine the amount of the mathematical reserves includes amounts to be received or paid under contracts of reinsurance in respect of long-term insurance business (see
INSPRU 1.2.28R (1)(d)
). This applies even where those cash flows cannot be identified as related to particular long-term insurance contracts (see INSPRU 1.2.22R (3)).
- 23/03/2007
INSPRU 1.2.79
See Notes
A firm must value reinsurance cash flows using methods and assumptions which are at least as prudent as the methods and assumptions used to value the underlying contracts of insurance which have been reinsured. In particular:
(1)
reinsurance recoveries must not be recognised unless the underlying liabilities to which they relate have also been recognised;
(2)
reinsurance cash outflows need not to be valued provided that:
(a) they are unambiguously linked to the emergence as surplus of margins included in the valuation of existing contracts of insurance or to the exercise by a reinsurer of its rights under a termination clause (see INSPRU 1.2.85 R); and
(b) the conditions in INSPRU 1.2.79A R are satisfied;
(3)
reinsurance cash inflows that are contingent on factors or conditions other than the reinsured risks must not be valued.
- 06/10/2010
INSPRU 1.2.79A
See Notes
The conditions referred to in INSPRU 1.2.79R (2)(b) are that:
(1) the reinsurance is not connected with any other transaction, which, when taken together with the reinsurance, could result in the requirements set out in INSPRU 1.2.79R (2) no longer being satisfied or in the risk transferred under the reinsurance being undermined; and
(2) the present value of the future reinsurance cash outflows that may be disregarded under INSPRU 1.2.79R (2) must not at any time exceed the value of the aggregate net cash inflows that have already been received by the firm under the contract of reinsurance accumulated at an assumed rate of LIBOR + 6% per annum.
- 06/10/2010
INSPRU 1.2.79B
See Notes
Examples of connected transactions that could have the effect described in INSPRU 1.2.79AR(1) might include a deposit, loan, repo, or stock lending transaction between the firm and the reinsurer, or between the firm and an undertaking that is closely related to the reinsurer. For these purposes, the expression closely related shall have the meaning set out in INSPRU 2.1.40 R.
- 06/10/2010
INSPRU 1.2.80
See Notes
In valuing reinsurance cash flows, a firm should establish prudent margins for adverse deviation (see INSPRU 1.2.13 R to INSPRU 1.2.19 G) including margins in respect of:
(1) any uncertainty as to the amount or timing of amounts to be paid or received; and
(2) the risk of credit default by the reinsurer.
- 31/12/2006
INSPRU 1.2.81
See Notes
In assessing the risk of credit default, the firm should take into account the rules and guidance in INSPRU 2.1 (Credit risk in insurance).
- 31/12/2006
INSPRU 1.2.82
See Notes
It will not necessarily be appropriate to use the same assumptions in INSPRU 1.2.79 R as for the underlying contracts. For example, if only a subgroup of the original contracts is reinsured, it may be appropriate to use different mortality rates.
- 31/12/2006
INSPRU 1.2.83
See Notes
Only reinsurance cash inflows that are triggered unambiguously by the reinsured risks may be valued. Reinsurance cash inflows that depend on other contingencies where the outcome does not form part of the valuation basis should not be given credit.
- 31/12/2006
INSPRU 1.2.84
See Notes
Firms should assess the extent of margins in the valuation of the existing contracts of insurance where these provide implicit provision for the reinsurance cash outflows in INSPRU 1.2.79 R. Where the reinsurance asset exceeds the estimated value of the future surplus under reinsured contracts firms should assess their credit risk exposure to the reinsurer.
- 31/12/2006
INSPRU 1.2.85
See Notes
For the purposes of INSPRU 1.2.79R (2), the "link" must be such that a contingent liability to pay or repay the amount to the reinsurer could not arise except when, and to the extent that, the margins in the valuation of the existing contracts of insurance emerge as surplus, or the reinsurer exercises its rights under a termination clause in the contract of reinsurance as a result of:
(2) a representation as to the existence, at or before the time the contract of reinsurance is entered into, of a state of affairs which is within the knowledge or control of the firm and which is material to the reinsurer's decision to enter into the contract being discovered to be false; or
- 31/12/2006
INSPRU 1.2.86
See Notes
For the purposes of INSPRU 1.2.79R (2) and INSPRU 1.2.85 R, future surplus may only be offset against future reinsurance cash outflow in respect of surplus on non-profit insurance contracts and the charges or shareholder transfers arising as surplus from with-profits insurance contracts. Such charges and transfers may only be allowed for to the extent consistent with the regulatory duty of the firm to treat its customers fairly.
- 31/12/2006
INSPRU 1.2.87
See Notes
For the purposes of INSPRU 1.2.85 R, a contingent liability means a liability that would only arise upon the happening of a particular contingency, even where that contingency is not expected to occur. For example, if the firm has a reinsurance arrangement in force that in the event the firm were wound up would give rise to repayments other than out of surplus emerging, the reinsurance cash outflows should be valued as a liability.
- 31/12/2006
INSPRU 1.2.88
See Notes
INSPRU 1.2.85 R allows a firm not to value reinsurance cash outflows provided the contingencies in which the reinsurance would require repayment other than out of future surpluses are limited to termination clauses concerning fraud, material misrepresentation, non-payment of reinsurancepremiums by the firm or a transfer of business by the firm without the agreement of the reinsurer, except if unreasonably withheld.
- 31/12/2006
INSPRU 1.2.89
See Notes
Where the reinsurance cash outflow is payable by a fund or sub-fund that generates such profits, charges or transfers, the firm need make no provision for such payments provided that repayment to the reinsurer is linked unambiguously (as defined in INSPRU 1.2.85 R) to the emergence of future surplus. Where the profits, charges or transfers arising under a block of business are payable by a fund or sub-fund to another part of the firm then only where the firm has committed to remit such profits, charges or transfers directly to the reinsurer would it be acceptable for no provision for payments to the reinsurer to be made.
- 31/12/2006
Application of INSPRU 1.2 to Lloyd's
INSPRU 1.2.92
See Notes
- 31/12/2006
Approved reinsurance to close
INSPRU 1.2.93
See Notes
In respect of business that has been subject to an approved reinsurance to close, managing agents must calculate mathematical reserves (before and after deduction of reinsurance cessions) for the reinsuring and not for the reinsured member.
- 31/12/2006
INSPRU 1.3
With-profits insurance capital component
- 31/12/2006
Application
INSPRU 1.3.1
See Notes
INSPRU 1.3 applies to a realistic basis life firm.
- 31/12/2006
INSPRU 1.3.2
See Notes
A realistic basis life firm means a firm to which GENPRU 2.1.18 R applies. The application of GENPRU 2.1.18 R is set out in GENPRU 2.1.19 R and GENPRU 2.1.20 R. GENPRU 2.1.13 R requires that a firm must maintain at all times capital resources equal to or in excess of its capital resources requirement. The enhanced capital requirement forms part of the capital resources requirement for a realistic basis life firm. The with-profits insurance capital component forms part of the enhanced capital requirement which a realistic basis life firm is required to calculate in accordance with GENPRU 2.1.38 R.
- 31/12/2006
Purpose
INSPRU 1.3.3
See Notes
This section sets out rules and guidance as to the methods and assumptions to be used in calculating the with-profits insurance capital component.
- 31/12/2006
INSPRU 1.3.4
See Notes
The purpose of the with-profits insurance capital component is to supplement the mathematical reserves so as to ensure that a firm holds adequate financial resources for the conduct of its with-profits insurance business. In particular, capital in excess of the mathematical reserves may be needed to ensure that adequate final bonuses can be awarded to policyholders. That is, adequate in the sense that in setting bonuses payable to policyholders the firm pays due regard to the interests of its policyholders and treats them fairly. The mathematical reserves for a realistic basis life firm are not required to include provision for future annual bonuses or final bonuses (INSPRU 1.2.9 R).
- 31/12/2006
INSPRU 1.3.5
See Notes
The required procedures are summarised in the flowchart in INSPRU 1 Annex 1.
- 31/12/2006
Main requirements
INSPRU 1.3.6
See Notes
A firm must calculate the with-profits insurance capital component in accordance with INSPRU 1.3.7 R.
- 31/12/2006
INSPRU 1.3.7
See Notes
(1) The with-profits insurance capital component for a firm is the aggregate of any amounts that:
(a) result from the calculations specified in (2) and (3); and
(b) are greater than zero.
(2) Subject to (3), in relation to each with-profits fund within the firm, the firm must deduct B from A, where:
(b) B is the sum of:
(ii) the value, in the most adverse scenario required by INSPRU 1.3.43R (3), of future internal transfers from the fund to shareholders or another of the firm's funds in respect of the future distribution of surplus between policyholders and shareholders; and
(iii) an amount not exceeding the value, in the most adverse scenario required by INSPRU 1.3.43R (3), of any other future internal transfers from the fund to a non-profit fund in respect of expense-related charges to the extent that the future receipt of the amount transferred is not already taken into account in the calculation of the firm'scapital resources or in establishing its technical provisions.
(3) Where a capital instrument that can be included in the firm'scapital resources in accordance with GENPRU 2.2 has been attributed wholly or partly to a with-profits fund and that instrument meets the requirements of GENPRU 2.2.271 R, the firm must add to the amount calculated under (2) for that fund the result, subject to a minimum of zero, of deducting D from C where:
(a) C is the outstanding face amount of the instrument to the extent attributed to the fund; and
(b) D is the realistic value of the instrument to the extent attributed to the fund in the single event that determines the risk capital margin under INSPRU 1.3.43 R.
- 31/12/2006
INSPRU 1.3.7A
See Notes
Future internal transfers from a with-profits fund are included in the realistic value of liabilities (see INSPRU 1.3.105 R, INSPRU 1.3.119 R, INSPRU 1.3.128 R and INSPRU 1.3.165 R). INSPRU 1.1.27 R ensures that sufficient assets are maintained in a with-profits fund to meet those future internal transfers. In calculating the WPICC, the economic value to the firm of those future transfers in the most adverse scenario required in calculating the risk capital margin (see INSPRU 1.3.43 R) should be recognised. In the case of internal transfers to a non-profit fund in respect of expense-related charges, those transfers may only be recognised to the extent that those cash flows have not already been taken into account in calculating the firm'scapital resources or technical provisions. In effect, the future asset of the shareholders or another of the firm's funds is available to offset the corresponding liability of the with-profits fund and should, therefore, subject to the limitation in INSPRU 1.3.7R (2)(b)(iii), be treated as capital arising from that fund which is available to reduce the amount of the WPICC.
- 31/12/2006
INSPRU 1.3.8
See Notes
Subordinated debt which is subordinated to policyholder interests (see GENPRU 2.2.271 R) is an example of the sort of capital instrument that may give rise to a component of the WPICC under INSPRU 1.3.7R (3). Such instruments are treated as capital under GENPRU 2.2, subject to the requirements of GENPRU 2.2.271 R. Under realistic reserving the capital instrument is valued as a realistic liability (INSPRU 1.3.40 R) and in calculating the risk capital margin such an instrument would be valued at its realistic value in the single event outlined in INSPRU 1.3.43 R (see also INSPRU 1.3.162 R). Overall, the effect of GENPRU 2.2, INSPRU 1.3.7R (3) and INSPRU 1.3.43 R is to enable a firm that obtains subordinated debt to benefit from additional capital resources equal to the face amount of that debt.
- 31/12/2006
INSPRU 1.3.9
See Notes
SUP 4 (Actuaries) sets out the role and responsibilities of the actuarial function and of the with-profits actuary.
(1) As part of his duties under SUP 4.3.13 R, the actuary appointed by the firm to perform the actuarial function must calculate the firm'smathematical reserves and, in the context of the calculation of the with-profits insurance capital component, must also:
(a) advise the firm's governing body on the methods and assumptions to be used in the calculation of the firm's with-profits insurance capital component;
(b) perform that calculation in accordance with the methods and assumptions determined by the firm'sgoverning body; and
(2) As part of his duties under SUP 4.3.16G, the with-profits actuary must advise the firm'sgoverning body on the discretion exercised by the firm. In the context of the calculation of the with-profits insurance capital component, the with-profits actuary must also advise the firm'sgoverning body as to whether the methods and assumptions (including the allowance for management actions) used for that calculation are consistent with the firm'sPrinciples and Practices of Financial Management (PPFM - see
COBS 20.3
) and with its regulatory duty to treat its customers fairly.
- 01/11/2007
General
Definitions
INSPRU 1.3.10
See Notes
In this section, real estate means an interest in land, buildings or other immovable property.
- 31/12/2006
INSPRU 1.3.11
See Notes
In this section, the long-term gilt yield is the annualised equivalent of the yield on the 15-year index for United Kingdom Government fixed-interest securities jointly compiled by the Financial Times, the Institute of Actuaries and the Faculty of Actuaries.
- 31/12/2006
INSPRU 1.3.12
See Notes
- 31/12/2006
INSPRU 1.3.13
See Notes
Unless the context otherwise requires, all references (however expressed) in this section to realistic liabilities, or to liabilities which are included in the calculation of realistic liabilities, include discretionary benefits payable by the firm in accordance with the firm's regulatory duty to treat its customers fairly.
- 31/12/2006
INSPRU 1.3.14
See Notes
- 31/12/2006
INSPRU 1.3.15
See Notes
In this section, any reference to the Principles and Practices of Financial Management (PPFM) is a reference to the requirements in
COBS 20.3
(Principles and Practices of Financial Management) for firms to establish, maintain and record the principles and practices of financial management according to which the business of its with-profits funds is conducted.
- 01/11/2007
INSPRU 1.3.16
See Notes
The extent to which a firm requires a separate PPFM for each of its with-profits funds will depend on the firm's circumstances and any relevant representations made by the firm to its with-profits policyholders. In this section, any reference to a firm'sPPFM refers to the PPFM which relate to the with-profits fund or the with-profits insurance contracts in question.
- 31/12/2006
Record keeping
INSPRU 1.3.17
See Notes
A firm must make, and retain for an appropriate period of time, a record of:
(1) the methods and assumptions used in making any calculation required for the purposes of this section (and any subsequent changes) and the reasons for their use; and
(2) any change in practice and the nature of, reasons for, and effect of, any change in approach with respect to those methods and assumptions.
- 31/12/2006
INSPRU 1.3.18
See Notes
SYSC 14.1.53 R requires firms to maintain accounting and other records for a minimum of three years, or longer as appropriate. For the purposes of INSPRU 1.3.17 R, a period of longer than three years will be appropriate for a firm'slong-term insurance business. In determining an appropriate time period, a firm should have regard to:
(2) the nature and term of the firm's long-term insurance contracts; and
(3) any additional provisions or statutory requirements applicable to the firm or its records.
- 31/12/2006
INSPRU 1.3.19
See Notes
A firm must also identify in the record required to be kept by INSPRU 1.3.17 R changes in practice, in particular changes in those items which will or may be significant in relation to the eventual claim values.
- 31/12/2006
INSPRU 1.3.20
See Notes
Some of the changes identified in accordance with INSPRU 1.3.19 R may have to be notified to the firm'spolicyholders in accordance with the firm'sPPFM.
- 31/12/2006
General principles for allocating aggregate amounts
INSPRU 1.3.21
See Notes
Where any calculation is required under this section which:
(2) covers an amount that is otherwise calculated in relation to the firm as a whole;
the firm must make an allocation of that amount as between all of its funds (including funds which are not with-profits funds).- 31/12/2006
INSPRU 1.3.22
See Notes
In any case where:
(2) any calculation is required under this section which:
(a) is to be made in respect of the regulatory excess capital or realistic excess capital for the fund; and
(b) covers an amount that is otherwise calculated or allocated in relation to the fund as a whole;
the firm must make an allocation of the amount in (2)(b) as between the with-profits insurance contracts and non-profit insurance contracts written in the fund.- 31/12/2006
Calculation of regulatory excess capital
INSPRU 1.3.23
See Notes
A firm must calculate the regulatory excess capital for each of its with-profits funds by deducting B from A, where:
(2) B is the sum of:
(b) the long-term insurance capital requirement in respect of the fund's with-profits insurance contracts.
- 31/12/2006
Regulatory value of assets
INSPRU 1.3.24
See Notes
(1) For the purposes of INSPRU 1.3.23R (1), the regulatory value of assets of a with-profits fund is equal to the sum of:
(a) the amount of the fund's long-term admissible assets; and
(b) the amount of any implicit items allocated to that fund;
less an amount, representing any non-profit insurance contracts written in that fund, determined in accordance with (2).(2) Where non-profit insurance contracts are written in a with-profits fund, the amount representing those contracts is the sum of:
(a) the mathematical reserves in respect of the non-profit insurance contracts written in the fund; and
(b) an amount in respect of the non-profit insurance contracts written in the fund which represents an appropriate allocation of the firm's resilience capital requirement, to the extent that it is covered by the fund's long-term admissible assets.
- 31/12/2006
INSPRU 1.3.25
See Notes
For the purpose of determining the value of a fund's long-term admissible assets in accordance with INSPRU 1.3.24R (1)(a), no value is to be attributed to:
(1) debts owed by reinsurers; or
(2)
claims; or
(3) tax recoveries; or
(4) claims against compensation funds;
to the extent already offset in the calculation of technical provisions.- 31/12/2006
INSPRU 1.3.26
See Notes
In making a determination in accordance with INSPRU 1.3.24R (2), a firm must allocate long-term admissible assets of an appropriate nature and term to any non-profit insurance contracts written in the with-profits fund.
- 31/12/2006
INSPRU 1.3.27
See Notes
[intentionally blank]
- 31/12/2006
INSPRU 1.3.28
See Notes
A firm needs to obtain an implicit item waiver from the
FSA
in order to bring in an amount under INSPRU 1.3.24R (1)(b). For guidance on applying for an implicit item waiver in respect of future surpluses relating to with-profits funds see GENPRU 2 Annex 8. The amount of any implicit item allocated to a with-profits fund may be defined in the terms of any waiver granted.
- 31/12/2006
Regulatory value of liabilities
INSPRU 1.3.29
See Notes
For the purposes of INSPRU 1.3.23R (2)(a), the regulatory value of liabilities of a with-profits fund is equal to the sum of:
(1) the mathematical reserves, in respect of the fund's with-profits insurance contracts, including the value of any provisions reflecting bonuses allocated at the actuarial valuation date; and
- 31/12/2006
INSPRU 1.3.30
See Notes
For the purposes of INSPRU 1.3.29R (2), the regulatory current liabilities of a with-profits fund are equal to the sum of the following amounts to the extent that they relate to that fund:
(1) accounting liabilities (including long-term insurance liabilities which have fallen due before the end of the financial year);
(2) liabilities from deposit back arrangements; and
(3) any provision for adverse variations (determined in accordance with INSPRU 3.2.17 R).
- 31/12/2006
INSPRU 1.3.31
See Notes
The amount of regulatory current liabilities for a with-profits fund refers to the sum of the amounts in (1) and (2) in respect of the fund:
as disclosed at lines 49 and 12 respectively of the appropriate Form 14 ('Long-term business liabilities and margins') for that fund as part of the Annual Returns required to be deposited with the FSA under IPRU(INS) rule 9.6R(1).
(1) the amount of 'Total other insurance and non-insurance liabilities'; and
(2) the amount of 'Cash bonuses which had not been paid to policyholders prior to the end of the financial year';
as disclosed at lines 49 and 12 respectively of the appropriate Form 14 ('Long-term business liabilities and margins') for that fund as part of the Annual Returns required to be deposited with the FSA under IPRU(INS) rule 9.6R(1).
- 31/12/2006
Calculation of realistic excess capital
INSPRU 1.3.32
See Notes
A firm must calculate the realistic excess capital for each of its with-profits funds by deducting B from A, where:
(2) B is the sum of:
- 31/12/2006
Realistic value of assets
INSPRU 1.3.33
See Notes
(1) For the purposes of INSPRU 1.3.32R (1), the realistic value of assets of a with-profits fund is the sum of:
(a) the amount of the fund's regulatory value of assets determined in accordance with INSPRU 1.3.24 R, but with no value given to any implicit items and excluding the regulatory value of any shares in a related undertaking which carries on long-term insurance business;
(c) the present value of future profits (or losses) on any non-profit insurance contracts written in the with-profits fund (see INSPRU 1.3.37 R);
(d) the value of any derivative or quasi-derivative held in the fund (see GENPRU 1.3.41 R) to the extent its value is not reflected in (a), (b) or (c);
(e) any amount determined under (2); and
(f) the amount of any prepayments made from the fund.
(2) Where any equity shares held (directly or indirectly) by a firm (A):
(b) have been identified by A under INSPRU 1.3.21 R as long-term insurance assets which are held in the with-profits fund for which the realistic value is to be determined under (1);
the amount required under (1)(e) is the relevant proportion of the value of all B's equity shares as determined in (3).(3) For the purposes of (2):
(a) the relevant proportion is the proportion of the total number of equity shares issued by B which are held (directly or indirectly) by A;
(b) the value of all B's equity shares must be taken as D deducted from C, where C is equal to the sum of:
(i) the shareholder net assets of B;
(ii) any surplus assets in the non-profit funds of B;
(iii) any additional amount arising from the present value of future profits (or losses) on any non-profit insurance contracts written by B (calculated on a basis consistent with INSPRU 1.3.37 R), excluding any amount arising from business that is written in a with-profits fund; and
(iv) where B has any with-profits funds, the present value of projected future transfers out of those funds to shareholder funds of B;
and D is equal to the sum of:(v) the long-term insurance capital requirement in respect of any non-profit insurance contracts written in a non-profit fund of B;
(vi) where B is a regulatory basis only life firm, the amount of the resilience capital requirement in respect of any non-profit insurance contracts written in a non-profit fund of B;
(vii) any part of the with-profits insurance capital component of B, or of B's long-term insurance capital requirement, where B is a regulatory basis only life firm, or resilience capital requirement in respect of B's with-profits insurance contracts, that is not covered from the assets of the with-profits fund from which it arises after deducting from those assets the amount calculated under (iv); and
(viii) any assets of B that back its regulatory capital requirements and that are valued in (iii) in the calculation of the present value of future profits of non-profit insurance business written by B.
(4) The methods and assumptions used in the calculations under (3)(b)(iii) and (iv) must follow a consistent approach to that set out in INSPRU 1.3.37 R.
- 31/12/2006
INSPRU 1.3.34
See Notes
In INSPRU 1.3.33R (1)(d), where a derivative or quasi-derivative has a positive asset value, credit should be given within the realistic value of assets. If the derivative or quasi-derivative has a negative asset value it should be valued within realistic liabilities as an element of realistic current liabilities (see INSPRU 1.3.40R (3)).
- 31/12/2006
INSPRU 1.3.35
See Notes
Where a firm identifies shares in a related undertaking which carries on long-term insurance business as shares held in one of its with-profits funds, INSPRU 1.3.33R (1)(e), INSPRU 1.3.33R (2) and INSPRU 1.3.33R (3) bring in a realistic valuation of the related undertaking equal to its net assets plus the present value of future profits, less its regulatory capital requirements (see INSPRU 1.3.33R (3)(b)(v), INSPRU 1.3.33R (3)(b)(vi) and INSPRU 1.3.33R (3)(b)(vii)). Where the related undertaking has taken the present value of future profits arising from its contracts into consideration in covering its regulatory capital requirements (for example, its risk capital margin, under INSPRU 1.3.45R (2)(c), INSPRU 1.3.33R (3)(b)(iii) requires a firm to exclude those future profits in valuing the related undertaking. The subtraction of the capital requirements in the calculation provides a straightforward method of allowing for the change in the related undertaking's value in stress conditions, as the value of the related undertaking is not subject to the realistic stress tests of the risk capital margin. In calculating the present value of future profits on non-profit insurance business written in the related undertaking under INSPRU 1.3.33R (3)(b)(iii), a firm may value the release of capital requirements as the business runs off (see INSPRU 1.3.38 G). INSPRU 1.3.33R (3)(b)(viii) ensures that any such capital is not double-counted.
- 31/12/2006
INSPRU 1.3.36
See Notes
Excess admissible assets of a with-profits fund means admissible assets which exceed any of the percentage limits referred to in INSPRU 2.1.22 R.
- 31/12/2006
INSPRU 1.3.37
See Notes
A firm must calculate the present value of future profits (or losses) on non-profit insurance contracts written in the with-profits fund using methodology and assumptions which:
(1) are based on current estimates of future experience;
(2) involve reasonable (but not excessively prudent) adjustments to reflect risk and uncertainty;
(3) allow for a market-consistent valuation of any guarantees or options within the contracts valued;
(4) are derived from current market yields, having regard to International Financial Reporting Standard 4: Insurance Contracts, as if it were being applied to determine the value under that standard for the first time;
(5) have regard to generally accepted actuarial practice and generally accepted industry standards appropriate for firms carrying on long-term insurance business;
(6) are consistent with the allocation, made in accordance with INSPRU 1.3.22 R, of any aggregate amounts as between the with-profits insurance contracts and the non-profit insurance contracts written in the fund;
(7) allow for any tax that would be payable out of the with-profits fund in respect of the contracts valued; and
(8) are consistent with the allocation, made in accordance with INSPRU 1.3.26 R, of long-term admissible assets as between the with-profits insurance contracts and any non-profit insurance contracts written in the fund.
- 31/12/2006
INSPRU 1.3.38
See Notes
In calculating the present value of future profits (or losses) for non-profit insurance business required by INSPRU 1.3.33R (1)(c), to the extent that the long-term insurance capital requirement is covered by the with-profits fund'slong-term admissible assets, a firm may take into consideration any release of this item as the relevant policies go off the books.
- 31/12/2006
INSPRU 1.3.39
See Notes
Annuities do not typically fall to be valued on a market-consistent basis under INSPRU 1.3.37R (3) as they are not "options and guarantees" as defined for accounting purposes. This is because they do not have "time value" in the option-pricing meaning of that term. However where, atypically, annuities do fall to be valued on a market-consistent basis under INSPRU 1.3.37R (3), the discount rate used should be appropriate to the characteristics of the liability, including its illiquidity. The appropriate interest rate, therefore, would not typically be the risk-free rate. Where illiquid assets are used to closely match similar illiquid liabilities, as could be the case in annuities business, it would be appropriate to look at the liquidity premium that is implicit in the market value of the assets as a proxy for the liquidity premium that should be included in a market consistent valuation of the liabilities. However, care should be exercised in doing this. Assets and liabilities are rarely perfectly matched and an appropriate margin needs to be included in the valuation to cover the risk of unexpected mismatch.
- 31/12/2006
INSPRU 1.3.39A
See Notes
In view of INSPRU 1.3.39 G, it is likely that the discount rate to be applied to the market-consistent valuation of those annuities that fall within the scope of INSPRU 1.3.37R (3) would not be significantly different from that which applies to other annuities (to which a discount rate based on the return on the matching assets less an allowance for risk which is reasonable but not excessively prudent, in accordance with INSPRU 1.3.37R (2), might be applied).
- 31/12/2006
INSPRU 1.3.39B
See Notes
In determining current market yields for the purpose of INSPRU 1.3.37R (4), a firm is required to have regard to IFRS 4 as if it were being applied to determine the value under that standard for the first time, that is, without reference to existing practices. Paragraph 27 of the standard is likely to be of particular relevance. In general, afirm should only include an allowance for future investment margins if its assumptions are limited to no more than a risk-free rate and the discount rate is set consistently. However, this does not preclude a firm from using a replicating portfolio of assets to determine the discount rate for the liability with suitable adjustments for differences in their characteristics (for the example of annuity business, see INSPRU 1.3.39 G). In setting assumptions for future investment returns, a firm should also consider sections BC134 to BC144 of the Basis for Conclusions in IFRS 4.
- 31/12/2006
Realistic value of liabilities: general
INSPRU 1.3.40
See Notes
For the purposes of INSPRU 1.3.32R (2)(a), the realistic value of liabilities of a with-profits fund is the sum of:
(1) the with-profits benefits reserve of the fund;
(2) the future policy related liabilities of the fund; and
(3) the realistic current liabilities of the fund.
- 31/12/2006
INSPRU 1.3.41
See Notes
All liabilities arising under, or in connection with, with-profits insurance contracts written in the fund should be included in the realistic value of liabilities referred to in INSPRU 1.3.40 R, including those in respect of guarantees and the value of options.
- 31/12/2006
INSPRU 1.3.42
See Notes
Detailed rules and guidance for the calculation of the three elements referred to in INSPRU 1.3.40 R are contained below in this section:
- 31/12/2006
Risk capital margin
INSPRU 1.3.43
See Notes
(1) A firm must calculate a risk capital margin for each of its with-profits funds in accordance with (2) to (6).
(2) The firm must identify relevant assets (INSPRU 1.3.45 R) which, in the most adverse scenario, will have a value (INSPRU 1.3.46 R) which is equal to the realistic value of liabilities of the fund under that scenario.
(3) The most adverse scenario means the single event comprising that combination of the scenarios in INSPRU 1.3.44 R which gives rise to the largest positive value that results from deducting B from A, where:
(a) A is the value of relevant assets which will produce the result described in (2); and
(b) B is the realistic value of liabilities of the fund.
(4) The risk capital margin for the fund is the result of deducting C from A, where C is the sum of:
(a) B; and
(b) any amount included within relevant assets under INSPRU 1.3.45R (2)(c).
(5) In calculating the value of relevant assets for the purpose of determining the most adverse scenario in (3), a firm must not adjust the valuation of any asset taken into consideration under INSPRU 1.3.33R (1)(e) (related undertakings carrying on long-term insurance business) or INSPRU 1.3.45R (2)(c) (present value of future profits arising from insurance contracts written outside the with-profits fund).
(6) In calculating the realistic value of liabilities of a fund under any scenario, a firm is not required to adjust the best estimate provision made under INSPRU 1.3.190R (1) in respect of a defined benefits pension scheme in accordance with INSPRU 1.3.191 R .
- 31/12/2006
INSPRU 1.3.44
See Notes
For the purposes of INSPRU 1.3.43R (3), the scenarios are one scenario selected from each of the following:
(1) in respect of UK and other assets within INSPRU 1.3.62R (1)(a):
(b) the range of market risk scenarios identified in accordance with INSPRU 1.3.68R (2) (real estate); and
(c) the range of market risk scenarios identified in accordance with INSPRU 1.3.68R (3) (fixed interest securities);
(2) in respect of non-UK assets within INSPRU 1.3.62R (1)(b):
(b) the range of market risk scenarios identified in accordance with INSPRU 1.3.73R (2) (real estate); and
(c) the range of market risk scenarios identified in accordance with INSPRU 1.3.73R (3) (fixed interest securities);
(3) the range of credit risk scenarios identified in accordance with INSPRU 1.3.78R (1) (bond or debt items);
(4) the range of credit risk scenarios identified in accordance with INSPRU 1.3.78R (2) (reinsurance items or analogous non-reinsurance financing agreements);
(5) the range of credit risk scenarios identified in accordance with INSPRU 1.3.78R (3) (other items including derivatives and quasi-derivatives); and
(6) the persistency risk scenario identified in accordance with INSPRU 1.3.100 R.
- 31/12/2006
INSPRU 1.3.45
See Notes
(1) In INSPRU 1.3.43 R, in relation to a with-profits fund, the relevant assets means a range of assets which meets the following conditions:
(a) the range is selected on a basis which is consistent with the firm's regulatory duty to treat its customers fairly;
(b) the range must include assets from within the with-profits fund the value of which is greater than or equal to the realistic value of liabilities of the fund;
(c) the range is selected in accordance with (2); and
(d) no asset of the firm may be allocated to the range of assets identified in respect of more than one with-profits fund.
(2) The range of assets must be selected from the assets specified in (a) to (c), in the order specified:
(a) assets that have a realistic value under INSPRU 1.3.33 R;
(b) where a firm has selected all the assets within (a), any admissible assets that are not identified as held within the with-profits fund; and
(c) where a firm has selected all the assets within (a) and (b), any additional assets.
(3) But a firm must not bring any amounts into account under (2)(b) or (2)(c) in respect of any with-profits fund if that would result in the firm exceeding its overall maximum limit (determined according to whether the firm has only one with-profits fund or more than one such fund).
(4) A firm exceeds its overall maximum limit for amounts brought into account under (2)(b) where:
(a) in the case of a firm with a single with-profits fund, the amount the firm brings into account in respect of that fund;
(b) in the case of a firm with two or more with-profits funds, the aggregate of the amounts the firm brings into account in respect of each of those funds;
exceeds the sum of the firm's shareholder net assets and the surplus assets in the firm'snon-profits funds, less any regulatory capital requirements in respect of business written outside its with-profits funds.(5) A firm exceeds its overall maximum limit for amounts brought into account under (2)(c) where:
(a) in the case of a firm with a single with-profits fund, the amount the firm brings into account in respect of that fund;
(b) in the case of a firm with two or more with-profits funds, the aggregate of the amounts the firm brings into account in respect of each of those funds;
exceeds 50% of the present value of future profits arising from insurance contracts written by the firm outside its with-profits funds.- 31/12/2006
INSPRU 1.3.46
See Notes
In valuing the relevant assets identified under INSPRU 1.3.43R (2), a firm must use the same methods of valuation as in INSPRU 1.3.33 R, except that:
(1) the value of any admissible assets not identified as held within the with-profits fund (INSPRU 1.3.45R (2)(b)) must be as determined under GENPRU 1.3; and
(2) the value of any asset which forms part of the range of assets as a result of INSPRU 1.3.45R (2)(c) must be determined on a basis consistent with that described in INSPRU 1.3.37 R.
- 31/12/2006
INSPRU 1.3.47
See Notes
The purpose of the risk capital margin for a with-profits fund is to cover adverse deviation from:
arising from the effects of market risk, credit risk and persistency risk. Other risks are not explicitly addressed by the risk capital margin.
(1) the fund's realistic value of liabilities;
(2) the value of assets identified, in accordance with INSPRU 1.3.43R (2), to cover the amount in (1) and the fund's risk capital margin;
arising from the effects of market risk, credit risk and persistency risk. Other risks are not explicitly addressed by the risk capital margin.
- 31/12/2006
INSPRU 1.3.48
See Notes
The amount of the risk capital margin calculated by the firm for a with-profits fund will depend on the firm's choice of assets held to cover the fund's realistic value of liabilities and the margin. INSPRU 1.3.43 R requires the relevant assets to be sufficient, in the most adverse scenario, to cover the realistic value of liabilities in the event that scenario was to arise.
- 31/12/2006
INSPRU 1.3.49
See Notes
INSPRU 1.3.45R (2)(c) allows firms to bring the economic value of non-profit insurance business written outside a with-profits fund into the assets available to cover the risk capital margin. To place a prudent limit on the amount of future profits taken into consideration a maximum of 50% of the present value of non-profit insurance business can be taken into the calculation (INSPRU 1.3.45R (5)). Where a contract is written in a non-profit fund but the assets arising from that contract are invested in a with-profits fund which is subject to charges for investment management or other services which benefit the non-profit fund, such charges can be taken into consideration in calculating the present value of future profits of the non-profit insurance business. Where a proportion of the present value of future profits on non-profit insurance business written outside a with-profits fund is brought in as an asset, no stress tests apply to this asset (see INSPRU 1.3.43R (5)) as the amount taken into consideration is limited to 50% of the total present value.
- 31/12/2006
INSPRU 1.3.50
See Notes
A firm using a stochastic approach in INSPRU 1.3.169R (1) should keep recalibration in the post-stress scenarios to the minimum required to reflect any change in the underlying risk-free yields. A firm using the market costs of hedging approach, as in INSPRU 1.3.169R (2), may assume in estimating the market cost of hedging in the post-stress scenarios that market volatilities are unchanged.
- 31/12/2006
INSPRU 1.3.51
See Notes
In the scenario tests set out in INSPRU 1.3.62 R to INSPRU 1.3.103 G, firms are required to test for worst case scenarios across a range of assumptions. The tests are, with the exception of the credit risk test, two-sided, requiring both increases and decreases in the assumptions. The
FSA
does not expect a firm to investigate every possible stress, but a firm should be able to demonstrate that it is reasonable to assume that it has successfully identified the single event that determines the risk capital margin for the firm's business, as required by INSPRU 1.3.43R (3).
- 31/12/2006
INSPRU 1.3.51A
See Notes
In the scenario tests set out in INSPRU 1.3.62 R to INSPRU 1.3.103 G, a firm is required to assess the changed value of its assets and liabilities in the economic conditions of the most adverse scenario. A firm is required to assess the changed value of each relevant asset (as defined in INSPRU 1.3.45 R), notwithstanding any uncertainty about the appropriate valuation basis for that asset. In valuing an asset in the most adverse scenario, a firm should have regard to the economic substance of the asset, rather than its legal form, and assess its value accordingly. Consider, for example, a convertible bond that is close to its conversion date and where the conversion option has value. The value of the convertible bond in the most adverse scenario is likely to be sensitive primarily to equity market scenarios and to a lesser extent to interest rate scenarios. The firm should value the asset according to its expected market value in the economic conditions underlying the most adverse scenario.
- 31/12/2006
Management actions
INSPRU 1.3.52
See Notes
In calculating the risk capital margin for a with-profits fund, a firm may reflect, in its projections of the value of assets and liabilities under the scenarios in INSPRU 1.3.44 R, the firm's prospective management actions (INSPRU 1.3.53 R).
- 31/12/2006
INSPRU 1.3.53
See Notes
- 31/12/2006
INSPRU 1.3.54
See Notes
The management actions in INSPRU 1.3.53 R may include, but are not limited to, changes in future bonus rates, reductions in surrender values, changes in asset dispositions (taking into account the associated selling costs) and changes in the amount of charges deducted from asset shares for with-profits insurance contracts.
- 31/12/2006
INSPRU 1.3.55
See Notes
A firm should use reasonable assumptions in incorporating management actions into its projections of claims such that the mitigating effects of the management actions are not overstated. In modelling management actions, a firm should ensure consistency with its PPFM and take into account its regulatory duty to treat its customers fairly.
- 31/12/2006
INSPRU 1.3.56
See Notes
In accordance with INSPRU 1.3.17 R, a firm should make and retain a record of the approach used, in particular the nature and effect of anticipated management actions (including, where practicable, the amount by which the actions would serve to reduce the projected values of assets and liabilities).
- 31/12/2006
INSPRU 1.3.57
See Notes
A firm which deducts charges in respect of any adverse experience or cost of capital to with-profits insurance contracts should keep a record under INSPRU 1.3.17 R of the amount of any such charges to its customers and of how it has ensured their fair treatment.
- 31/12/2006
Policyholder actions
INSPRU 1.3.58
See Notes
In calculating the risk capital margin for a with-profits fund, a firm must reflect, in its projections of the value of assets and liabilities under the scenarios in INSPRU 1.3.44 R, a realistic assessment of the actions of its policyholders (see INSPRU 1.3.59 R).
- 31/12/2006
INSPRU 1.3.59
See Notes
Policyholder actions refer to the foreseeable actions that would be taken by the firm'spolicyholders, taking into account:
(1) the experience of the firm in the past; and
(2) the changes that may occur in the future if options and guarantees become more valuable to policyholders than in the past.
- 31/12/2006
INSPRU 1.3.60
See Notes
A firm should use realistic assumptions in incorporating policyholder actions into its projections of claims such that any mitigating effects of policyholder actions are not overstated and any exacerbating effects of policyholder actions are not understated. In modelling policyholder actions, a firm should ensure consistency with its PPFM and take into account its regulatory duty to treat its customers fairly in determining the options and information that would be available to policyholders.
- 31/12/2006
INSPRU 1.3.61
See Notes
In calculating the persistency scenario in INSPRU 1.3.100 R, a firm needs to make assumptions regarding the future termination rates exhibited by policies, at points described in particular in INSPRU 1.3.101 R. Such assumptions should be realistic. However, the firm must have regard to the economic scenarios being projected. For example, if the value of an option became significantly greater in a future scenario than in the recent past, then the behaviour of policyholders in taking up the option is likely to differ in this future scenario compared with the recent past.
- 31/12/2006
Market risk scenario
INSPRU 1.3.62
See Notes
(1) For the purposes of INSPRU 1.3.44 R, the ranges of market risk scenarios that a firm must assume are:
(a) for exposures to UK assets and for exposures to non-UK assets within (2), the ranges of scenarios set out in INSPRU 1.3.68 R; and
(2) The exposures to non-UK assets within this paragraph are:
(a) exposures which do not arise from a significant territory outside the United Kingdom (INSPRU 1.3.63 R); or
(b) exposures which do arise from a significant territory outside the United Kingdom but which represent less than 0.5% of the realistic value of assets of the with-profits fund, measured by market value.
- 31/12/2006
INSPRU 1.3.63
See Notes
For the purposes of this section in relation to a with-profits fund, a significant territory is any country or territory in which more than 2.5% of the fund's realistic value of assets (by market value) are invested.
- 31/12/2006
INSPRU 1.3.63A
See Notes
Guidance on how a firm should determine where particular assets are invested is provided in INSPRU 3.1.13B G.
- 31/12/2006
INSPRU 1.3.64
See Notes
In determining its most adverse scenario, a firm applying INSPRU 1.3.68 R and INSPRU 1.3.73 R should consider separately possible movements in UK and non-UK markets. It should not assume that market prices in different markets move in a similar way at the same time. A firm should also allow for the effect of the other components of the single event comprising the combination of scenarios applicable under INSPRU 1.3.43 R.
- 31/12/2006
INSPRU 1.3.65
See Notes
In relation to the market risk scenarios in INSPRU 1.3.68 R and INSPRU 1.3.73 R, the effect of INSPRU 1.3.52 R and INSPRU 1.3.58 R is that a firm may reflect management actions and must make a realistic assessment of policyholder actions in projecting the assets and liabilities in its calculation of the risk capital margin for a with-profits fund within the firm.
- 31/12/2006
INSPRU 1.3.67
See Notes
The relevant assets identified under INSPRU 1.3.43R (2) to calculate the risk capital margin may, in certain circumstances, include up to 50% of the present value of future profits arising from insurance contracts written by the firm outside its with-profits funds. INSPRU 1.3.43R (5) exempts such an asset from the market risk stress tests.
- 31/12/2006
Market risk scenario for exposures to UK assets and certain non-UK assets
INSPRU 1.3.68
See Notes
The range of market risk scenarios referred to in INSPRU 1.3.62R (1)(a) is:
(1) a rise or fall in the market value of equities of up to the greater of:
(a) 10%; and
(2) a rise or fall in real estate values of up to 12.5%; and
(3) a rise or fall in yields on all fixed interest securities of up to 17.5% of the long-term gilt yield.
- 31/12/2006
INSPRU 1.3.69
See Notes
For the purposes of INSPRU 1.3.68 R, a firm must:
(1) assume that yields on equities and real estate remain unchanged from those applicable at market levels before applying each scenario; and
(2) model a rise or fall in equity, real estate and fixed interest markets as if the movement occurred instantaneously.
- 31/12/2006
INSPRU 1.3.70
See Notes
For example, where the long-term gilt yield is 6%, a change of 17.5% in that yield would amount to a change of 1.05 percentage points. For the purpose of the scenarios in INSPRU 1.3.68R (3), the firm would assume a fall or rise of up to 1.05 percentage points in yields on all fixed interest securities.
- 31/12/2006
Equity market adjustment ratio
INSPRU 1.3.71
See Notes
The equity market adjustment ratio referred to in INSPRU 1.3.68R (1)(b) is:
(1) if the ratio calculated in (a) and (b) lies between 80% and 100%, the result of 100% less the ratio (expressed as a percentage) of:
(a) the current value of the FTSE Actuaries All Share Index; to
(b) the average value of the FTSE Actuaries All Share Index over the preceding 90 calendar days;
(2) 0%, if the ratio calculated in (1)(a) and (b) is more than 100%; and
(3) 20%, if the ratio calculated in (1)(a) and (b) is less than 80%.
- 31/12/2006
INSPRU 1.3.72
See Notes
In INSPRU 1.3.71R (1)(b), the average value of the FTSE Actuaries All Share Index over any period of 90 calendar days means the arithmetic mean based on levels at the close of business on each of the days in that period on which the London Stock Exchange was open for trading.
- 31/12/2006
Market risk scenario for exposures to other non-UK assets
INSPRU 1.3.73
See Notes
The range of market risk scenarios referred to in INSPRU 1.3.62R (1)(b) is:
(1) an appropriate rise or fall in the market value of equities listed in that territory (INSPRU 1.3.75 G), which must be at least equal to the percentage determined in INSPRU 1.3.68R (1);
(2) a rise or fall in real estate values in that territory of up to 12.5%; and
(3) a rise or fall in yields on all fixed interest securities of up to 17.5% of the nearest equivalent (in respect of the method of calculation) of the long-term gilt yield.
- 31/12/2006
INSPRU 1.3.74
See Notes
For the purposes of INSPRU 1.3.73 R, a firm must:
(1) assume that yields on equities and real estate remain unchanged from those applicable at market levels before applying each scenario; and
(2) model a rise or fall in equity, real estate and fixed interest markets as if the movement occurred instantaneously.
- 31/12/2006
INSPRU 1.3.75
See Notes
For the purposes of INSPRU 1.3.73R (1), an appropriate rise or fall in the market value of equities to which a firm has exposure in a significant territory must be determined having regard to:
(1) an appropriate equity market index (or indices) for that territory; and
(2) the historical volatility of the equity market index (or indices) selected in (1).
- 31/12/2006
INSPRU 1.3.76
See Notes
For the purpose of INSPRU 1.3.75G (1), an appropriate equity market index (or indices) for a territory should be such that:
(1) the constituents of the index (or indices) are reasonably representative of the nature of the equities to which the firm is exposed in that territory which are included in the relevant assets identified in accordance with INSPRU 1.3.43R (2); and
(2) the frequency of, and historical data relating to, published values of the index (or indices) are sufficient to enable an average value(s) and historical volatility of the index (or indices) to be calculated over at least the three preceding financial years.
- 31/12/2006
Credit risk scenarios
General
INSPRU 1.3.77
See Notes
(1) The purpose of the credit risk scenarios in INSPRU 1.3.78 R to INSPRU 1.3.99 G is to show the financial effect of specified changes in the general credit risk environment on a firm's direct (counterparty) and indirect credit risk exposures. The scenarios apply in relation to corporate bonds, debt, reinsurance and other exposures, including derivatives and quasi-derivatives. This is thus quite separate from any reference to allowance for credit risk in INSPRU 3.1.
(2) In the case of bonds and debts, the scenarios are described in terms of an assumed credit rating dependent on the widening of credit spreads - changes in bond and debt credit spreads will have a direct impact on the value of bond and debt assets. Credit ratings are intended to give an indication of the security of the income and capital payments for a bond - the higher the credit rating, the more secure the payments. The reaction of credit spreads to developments in markets for credit risk varies by credit rating and so the scenarios to be assumed for bonds and debts depend on their ratings. The credit spreads on bonds and debt represent compensation to the investor for the risk of default and downgrade, but also for illiquidity, price volatility and the uncertainty of recovery rates relative to government bonds. Credit spreads on bonds tend to widen during an economic recession to reflect the increased expectations that corporate borrowers may default on their obligations or be subject to rating downgrades.
(3) Changes in bond and debt credit spreads will also be indicative of a change in direct counterparty exposure in relation to reinsurance and other exposures including derivatives and quasi-derivatives.
(4) In addition, changes in bond and debt credit spreads may indirectly impact on credit exposures, for example by affecting the payments anticipated under credit derivative instruments.
(5) A firm will also need to allow for the effect of other components of the single event comprising the combination of scenarios applicable under INSPRU 1.3.43 R in assessing exposure to credit risk. For example, in the case of an equity put option and a fall in equity market values, the resulting increase in the level of exposure to the firm'scounterparty for the option combined with a change in the quality of the counterparty should be allowed for.
- 31/12/2006
INSPRU 1.3.78
See Notes
For the purposes of INSPRU 1.3.44 R, the range of credit risk scenarios that a firm must assume is:
(1) changes in value resulting from an increase in credit spreads by an amount of up to the spread stress determined according to INSPRU 1.3.84 R in respect of any bond or debt item;
(2) changes in value determined according to INSPRU 1.3.94 R in respect of any reinsurance item or any analogous non-reinsurance financing agreement item; and
(3) changes in value determined according to INSPRU 1.3.98 R for any other item (including any derivative or quasi-derivative).
- 31/12/2006
INSPRU 1.3.79
See Notes
For the purposes of INSPRU 1.3.78 R, a firm must make appropriate allowance for any loss mitigation techniques to the extent that they are loss mitigation techniques relied on for the purpose of INSPRU 2.1.8 R in accordance with INSPRU 2.1.16 R and INSPRU 2.1.18 R.
- 31/12/2006
INSPRU 1.3.80
See Notes
The change in asset or liability values to be determined in relation to a credit risk scenario for the purposes of INSPRU 1.3.43 R and INSPRU 1.3.44 R is the change in value which would arise on the occurrence of the relevant credit risk scenario as a result of bond, debt, reinsurance or other exposures whether or not there is a direct counterparty exposure.
- 31/12/2006
INSPRU 1.3.81
See Notes
Where a bond or a debt item or reinsurance asset is currently in default, it may be ignored by a firm for the purpose of applying INSPRU 1.3.78 R.
- 31/12/2006
INSPRU 1.3.82
See Notes
Where a bond or a debt item or a reinsurance asset is currently in default and has been specifically provisioned, in accordance with relevant accounting standards, a firm is not required to increase the existing default provisions to reflect a worsening of recovery rates.
- 31/12/2006
INSPRU 1.3.83
See Notes
Where the credit risk scenarios in INSPRU 1.3.78 R to INSPRU 1.3.99 G require a firm to assume a change in current credit spread, or a direct change in market value, the firm must not change the risk-free yields used to discount future cash flows in calculating the revised realistic value of liabilities and realistic value of assets (INSPRU 1.3.43R (2)) resulting from those credit risk scenarios.
- 31/12/2006
Spread stresses to be assumed for bonds and debt
INSPRU 1.3.84
See Notes
(1) In INSPRU 1.3.78R (1) the spread stress which a firm must assume for any bond or debt item is:
(a) for any bond or debt item issued or guaranteed by an organisation which is in accordance with INSPRU 1.3.87 R a credit risk scenario exempt organisation in respect of that item, zero basis points; and
(b) for any other bond or debt item:
(i) Y if the credit rating description of that other bond or debt item determined by reference to INSPRU 1.3.89 R is not "Highly speculative or very vulnerable"; and
(ii) otherwise the larger of Y and Z.
(2) For the purpose of (1)(b):
(a) Y is the product of the spread factor for that bond or debt item and the square root of S, where:
(i) the spread factor for a bond or debt item is the spread factor shown in the final column of Table INSPRU 1.3.90 R, in the row of that Table corresponding to the credit rating description of the bond or debt item determined for the purpose of this rule by reference to INSPRU 1.3.89 R; and
(ii) subject to (3), S is the current credit spread for a bond or debt item, expressed as a number of basis points, which the firm must determine as the current yield on that bond or debt item in excess of the current gross redemption yield on the government bond most similar to that bond or debt item in terms of currency of denomination and equivalent term; and
(b) Z is the change in credit spread expressed as a number of basis points that would result in the current market value of the bond or debt falling by 5%.
(3) Where, for the purposes of (2)(a)(ii), there is no suitable government bond, the firm must use its best estimate of the gross redemption yield that would apply for a notional government bond similar to the bond or debt item in terms of currency of denomination and equivalent term.
- 31/12/2006
INSPRU 1.3.85
See Notes
For the purpose of INSPRU 1.3.84R (1)(a), a guarantee must be direct, explicit, unconditional and irrevocable.
- 31/12/2006
INSPRU 1.3.86
See Notes
(1) As an example, a bond item has the credit rating description "exceptional or extremely strong" and currently yields 49 basis points in excess of the most similar government bond. The spread factor for that bond item is 3.00 by reference to Table INSPRU 1.3.90 R. Since S is 49, the square root of S is 7 and the spread stress for that item is 3 times 7, that is, 21 basis points. The firm must consider the impact of an increase in spreads by up to 21 basis points for that item.
(2) As a further example, a bond item has the credit rating description "highly speculative or very vulnerable". For this bond, S is 400, being the current spread for that bond expressed as a number of basis points. The spread factor for the bond is 24.00. So the firm must consider the impact of an increase in spreads by up to 24.00 times 20 i.e. 480 basis points for that item. The bond is however of short duration and the reduction in market value resulting from an additional spread of 480 basis points is less than 5 per cent of its current market value. A 5 per cent reduction in its market value would result from a spread widening of 525 basis points. The firm must consider the impact of an increase in spreads by up to 525 basis points for that item by virtue of its credit rating description.
(3) The calculation of the credit spread on commercial floating rate notes warrants particular consideration. Suppose, for example, that a notional floating rate note guaranteed by the UK government would have a market consistent price of X. This price can be estimated based on an assumed distribution of future payments under the floating rate note, and the current forward gilt curve. Suppose further that the market price of the commercial floating rate note is Y, where Y is less than X. A firm could calculate what parallel upward shift in the forward gilt curve would result in the notional government-backed floating rate note having a market price of Y for an unchanged assumed distribution of future payments. The size of the resulting shift could then be taken as the credit spread on the commercial floating rate note.
(4) In arriving at the estimated gross redemption yield in INSPRU 1.3.84R (3), the firm may have regard to any appropriate swap rates for the currency of denomination of the bond or debt item, adjusted to take appropriate account of observed differences between swap rates and the yields on government bonds.
- 31/12/2006
INSPRU 1.3.87
See Notes
For the purposes of this section:
(1) an organisation is a credit risk scenario exempt organisation in respect of an item if the organisation is:
(a) the European Central Bank; or
(b) any central government or central bank which, in relation to that item, satisfies the conditions in (2); or
(c) a multilateral development bank which is listed in (3); or
(d) an international organisation which is listed in (4);
(2) the conditions in (1)(b) are that, for any claim against the central government or central bank denominated in the currency in which the item is denominated:
(a) a credit rating is available from at least one listed rating agency nominated in accordance with INSPRU 1.3.92 R; and
(b) the credit rating description in the first column of Table INSPRU 1.3.90 R corresponding to the lowest such credit rating is either "exceptionally or extremely strong" or "very strong";
(3) for the purposes of (1)(c) the listed multilateral development banks are:
(a) the International Bank for Reconstruction and Development;
(b) the International Finance Corporation;
(c) the Inter-American Development Bank;
(d) the Asian Development Bank;
(e) the African Development Bank;
(f) the Council of Europe Development Bank;
(g) the Nordic Investment Bank;
(h) the Caribbean Development Bank;
(i) the European Bank for Reconstruction and Development;
(j) the European Investment Bank;
(k) the European Investment Fund; and
(l) the Multilateral Investment Guarantee Agency;
(4) for the purposes of (1)(d) the listed international organisations are:
(a) the
EU
;
(b) the International Monetary Fund; and
(c) the Bank for International Settlements.
- 01/12/2009
INSPRU 1.3.88
See Notes
Under INSPRU 1.3.87R (2), a firm needs to take account of the currency in which the claim is denominated when it is considering claims on or guaranteed by a central government or central bank. It is possible, for example, that a given central bank would be a credit risk scenario exempt organisation in respect of claims on it denominated in its domestic currency, while not being a credit risk scenario exempt organisation in respect of claims on it denominated in a currency other than its domestic currency - the central government or central bank may have been assigned different credit assessments depending on the currency in which the claim on it is denominated.
- 31/12/2006
INSPRU 1.3.89
See Notes
(1) For the purposes of this section, the credit rating description of a bond or debt item is to be determined in accordance with (2) and (3).
(2) If the item has at least one credit rating nominated in accordance with INSPRU 1.3.92 R ("a rated item"), its credit rating description is:
(a) where it has only one nominated credit rating, the general description given in the first column of Table INSPRU 1.3.90 R corresponding to that rating; or
(b) where it has two or more nominated credit ratings and the two highest nominated ratings fall within the same general description given in the first column of that Table, that description; or
(c) where it has two or more nominated credit ratings and the two highest nominated ratings do not fall within the same general description given in the first column of that Table, the second highest of those two descriptions.
(3) If the item is not a rated item, its credit rating description is the general description given in the first column of Table INSPRU 1.3.90 R that most closely corresponds to the firm's own assessment of the item's credit quality.
(4) An assessment under (3) must be made by the firm for the purposes of the credit risk scenario having due regard to the seniority of the bond or debt and the credit quality of the bond or debt issuer.
- 31/12/2006
Table : Listed rating agencies, credit rating descriptions, spread factors
INSPRU 1.3.90
See Notes
| Credit Rating Description | Listed rating agencies | Spread Factor | |||
| A. M. Best Company | Fitch Ratings | Moodys Investors Service | Standard & Poors Corporation | ||
| Exceptional or extremely strong | aaa | AAA | Aaa | AAA | 3.00 |
| Very strong | aa | AA | Aa | AA | 5.25 |
| Strong | a | A | A | A | 6.75 |
| Adequate | bbb | BBB | Baa | BBB | 9.25 |
| Speculative or less vulnerable | bb | BB | Ba | BB | 15.00 |
| Very speculative or more vulnerable | B | B | B | B | 24.00 |
| Highly speculative or very vulnerable | Below B | Below B | Below B | Below B | 24.00 |
- 31/12/2006
INSPRU 1.3.91
See Notes
Where listed rating agencies provide ratings by sub-category then all ratings should be allocated to the main ratings category (e.g. ratings sub-category A+ or A- would be allocated to the assigned ratings category "Strong").
- 31/12/2006
INSPRU 1.3.92
See Notes
For the purposes of INSPRU 1.3.87 R and INSPRU 1.3.89 R, a firm may, subject to (1) to (5), nominate for use credit ratings produced by one or more of the rating agencies listed in INSPRU 1.3.93 R:
(1) if the firm decides to nominate for use for an item the credit rating produced by one or more rating agencies, it must do so consistently for all similar items;
(2) the firm must use credit ratings in a continuous and consistent way over time;
(3) the firm must nominate for use only credit ratings that take into account both principal and interest;
(4) if the firm nominates for use credit ratings produced by one of the listed rating agencies then the firm must use solicited credit ratings produced by that listed rating agency; and
(5) the firm may nominate for use unsolicited credit ratings produced by one or more of the listed rating agencies except where there are reasonable grounds for believing that any unsolicited credit ratings produced by the agency are used so as to obtain inappropriate advantages in the relationship with rated parties.
- 31/12/2006
INSPRU 1.3.93
See Notes
In this section, a listed rating agency is:
(1) A.M. Best Company; or
(2) Fitch Ratings; or
(3) Moody's Investors Service; or
(4) Standard & Poor's Corporation.
- 31/12/2006
Credit risk scenario for reinsurance
INSPRU 1.3.94
See Notes
(1) The contracts of reinsurance or analogous non-reinsurance financing agreements to which INSPRU 1.3.78R (2) applies are those:
(a) into which the firm has entered;
(b) which represent an economic asset under the single event applicable under INSPRU 1.3.43R (3); and
(c) which are material (individually or in aggregate).
(2) For the purposes of (1), no account is to be taken of reinsurance or analogous non-reinsurance financing arrangements between undertakings in the same group where:
(a) the ceding and accepting undertakings are regulated by the
FSA
or a regulatory body in a designated State or territory for insurance (including reinsurance);
(b) no subsequent cessions of the ceded risk which are material (individually or in aggregate) are made to subsequent accepting undertakings by accepting undertakings (including subsequent accepting undertakings) other than to subsequent accepting undertakings which are in the same group; and
(c) for any subsequent cession or cessions of the ceded risk which are material (individually or in aggregate) each of the ceding and accepting undertakings (including subsequent accepting undertakings) is regulated by the
FSA
or a regulatory body in a designated State or territory for insurance (including reinsurance).
(3) The change in value which a firm must determine for a contract of reinsurance or an analogous non-reinsurance financing agreement is the firm's best estimate of the change in realistic value which would result from changes in credit risk market conditions consistent, subject to (4), with the changes in credit spreads determined in accordance with INSPRU 1.3.78R (1).
(4) For the purpose of (3), 5% should be replaced by 10% in INSPRU 1.3.84R (2)(b).
- 31/12/2006
INSPRU 1.3.95
See Notes
(1)
Reinsurance and analogous non-reinsurance financing agreements entered into by the firm, either with or acting as a reinsurer, must be included within the scope of the scenario. The combined rights and obligations under a contract of reinsurance or an analogous non-reinsurance financing agreement may represent an economic asset or liability. The value placed by the firm on the reinsurance item or non-reinsurance financing item should allow for a realistic assessment of the risks transferred and the risks of counterparty default associated with the item. In the case of analogous non-reinsurance financing agreements, references to terms such as "reinsurer", "ceding undertakings" and "accepting undertakings" include undertakings which by analogy are reinsurers, ceding or accepting undertakings. Analogous non-reinsurance financing agreements include contingent loans, securitisations and any other arrangements in respect of contracts of insurance that are analogous to contracts of reinsurance in terms of the risks transferred and the finance provided.
(2) In assessing values in accordance with INSPRU 1.3.94 R, a firm may consider it appropriate to determine values by drawing an analogy with the approach in respect of bond and debt items set out in INSPRU 1.3.84 R. (This might be the case if, in economic terms, the item being valued sufficiently resembles a bond or debt item - an alternative approach might otherwise be preferred). If the firm does consider it appropriate to draw an analogy, the "credit spread" assumed should be consistent with the assumed default probabilities and the values placed on the reinsurance asset for the purposes of determining the realistic values of assets and liabilities. A firm may regard it as appropriate to have regard to any financial strength ratings applicable to the reinsurer, but if so should apply the same principles set out in INSPRU 1.3.92 R for the nomination of financial strength ratings. Table INSPRU 1.3.97 G provides guidance as to the allocation of spread factors which a firm may, by analogy, deem appropriate to apply. Appropriate allowance should be made for any change in the extent of the counterparty exposure under the assumed scenario.
(3) The changes in credit risk spreads determined for bond and debt items in accordance with INSPRU 1.3.78R (1) are required to result in a reduction in market value for some items of 5% of their current value through the operation of INSPRU 1.3.84R (2)(b). For reinsurance contracts and analogous non-reinsurance financing agreements, determining the change in value by reference to INSPRU 1.3.94R (3) requires a firm to consider the possibility of counterparty default in changed credit risk market conditions. Where in the changed credit risk market conditions assumed to apply the firm's assessment of the counterparty risk would result in the asset being considered equivalent to "Highly speculative or very vulnerable", the reduction in value required is at least 10% of its current value. INSPRU 1.3.94R (4) relates to this requirement.
- 31/12/2006
INSPRU 1.3.96
See Notes
A financial strength rating of a reinsurer refers to a current assessment of the financial security characteristics of the reinsurer with respect to its ability to pay claims under its reinsurance contracts and treaties in accordance with their terms.
- 31/12/2006
INSPRU 1.3.97
See Notes
Table: Listed rating agencies, financial strength descriptions and spread factors
| Financial Strength Description | A. M. Best Company | Fitch Ratings | Moodys Investors Service | Standard & Poors Corporation | Spread Factor |
| Superior, extremely strong | A++ | AAA | Aaa | AAA | 3.00 |
| Superior, very strong | A+ | AA | Aa | AA | 5.25 |
| Excellent or strong | A, A- | A | A | A | 6.75 |
| Good | B++, B+ | BBB | Baa | BBB | 9.25 |
| Fair, marginal | B, B- | BB | Ba | BB | 15.00 |
| Marginal, weak | C++, C+ | B | B | B | 24.00 |
| Unrated or very weak | Unrated or below C++, C+ | Unrated or below B | Unrated or below B | Unrated or below B | 24.00 |
- 31/12/2006
Credit risk scenario for other exposures (including any derivative or quasi-derivative)
INSPRU 1.3.98
See Notes
For the purposes of INSPRU 1.3.78R (3), the change in value which must be determined for any other item (including any derivative or quasi-derivative) which represents an economic asset under the single event applicable under INSPRU 1.3.43R (3) is the firm's best estimate of the change in the realistic value of that item which would result from changes in credit risk market conditions consistent with the changes in credit spreads determined in accordance with INSPRU 1.3.78R (1) and the changes in value determined in accordance with INSPRU 1.3.78R (2).
- 31/12/2006
INSPRU 1.3.99
See Notes
In applying INSPRU 1.3.98 R, a firm should assess the total impact on the value of the item resulting from the assumed changed credit risk market conditions. The total change in value may result from the interaction of a number of separate influences. For example, a widening of credit spreads may imply an impact on the amount exposed to counterparty default as well as on the likelihood of that default. Each factor influencing the change in value needs separate consideration. It should be assumed, both for determining amounts exposed to counterparty default and the likelihood of such default that there will be no change in the likelihood of default in relation to an item issued by or guaranteed by an organisation which is in respect of that item a credit risk scenario exempt organisation (INSPRU 1.3.87 R. INSPRU 1.3.77G (5) is also relevant in this context.
- 31/12/2006
Persistency risk scenario
INSPRU 1.3.100
See Notes
For the purposes of the persistency risk scenario in INSPRU 1.3.44R (6), a firm must allow for the effects of an increase or a decrease in persistency experience of its with-profits insurance contract by adjusting the termination rates in each year of projection by 32.5% of the termination rates assumed in the calculation of the realistic value of liabilities in INSPRU 1.3.40 R.
- 31/12/2006
INSPRU 1.3.101
See Notes
The termination rates referred to in INSPRU 1.3.100 R are the rates of termination (including the paying-up of policies, but excluding deaths, maturities and retirements) other than on dates specified by the firm where:
(1) a guaranteed amount applies as the minimum amount which will be paid on claim; or
(2) any payments to the policyholder cannot be reduced at the discretion of the firm by its applying a market value adjustment.
- 31/12/2006
INSPRU 1.3.102
See Notes
For the purposes of INSPRU 1.3.100 R, the increase or decrease in termination rates must be applied to the projection of terminations up to policy guarantee dates and between policy guarantee dates, but not to the assumptions as to the proportion of policyholders taking up the guarantees at policy guarantee dates.
- 31/12/2006
INSPRU 1.3.103
See Notes
INSPRU 1.3.100 R to INSPRU 1.3.102 R require firms to apply a persistency stress test to the realistic value of liabilities. Where a firm brings the present value of non-profit insurance business in a with-profits fund into the calculation of the realistic value of assets (see INSPRU 1.3.33 R) there is no requirement to stress this asset for changes in persistency assumptions.
- 31/12/2006
Realistic value of liabilities: detailed provisions
INSPRU 1.3.104
See Notes
INSPRU 1.3.40 R sets out the three elements comprising the realistic value of liabilities for a with-profits fund. The remainder of this section contains general rules and guidance on determining the realistic value of liabilities plus further detail relating to each of those elements separately, as follows:
- 31/12/2006
Methods and assumptions: general
INSPRU 1.3.105
See Notes
In calculating the realistic value of liabilities for a with-profits fund, a firm must use methods and assumptions which:
(1) are appropriate to the business of the firm;
(2) are consistent from year to year without arbitrary changes (that is, changes without adequate reasons);
(3) are consistent with the method of valuing assets (GENPRU 1.3);
(4) make full provision for tax payable out of the with-profits fund, based on current legislation and practice, together with any known future changes, and on a consistent basis with the other methods and assumptions used;
(5) take into account discretionary benefits which are at least equal to, and charges which are no more than, the levels required for the firm to fulfil its regulatory duty to treat its customers fairly;
(6) take into account prospective management actions (INSPRU 1.3.53 R) and policyholder actions (INSPRU 1.3.59 R);
(7) provide for shareholder transfers out of the with-profits fund as a liability of the fund;
(8) have regard to generally accepted actuarial practice; and
- 31/12/2006
INSPRU 1.3.106
See Notes
More specific rules and guidance are set out below on some aspects of the methods and assumptions to be used in calculating the realistic value of liabilities for a with-profits fund. In contrast to the mathematical reserves requirements in INSPRU 1.2.10R (4) and INSPRU 1.2.13 R, there is no requirement to include margins for adverse deviation of relevant factors in calculating the realistic value of liabilities. Assumptions need be no more prudent than is necessary to achieve a best estimate, taking into account the firm'sPPFM and its regulatory duty to treat its customers fairly. Where there is no requirement for a PPFM, for example non-UK business, a firm should use assumptions that are consistent with the firm's documented approach to treating its customers fairly. A firm may judge that a margin should be included in its calculations to avoid an understatement of the realistic value of liabilities as a result of uncertainty, for example, either in its method or in its data.
- 31/12/2006
INSPRU 1.3.107
See Notes
The amount and timing of tax charges affect the amount of assets available to meet policyholder liabilities. INSPRU 1.3.105R (4) requires firms to provide fully for all tax payable out of the with-profits fund on a basis consistent with the other assumptions and methods used in deriving the realistic balance sheet. So, for example, all projections which underlie the realistic valuation of assets or liabilities must allow for taxation. The approach adopted should not give any credit for any reduction in tax deriving from future expenses or deficits which is attributable to future new business. For assets backing capital requirements it is not necessary to take into consideration future tax charges on investment income generated by those assets. However, firms should consider this aspect in their capital planning.
- 31/12/2006
INSPRU 1.3.108
See Notes
[intentionally blank]
- 31/12/2006
Valuation of contracts: General
INSPRU 1.3.109
See Notes
(1) A firm must determine the amount of the with-profits benefits reserve or the future policy related liabilities for a with-profits fund by carrying out a separate calculation in relation to each with-profits insurance contract or for each group of similar contracts.
(2) Appropriate approximations or generalisations may be made where they are likely to provide the same, or a higher, result than a separate calculation for each contract.
(3) A firm must set up additional reserves on an aggregated basis for general risks which are not specific to individual contracts or a group of similar contacts where the firm considers the realistic value of liabilities may otherwise be understated.
- 31/12/2006
INSPRU 1.3.110
See Notes
For the purpose of INSPRU 1.3.109R (1), a group of similar contracts is such that the conditions in INSPRU 1.3.109R (2) are satisfied.
- 31/12/2006
INSPRU 1.3.111
See Notes
Where a firm has grouped individual contracts for the purpose of calculating the mathematical reserves for a with-profits fund (in accordance with INSPRU 1.2.22 R), the firm is not required to use the same grouping of contracts in calculating the with-profits benefits reserve or future policy related liabilities for that fund.
- 31/12/2006
INSPRU 1.3.112
See Notes
In contrast to INSPRU 1.2.24 R for the mathematical reserves, treating individual contracts as an asset is not prohibited if, and to the extent that, this treatment does not conflict with a firm's regulatory duty to treat its customers fairly.
- 31/12/2006
INSPRU 1.3.113
See Notes
In calculating the with-profits benefits reserve, an overall (grouped or pooled) approach may be appropriate under either of the two methods set out in INSPRU 1.3.116 R. In particular, the calculation of aggregate retrospective reserves (see INSPRU 1.3.118 R) and the projection of future cash flows (see INSPRU 1.3.128 R) based on suitable specimen policies is permitted.
- 31/12/2006
INSPRU 1.3.114
See Notes
In calculating the future policy related liabilities, the grouping of policies for valuing the costs of guarantees, options or smoothing, and their representation by representative policies, is acceptable provided the firm can demonstrate that the grouping of policies does not materially misrepresent the underlying exposure and does not significantly misstate the costs. A firm should exercise care in grouping policies in order to ensure that the risk exposure is not inappropriately distorted by, for example, forming groups containing policies with guarantees that are "in the money" and policies with guarantees well "out of the money". A firm should also have regard to the effects of policyholder behaviour over time on the spread of the outstanding guarantees or options.
- 31/12/2006
INSPRU 1.3.115
See Notes
Where a firm groups similar policies for the purpose of calculating the with-profits benefits reserve or the future policy related liabilities, the firm should carry out sufficient validation to be reasonably sure that the grouping of policies has not resulted in the loss of any significant attributes of the portfolio being valued.
- 31/12/2006
With-profits benefits reserve
INSPRU 1.3.116
See Notes
A firm must calculate a with-profits benefits reserve for a with-profits fund using either:
(1) a retrospective calculation under INSPRU 1.3.118 R (the retrospective method); or
(2) a prospective calculation under INSPRU 1.3.128 R of all future cash flows expected to arise under, or in respect of, each of the with-profits insurance contracts written in that fund (the prospective method).
- 31/12/2006
INSPRU 1.3.117
See Notes
Subject to INSPRU 1.3.105R (2), a firm may use different methods under INSPRU 1.3.116 R for different types or generations of with-profits insurance contracts.
- 31/12/2006
Retrospective method
INSPRU 1.3.118
See Notes
In the retrospective method of calculating a with-profits benefits reserve, a firm must calculate either the aggregate of the retrospective reserves in respect of each with-profits insurance contract or, to the extent permitted by INSPRU 1.3.109 R and INSPRU 1.3.110 R, the total retrospective reserve in respect of each group of with-profits insurance contracts.
- 31/12/2006
INSPRU 1.3.119
See Notes
In calculating the retrospective reserve for a with-profits insurance contract, or the total retrospective reserve in respect of a group of with-profits insurance contracts, a firm must take account of at least the following:
(2) any expenses incurred or charges made (including commissions);
(3) any partial benefits paid or due;
(4) any investment income on, and any increases (or decreases) in, asset values;
(5) any tax paid or payable;
(6) any amounts received (or paid) under contracts of reinsurance or analogous non-reinsurance financing agreements, where relevant to retrospective reserves;
(7) any shareholder transfers and any associated tax paid or payable; and
(8) any permanent enhancements to (or deductions from) the retrospective reserves made by the firm.
- 31/12/2006
INSPRU 1.3.120
See Notes
In taking account of amounts in INSPRU 1.3.119R (6), due regard should be had to the specific details of each relevant contract of reinsurance or analogous non-reinsurance financing agreement and the relationship between the amounts received (or paid) and the value of the benefit granted (or received) under the arrangement. This should take into consideration, for example, the risk of default and differences in the firm's realistic assessment of the risks transferred and the contractual terms for such transfer of risk. Analogous non-reinsurance financing agreements include contingent loans, securitisations and any other arrangements in respect of contracts of insurance that are analogous to contracts of reinsurance in terms of the risks transferred and the finance provided.
- 31/12/2006
INSPRU 1.3.121
See Notes
Where allowance is made for shareholder transfers, this should be in respect of the accrued bonus entitlement reflected in the retrospective reserve. This would include both annual bonuses already declared and accrued final bonus. However, shareholder transfers in respect of surplus yet to be credited to retrospective reserves should not be charged to those reserves until the corresponding surplus is credited.
- 31/12/2006
INSPRU 1.3.122
See Notes
In calculating retrospective reserves, a firm must have regard to its regulatory duty to treat its customers fairly and must ensure that its approach is consistent with its Principles and Practices of Financial Management.
- 31/12/2006
INSPRU 1.3.123
See Notes
In calculating retrospective reserves, a firm must ensure its treatment of past cash flows, and of any future cash flows, is consistent with those cash flows valued in its prospective calculation of the future policy related liabilities for that fund in accordance with the rules in INSPRU 1.3.136 G to INSPRU 1.3.189 G.
- 31/12/2006
INSPRU 1.3.124
See Notes
An example of INSPRU 1.3.123 R concerns future shareholder transfers. A firm must make adequate provision for future shareholder transfers within the future policy related liabilities (see INSPRU 1.3.165 R). The basis of provisioning needs to be consistent with the amounts accrued within retrospective reserves and the amounts already transferred out of the with-profits fund.
- 31/12/2006
INSPRU 1.3.125
See Notes
Another example of the application of INSPRU 1.3.123 R relates to the reference in INSPRU 1.3.119R (8) to past permanent enhancements to (or deductions from) retrospective reserves made by firms. This item may include past miscellaneous surplus (or losses) which have been credited to (or debited from) retrospective reserves. Any other enhancements (or deductions) made on a temporary basis and any future surplus (or losses) that firms intend to credit to (or debit from) retrospective reserves should be included under the future policy related liabilities (see INSPRU 1.3.137 R).
- 31/12/2006
INSPRU 1.3.126
See Notes
Firms characteristically use a range of calculation methods to determine retrospective reserves. A firm's definition and calculation of retrospective reserves will depend on a number of factors. These include: the firm's practice; its administration and accounting systems; the extent of its historical records; and the composition of its with-profits portfolio. The rules and guidance for the retrospective method are drawn up to be sufficiently flexible to accommodate the diversity of calculation methods used by firms, rather than to enforce any particular method of calculation of retrospective reserves. INSPRU 1.3.119 R simply sets minimum standards that all retrospective methods must meet.
- 31/12/2006
INSPRU 1.3.127
See Notes
For the purposes of INSPRU 1.3.119R (2) and INSPRU 1.3.128R (2), the phrases 'charges made' or 'charges to be made' refer to circumstances where types of risk (such as mortality risk, longevity risk and investment risk) are met by the firm or with-profits fund in return for a charge deducted by the firm from the with-profits benefits reserve.
- 31/12/2006
Prospective method
INSPRU 1.3.128
See Notes
In the prospective method of calculating a with-profits benefits reserve, a firm must take account of at least the following cash flows:
(1) future premiums;
(2) expenses to be incurred or charges to be made, including commissions;
(3) benefits payable (INSPRU 1.3.129 R);
(4) tax payable;
(5) any amounts to be received (or paid) under contracts of reinsurance or analogous non-reinsurance financing agreements, where relevant to with-profits insurance contracts being valued; and
(6) shareholder transfers.
- 31/12/2006
INSPRU 1.3.129
See Notes
For the purposes of INSPRU 1.3.128R (3), benefits payable include:
(1) all guaranteed benefits, including guaranteed amounts payable on death and maturity, guaranteed surrender values and paid-up values;
(2) vested, declared and allotted bonuses to which policyholders are entitled; and
(3) future annual and final bonuses at least equal to the levels required for the firm to fulfil its regulatory duty to treat its customers fairly.
- 31/12/2006
INSPRU 1.3.130
See Notes
A firm must value the cash flows listed in INSPRU 1.3.128 R using best estimate assumptions of future experience, having regard to generally accepted actuarial practice and taking into account the firm'sPPFM and its regulatory duty to treat its customers fairly.
- 31/12/2006
INSPRU 1.3.131
See Notes
The prospective method sets the with-profits benefits reserve at the net present value of future cash flows listed in INSPRU 1.3.128 R.
- 31/12/2006
INSPRU 1.3.132
See Notes
In contrast to INSPRU 1.2.10R (4) and INSPRU 1.2.13 R relating to the methods and assumptions used to value the mathematical reserves, there is no requirement to value future cash flows using assumptions that include margins for adverse deviation. Also there are no detailed rules as to the future yields on assets, discount rates, premium levels, expenses, tax, mortality, morbidity, persistency and reinsurance. A firm should make its own assessment as to the amount of these future cash flows including bonuses and discretionary surrender or transfer values. A firm should make a realistic assessment of longevity risk and asset default risk (including default risk arising under contracts of reinsurance or analogous non-reinsurance financing agreements) within the best estimate assumptions of future experience required by INSPRU 1.3.130 R.
- 31/12/2006
INSPRU 1.3.133
See Notes
In valuing the future cash flows listed in INSPRU 1.3.128 R, the firm should use a projection term which is long enough to capture all material cash flows arising from the contract or groups of contracts being valued. If the projection term does not extend to the term of the last policy, the firm should check that the shorter projection term does not significantly affect the results.
- 31/12/2006
INSPRU 1.3.134
See Notes
Where a firm expects to pay additional benefits that are not included in the cash flows listed in INSPRU 1.3.128 R, it must make adequate provision for these benefits in calculating the future policy related liabilities in accordance with the rules in INSPRU 1.3.136 G to INSPRU 1.3.189 G.
- 31/12/2006
INSPRU 1.3.135
See Notes
The prospective assessment of the with-profits benefits reserve will usually be on a deterministic basis. A firm will have to make further provision in the future policy-related liabilities for, for example, the costs of potential asset fluctuations or policy options.
- 31/12/2006
Future policy related liabilities
INSPRU 1.3.136
See Notes
Overview of liabilities
INSPRU 1.3.137 R lists the future policy related liabilities for a with-profits fund that form part of a firm'srealistic value of liabilities in INSPRU 1.3.40 R. Detailed rules and guidance relating to particular types of liability and asset are set out in INSPRU 1.3.139 R to INSPRU 1.3.168 G. These are followed by rules and guidance that deal with certain aspects of several liabilities (that is, liabilities relating to guarantees, options and smoothing):
INSPRU 1.3.137 R lists the future policy related liabilities for a with-profits fund that form part of a firm'srealistic value of liabilities in INSPRU 1.3.40 R. Detailed rules and guidance relating to particular types of liability and asset are set out in INSPRU 1.3.139 R to INSPRU 1.3.168 G. These are followed by rules and guidance that deal with certain aspects of several liabilities (that is, liabilities relating to guarantees, options and smoothing):
(1)
INSPRU 1.3.169 R to INSPRU 1.3.186 G refer to valuing the costs of guarantees, options and smoothing; and
(2)
INSPRU 1.3.187 R to INSPRU 1.3.189 G refer to the treatment of surplus on guarantees, options and smoothing.
- 31/12/2006
INSPRU 1.3.137
See Notes
The future policy related liabilities for a with-profits fund are equal to the sum of amounts, as they relate to that fund, in respect of (1) to (11) to the extent each is valued as a liability less the sum of amounts, as they relate to that fund, in respect of (1) to (11) to the extent each is valued as an asset:
(1) past miscellaneous surplus (or deficit) planned to be attributed to the with-profits benefits reserve (see INSPRU 1.3.139 R);
(3) planned deductions for the costs of guarantees, options and smoothing from the with-profits benefits reserve (see INSPRU 1.3.144 R);
(4) planned deductions for other costs deemed chargeable to the with-profits benefits reserve (see INSPRU 1.3.146 R);
(5) future costs of contractual guarantees (other than financial options) (see INSPRU 1.3.148 R);
(6) future costs of non-contractual commitments (see INSPRU 1.3.154 R);
(7) future costs of financial options (see INSPRU 1.3.156 G);
(8) future costs of smoothing (see INSPRU 1.3.158 R);
(9) financing costs (see INSPRU 1.3.162 R);
- 31/12/2006
INSPRU 1.3.138
See Notes
Some of the elements of the calculation set out in INSPRU 1.3.137 R may have already been taken into consideration in the calculation of the with-profits benefits reserve, either under the retrospective method (see INSPRU 1.3.118 R onwards) or the prospective method (see INSPRU 1.3.128 R onwards). Where this is the case, the adjustments made under INSPRU 1.3.137 R should be such that no double-counting arises.
- 31/12/2006
Past miscellaneous surplus (or deficit) planned to be attributed to the with-profits benefits reserve
INSPRU 1.3.139
See Notes
In calculating the future policy related liabilities for a with-profits fund, a firm must allow for past miscellaneous surplus (or deficit) which it intends to attribute to the with-profits benefits reserve for that fund but which has not yet been permanently credited to (or debited from) the with-profits benefits reserve for that fund.
- 31/12/2006
INSPRU 1.3.140
See Notes
Past miscellaneous surplus (or deficit) already permanently credited to (or debited from) the with-profits benefits reserve will have been included in the calculation of the with-profits benefits reserve in accordance with INSPRU 1.3.119R (8).
- 31/12/2006
Planned enhancements to the with-profits benefits reserve
INSPRU 1.3.141
See Notes
In calculating the future policy related liabilities for a with-profits fund, a firm must make provision for any future planned enhancements to the with-profits benefits reserve for that fund that cannot be financed out of the resources of the with-profits benefits reserve and future premiums.
- 31/12/2006
INSPRU 1.3.142
See Notes
For the purposes of INSPRU 1.3.141 R, planned enhancements to the with-profits benefits reserve will arise when a firm has a contractual obligation, or a non-contractual commitment (arising from its regulatory duty to treat customers fairly), to enhance claims on some classes of policy (perhaps in the form of specially enhanced future bonus rates). In such circumstances, the present value of the costs of paying out a target asset share that is more than the projected with-profits benefits reserve for those classes of policy for which this practice is applicable should be included in the amount of the future policy related liabilities. For example, a firm may have a non-contractual commitment (arising from its regulatory duty to treat customers fairly) to pay enhanced benefits but have discretion not to make such payments in adverse circumstances. Such planned enhancements should be provided for in the realistic balance sheet, but allowance should be made for management action in the calculation of the risk capital margin.
- 31/12/2006
INSPRU 1.3.143
See Notes
The valuation of claims in excess of targeted asset shares in respect of guarantees, options and smoothing, including those arising under guaranteed annuity rates, should be carried out in accordance with INSPRU 1.3.169 R to INSPRU 1.3.186 G.
- 31/12/2006
Planned deductions for the costs of guarantees, options and smoothing from the with-profits benefits reserve
INSPRU 1.3.144
See Notes
Where a firm expects to deduct future charges from the with-profits benefits reserve for a with-profits fund to cover the costs of guarantees, options or smoothing for that fund, the firm must take credit for these future charges in calculating the future policy related liabilities for that fund.
- 31/12/2006
INSPRU 1.3.145
See Notes
In calculating future policy related liabilities for a with-profits fund, a firm should take credit under INSPRU 1.3.137R (3) for the present value of the future "margins" available in respect of charges deducted to cover the costs of guarantees, options and smoothing. INSPRU 1.3.188 R requires firms that accumulate the charges made less costs incurred to provide for any surplus on the experience account as a realistic liability. Any such provision should be made under INSPRU 1.3.137R (5), INSPRU 1.3.137R (7) or INSPRU 1.3.137R (8) depending on the nature of the charges made, and has no effect on the amount calculated under INSPRU 1.3.144 R.
- 31/12/2006
Planned deductions for other costs deemed chargeable to the with-profits benefits reserve
INSPRU 1.3.146
See Notes
Where a firm expects to deduct future charges (other than those valued in INSPRU 1.3.144 R) from the with-profits benefits reserve for a with-profits fund, the firm must take credit for these future charges in calculating the future policy-related liabilities for that fund.
- 31/12/2006
INSPRU 1.3.147
See Notes
A firm should take credit for the present value of the other future "margins" available. The circumstances where such margins may arise include:
(1) where a firm is targeting claims at less than 100% of the with-profits benefits reserve, the amount of such shortfall; and
(2) where a firm expects to deduct any future charges (other than those for guarantees, options and smoothing) from the with-profits benefits reserve.
- 31/12/2006
Future costs of contractual guarantees (other than financial options)
INSPRU 1.3.148
See Notes
A firm must make provision for the costs of paying excess claim amounts for a with-profits fund where the firm expects that the amount in (1) may be greater than the amount in (2), calculated as at the date of claim:
(2) the fund's with-profits benefits reserve allocated in respect of that policy or group of policies.
- 31/12/2006
INSPRU 1.3.149
See Notes
For the purposes of INSPRU 1.3.148 R, the future costs of guarantees cannot be negative.
- 31/12/2006
INSPRU 1.3.150
See Notes
In carrying out projections to calculate the cost of guarantees under INSPRU 1.3.137 R the opening liability should be set equal to the with-profits benefit reserve (see INSPRU 1.3.118 R), adjusted for miscellaneous surplus or deficits (see INSPRU 1.3.137R (1)) and planned enhancements (see INSPRU 1.3.141 R).
- 31/12/2006
INSPRU 1.3.151
See Notes
In projecting forward the with-profits benefits reserve, adjusted as in INSPRU 1.3.150 G, to the date of claim for the purposes of INSPRU 1.3.148 R, the firm should use market consistent assumptions for the expected future premium and investment income (including realised and unrealised gains or losses), expenses and claims, any charges to be deducted, tax and any other item of income or outgo. This projection should be carried out on the same basis as is described in INSPRU 1.3.130 R.
- 31/12/2006
INSPRU 1.3.152
See Notes
INSPRU 1.3.169 R to INSPRU 1.3.186 G contain further rules and guidance on the valuation of guarantees, options and smoothing.
- 31/12/2006
INSPRU 1.3.153
See Notes
Some examples of contractual guarantees are:
(1) for conventional with-profits insurance contracts, guaranteed sums assured and bonuses on death, maturity or retirement; and
(2) for accumulating with-profits policies, guarantees at a point in time or guaranteed minimum bonus rates.
- 31/12/2006
Future costs of non-contractual commitments
INSPRU 1.3.154
See Notes
- 31/12/2006
INSPRU 1.3.155
See Notes
- 31/12/2006
Future costs of financial options
INSPRU 1.3.156
See Notes
Financial options include guaranteed annuity and cash option rates.
- 31/12/2006
INSPRU 1.3.157
See Notes
INSPRU 1.3.169 R to INSPRU 1.3.186 G contain further rules and guidance on the valuation of options.
- 31/12/2006
Future costs of smoothing
INSPRU 1.3.158
See Notes
A firm must make provision for future smoothing costs of a with-profits fund where the firm expects that the claims paid on a policy or group of policies in the fund will vary from the greater of:
(1) the value of guarantees determined in INSPRU 1.3.148 R in respect of that policy or group of policies; and
(2) the fund's with-profits benefits reserve allocated in respect of that policy or group of policies which must be enhanced as described in INSPRU 1.3.141 R;
calculated as at the date of claim.- 31/12/2006
INSPRU 1.3.159
See Notes
For the purposes of INSPRU 1.3.158 R, smoothing costs are defined as the present value of the difference between projected claims and the projected with-profits benefit reserve after enhancements (INSPRU 1.3.141 R), other than payouts on guarantees (INSPRU 1.3.148 R).
- 31/12/2006
INSPRU 1.3.160
See Notes
Subject to INSPRU 1.3.188 R, the future costs of smoothing can be negative.
- 31/12/2006
INSPRU 1.3.161
See Notes
INSPRU 1.3.169 R to INSPRU 1.3.186 G contain further rules and guidance on the valuation of the future costs of smoothing.
- 31/12/2006
Financing costs
INSPRU 1.3.162
See Notes
A firm must provide for future liabilities to repay financing costs of a with-profits fund where the firm expects to have to meet such liabilities and to the extent that these liabilities are not already provided for by amounts included in the fund's realistic current liabilities (INSPRU 1.3.190 R and INSPRU 1.3.191 R). The amount of the liabilities to repay financing costs must be assessed on a market-consistent basis.
- 31/12/2006
INSPRU 1.3.163
See Notes
In INSPRU 1.3.162 R, financing costs refer to the future costs incurred by way of capital, interest and fees payable to the provider. A firm should make a realistic assessment of the requirement to repay such financing in its expected future circumstances (which may be worse than currently). Having taken account of its particular circumstances:
(1) where a firm has no liability to repay such financing, it should not include such repayment as a liability;
(2) where a firm has a reduced liability to repay such financing, it should include a reduced repayment as a liability.
- 31/12/2006
INSPRU 1.3.164
See Notes
In INSPRU 1.3.162 R, financing includes reinsurance financing arrangements and analogous non-reinsurance financing arrangements, such as contingent loans, securitisations and any other arrangements in respect of contracts of insurance that are analogous to contracts of reinsurance in terms of the risks transferred and the finance provided.
- 31/12/2006
Other long-term insurance liabilities
INSPRU 1.3.165
See Notes
A firm must provide for any other long-term insurance liabilities arising from or in connection with with-profits insurance contracts in a with-profits fund, to the extent that adequate provision has not been made in the with-profits benefits reserve or in any other part of the future policy related liabilities for that fund.
- 31/12/2006
INSPRU 1.3.166
See Notes
Some examples of these other long-term insurance liabilities are:
(1) pension and other mis-selling reserves;
(2) provisions for tax; and
(3) provisions for future shareholder transfers.
- 31/12/2006
INSPRU 1.3.167
See Notes
In determining the realistic liability for taxation firms should apply the general principles set out in INSPRU 1.3.105 R and the guidance given in INSPRU 1.3.107 G.
- 31/12/2006
INSPRU 1.3.168
See Notes
INSPRU 1.3.105 R requires firms to provide for shareholder transfers out of the with-profits fund as a liability of the fund. The provision should be consistent with the methods and assumptions used in valuing the other realistic liabilities. So, for example, where the with-profits benefits reserve includes amounts that would be paid to policyholders through future bonuses, provision should also be made for future shareholder transfers associated with those bonuses.
- 31/12/2006
Valuing the costs of guarantees, options and smoothing
INSPRU 1.3.169
See Notes
For the purposes of INSPRU 1.3.137R (5), INSPRU 1.3.137R (7) and INSPRU 1.3.137R (8), a firm must calculate the costs of any guarantees, options and smoothing using one or more of the following three methods:
(1) a stochastic approach using a market-consistent asset model (INSPRU 1.3.170 R);
(2) using the market costs of hedging the guarantee or option;
(3) a series of deterministic projections with attributed probabilities.
- 31/12/2006
INSPRU 1.3.170
See Notes
The market-consistent asset model in INSPRU 1.3.169R (1):
(1) means a model that delivers prices for assets and liabilities that can be directly verified from the market; and
(2) must be calibrated to deliver market-consistent prices for those assets that reflect the nature and term of the with-profits insurance liabilities of the with-profits fund.
- 31/12/2006
INSPRU 1.3.171
See Notes
Deterministic approaches will not usually capture the time value of the option generated by a guarantee. In order to calculate this value properly, firms are expected either to use market option values where these are readily available or to undertake a stochastic approach using a market-consistent asset model.
- 31/12/2006
INSPRU 1.3.172
See Notes
The
FSA
considers stochastic modelling to be preferable for material groups or classes of with-profits insurance contracts unless it can be shown that more simplistic or alternative methods are both appropriate and sufficiently robust.
- 31/12/2006
INSPRU 1.3.173
See Notes
Where the guarantee or option is relatively simple in nature, is capable of being hedged, and has a value unlikely to be affected by management actions (INSPRU 1.3.185 R) (for example, a guaranteed annuity rate option) then the cost of the guarantee or option would be the market cost of hedging the guarantee. Where that is generally the case but, in respect of a minor part of a portfolio, no market exists for hedging the option generated by the guarantee, a firm should take the value of the nearest equivalent benefit or right for which a market exists and record how it has adjusted the valuation to reflect the original option. Where the market value of the hedge is used firms should also make provisions for the credit risk arising from the hedge, both that arising from exposure to a counterparty and that arising from credit risk in the underlying instrument. The extent to which the guarantee or option is capable of being hedged depends on a firm's assumptions regarding future investment mix, persistency, annuitant mortality and take-up rates. While the
FSA
recognises that the hedge may not be perfectly matched to the underlying guarantee or option, a firm should ensure that hedge is reasonably well matched having regard to the sensitivity of the guarantee or option to the firm's choice of key assumptions.
- 31/12/2006
INSPRU 1.3.174
See Notes
- 31/12/2006
INSPRU 1.3.175
See Notes
In determining the costs of smoothing, a firm should consider:
(1) the consistency of its assumptions (including the exercise of management discretion over bonus rates); and
- 31/12/2006
Stochastic approach
INSPRU 1.3.176
See Notes
For the purposes of INSPRU 1.3.169R (1), a stochastic approach would consist of an appropriate market-consistent asset model for projections of asset prices and yields (such as equity prices, fixed interest yields and property yields), together with a dynamic model incorporating the corresponding value of liabilities and the impact of any foreseeable actions to be taken by management. Under the stochastic approach, the cost of the guarantee, option or smoothing would be equal to the average of these stochastic projections.
- 31/12/2006
INSPRU 1.3.177
See Notes
In performing the projections of assets and liabilities under the stochastic approach in INSPRU 1.3.169R (1), a firm should have regard to the aspects in (1) and (2).
(1) The projection term should be long enough to capture all material cash flows arising from the contract or groups of contracts being valued. If the projection term does not extend to the term of the last policy, the firm should check that the shorter projection term does not significantly affect the results.
(2) The number of projections should be sufficient to ensure a reasonable degree of convergence in the results, including the determination of the result of the risk capital margin. The firm should test the sensitivity of the results to the number of projections.
- 31/12/2006
INSPRU 1.3.178
See Notes
The
FSA
considers a holistic approach to stochastic modelling to be preferable so as to value all items of costs together rather than using separate methods for different items of the realistic value of liabilities. This approach requires the projection of all material cash flows arising under the contract or group of contracts for each stochastic projection, rather than only those arising from the guarantee or option within the contract. The advantages of this approach are that it ensures greater consistency in the valuation of different components of the contract and explicitly takes into account the underlying hedges or risk mitigation between components of the contract or group of contracts being valued. Where a firm can use a stochastic approach to value simultaneously all components of the contract or group of contracts, the firm should adopt this approach where practical and feasible.
- 31/12/2006
INSPRU 1.3.179
See Notes
Where a stochastic approach is used, a firm should make and retain a record under INSPRU 1.3.17 R of the nature of the asset model and of the assumptions used (including the volatility of asset values and any assumed correlations between asset classes or between asset classes and economic indicators, such as inflation).
- 31/12/2006
INSPRU 1.3.180
See Notes
In calibrating asset models for the purposes of INSPRU 1.3.170 R, a firm should have regard to the aspects in (1), (2) and (3).
(1) Few (if any) asset models can replicate all the observable market values for a wide range of asset classes. A firm should calibrate its asset models to reflect the nature and term of the fund's liabilities giving rise to significant guarantee and option costs.
(2) A firm will need to apply judgement to determine suitable estimates of those parameters which cannot be implied from observable market prices (for example, long-term volatility). A firm should make and retain a record under INSPRU 1.3.17 R of the choice of parameters and the reasons for their use.
(3) A firm should calibrate the model to the current risk-free yield curve. Risk-free yields should be determined after allowing for credit and all other risks arising. Firms may have regard to any standards and guidance adopted or issued by the Board of Actuarial Standardson the calculation of the risk-free yield but should not assume a higher yield than suggested by any such standards andguidance.
- 31/12/2008
Deterministic approach
INSPRU 1.3.181
See Notes
For the purposes of the deterministic approach in INSPRU 1.3.169R (3), a firm must calculate a series of deterministic projections of the values of assets and corresponding liabilities, where each deterministic projection corresponds to a possible economic scenario or outcome.
- 31/12/2006
INSPRU 1.3.182
See Notes
A firm should determine a range of scenarios or outcomes appropriate to both valuing the costs of the guarantee, option or smoothing and the underlying asset mix, together with the associated probability of occurrence. These probabilities of occurrence should be weighted towards adverse scenarios to reflect market pricing for risk. The costs of the guarantee, option or smoothing should be equal to the expected cost based on a series of deterministic projections of the values of assets and corresponding liabilities. In using a series of deterministic projections, a firm should consider whether its approach provides a suitably robust estimate of the costs of the guarantee, option or smoothing.
- 31/12/2006
INSPRU 1.3.183
See Notes
In performing the projections of assets and liabilities under the deterministic approach in INSPRU 1.3.169R (3), a firm should have regard to the aspects in (1) and (2).
(1) The projection term should be long enough to capture all material cash flows arising from the contract or group of contracts being valued. If the projection term does not extend to the term of the last contract, the firm should check that the shorter projection term does not significantly affect the results.
(2) The series of deterministic projections should be numerous enough to capture a wide range of possible outcomes and take into account the probability of each outcome's likelihood. The costs will be understated if only relatively benign or limited economic scenarios are considered.
- 31/12/2006
INSPRU 1.3.184
See Notes
Where a series of deterministic projections is used, a firm should make and retain a record under INSPRU 1.3.17 R of the range of projections and how the probabilities attributed to each projection or outcome were determined (including the period of reference for any relevant data on past experience).
- 31/12/2006
Management and policyholder actions
INSPRU 1.3.185
See Notes
In calculating the costs of any guarantees, options or smoothing, a firm:
(1) may reflect its prospective management actions (within the meaning of INSPRU 1.3.53 R); and
(2) must reflect a realistic assessment of the policyholder actions (within the meaning of INSPRU 1.3.59 R);
in its projections of the value of assets and liabilities.- 31/12/2006
INSPRU 1.3.186
See Notes
For the purposes of INSPRU 1.3.185 R, the related guidance in INSPRU 1.3.54 G to INSPRU 1.3.57 G (management actions) and in INSPRU 1.3.60 G (policyholder actions) applies.
- 31/12/2006
Treatment of surplus on guarantees, options and smoothing
INSPRU 1.3.187
See Notes
INSPRU 1.3.188 R applies to firms calculating the costs of guarantees, options and smoothing to be included in the future policy-related liabilities in accordance with INSPRU 1.3.137R (5), INSPRU 1.3.137R (7) and INSPRU 1.3.137R (8).
- 31/12/2006
INSPRU 1.3.188
See Notes
Where a firm accumulates past experience and deducts or is otherwise able to take credit for charges for guarantees or options or smoothing, the future costs of guarantees or options or smoothing (as appropriate) must not be less than the greater of:
(1) the prospective calculation of the future cost of guarantees (see INSPRU 1.3.148 R) or options (see INSPRU 1.3.156 G) or smoothing (see INSPRU 1.3.158 R) (as appropriate); and
(2) the sum of:
(a) the accumulated charges (after deduction of past costs) for guarantees or options or smoothing (as appropriate); and
(b) the prospective calculation of the future charges deducted for guarantees or options or smoothing (see INSPRU 1.3.144 R) (as appropriate).
- 31/12/2006
INSPRU 1.3.189
See Notes
The extent to which the amount in INSPRU 1.3.188R (2) exceeds the amount in INSPRU 1.3.188R (1) will determine the surplus available to support actions that would be taken by the firm's management. The purpose of INSPRU 1.3.188 R is to ensure that any resulting surplus at the valuation date arising from the accumulation of charges less costs remains available to support foreseeable actions that would be taken by the firm's management. Any additional liability arising from INSPRU 1.3.188 R is added to the liabilities under INSPRU 1.3.137R (5), INSPRU 1.3.137R (7) and INSPRU 1.3.137R (8), but has no impact on the adjustment for planned deductions for the costs of guarantees, options and smoothing (INSPRU 1.3.137R (3) and INSPRU 1.3.144 R).
- 31/12/2006
Realistic current liabilities
INSPRU 1.3.190
See Notes
For the purposes of INSPRU 1.3.40R (3), the realistic current liabilities of a with-profits fund are equal to the sum of the following amounts:
(1) the firm's best estimate provision for those liabilities for which prudent provision is made in regulatory current liabilities (see INSPRU 1.3.30 R); and
(2) to the extent that amounts have not been provided in (1), any tax and any other costs arising either in respect of excess admissible assets (within the meaning of INSPRU 1.3.36 R) or on the recognition of future shareholder transfers.
- 31/12/2006
INSPRU 1.3.191
See Notes
For the purpose of assessing the best estimate provision to be made under INSPRU 1.3.190R (1) in respect of a defined benefit occupational pension scheme, a firm must use either its defined benefit liability or its deficit reduction amount, consistent with the firm's election under INSPRU 1.3.5BR(2).
- 31/12/2006
INSPRU 1.4
Equalisation provisions
- 31/12/2006
Application
INSPRU 1.4.1
See Notes
INSPRU 1.4 applies to an insurer carrying on general insurance business unless it is:
(1) a non-directive friendly society; or
(2) an incoming EEA firm; or
(3) an incoming Treaty firm.
- 31/12/2006
INSPRU 1.4.2
See Notes
The scope of INSPRU 1.4.11 R to INSPRU 1.4.37 G (non-credit equalisation provisions) is not restricted to firms subject to the relevant
EU
directives.
- 01/12/2009
INSPRU 1.4.3
See Notes
The requirements of this section apply to a firm on a solo basis.
- 31/12/2006
Purpose
INSPRU 1.4.4
See Notes
This section sets out rules and guidance on the calculation of the amount of the equalisation provisions that are required to be maintained by firms that carry on non-credit insurance business or credit insurance business.
- 31/12/2006
INSPRU 1.4.5
See Notes
Credit or non-credit equalisation provisions form part of the technical provisions that a firm is required to establish under INSPRU 1.1.12R (1). They help to smooth fluctuations in loss ratios in future years for business where claims in any future year may be subject to significant deviation from recent or average claims experience, or where trends in experience may be subject to change. Such volatile claims experience might arise in the case, for example, of insurance against losses caused by major catastrophes such as hurricanes or earthquakes.
- 31/12/2006
INSPRU 1.4.6
See Notes
In general terms, INSPRU 1.4 sets out rules and guidance as to:
(2) the methods to be used in calculating the amount of each provision;
(3) the geographical location of the business relevant to certain calculations for different types of firm - this is summarised in the Table in INSPRU 1.4.7 G.
- 31/12/2006
INSPRU 1.4.7
See Notes
| Table: Scope of insurance business to be included in calculations | ||||
| Type Of Firm | Credit Equalisation Provision | Non Credit Equalisation Provision | ||
| Threshold in INSPRU 1.4.4 G | Provision in INSPRU 1.4.43 R | Threshold in INSPRU 1.4.18R (2) and provision in INSPRU 1.4.17 R | ||
| UK insurer | World-wide | World-wide | World-wide | |
| Pure reinsurer with head office outside United Kingdom | UK | World-wide | UK | |
| Pure reinsurer with head office in United Kingdom | World-wide | World-wide | World-wide | |
| Non-EEA direct insurers | EEA-deposit insurer | UK | UK | UK |
| Swiss general insurer | UK | UK | UK | |
| UK-deposit insurer | All EEA | World-wide | UK | |
| All other non-EEA direct insurers | UK | World-wide | UK | |
- 31/12/2006
INSPRU 1.4.8
See Notes
The First Non-Life Directive (as amended) and the Reinsurance Directive require the calculation of credit equalisation provisions. Non-credit equalisation provisions are a domestic United Kingdom requirement. For insurance regulatory purposes under
EU
Directives, credit equalisation provisions are classified as liabilities.
- 01/12/2009
INSPRU 1.4.9
See Notes
However, firms are permitted to include equalisation provisions within their financial resources when demonstrating compliance with non-Directive capital requirements. Hence equalisation provisions are deducted from the available capital resources of a firm for the purpose of meeting its minimum capital requirement for general insurance business; but, in the calculation of a firm'senhanced capital requirement for general insurance business under INSPRU 1.1.72C R, its equalisation provisions (if any) are added back to its capital resources.
- 31/12/2006
INSPRU 1.4.10
See Notes
Under International Accounting Standards (IAS), which will apply to the financial statements of some insurers from 2005, there will be no requirement to treat equalisation provisions as liabilities in insurers' published financial statements. However, they will continue to be treated as liabilities for the purposes of demonstrating compliance with Directive capital requirements.
- 31/12/2006
Non-credit equalisation provision
INSPRU 1.4.11
See Notes
Firms carrying on non-credit insurance business
(1)
INSPRU 1.4.11 R to INSPRU 1.4.37 G apply to any firm, other than an assessable mutual, which carries on the business of effecting or carrying out general insurance contracts falling within any description in column 2 in Table INSPRU 1.4.12 R ("non-credit insurance business").
(2) A firm falling within (1) must classify all of its non-credit insurance business into separate insurance business groupings, as specified in Table INSPRU 1.4.12 R.
- 31/12/2006
INSPRU 1.4.12
See Notes
Table : Groupings of non-credit insurance business
| Insurance Business Grouping | General Insurance Contracts | |
| A | Contracts of insurance which fall within general insurance businessclasses 4, 8 or 9, other than: | |
| (a) | contracts of insurance under non-proportional reinsurance treaties; and | |
| (b) | contracts of insurance against nuclear risks | |
| B | Contracts of insurance which fall within general insurance businessclass 16(a), other than: | |
| (a) | contracts of insurance under non-proportional reinsurance treaties; and | |
| (b) | contracts of insurance against nuclear risks | |
| C | Contracts of insurance which fall within general insurance business classes 5, 6, 11 or 12, other than: | |
| (a) | contracts of insurance against nuclear risks; and | |
| (b) | reinsurance contracts corresponding to contracts in (a). | |
| D | Contracts of insurance against nuclear risks. | |
| E | Contracts of insurance under non-proportional reinsurance treaties and which fall within general insurance business classes 4, 8, 9 or 16(a) other than contracts of insurance against nuclear risks. | |
- 31/12/2006
INSPRU 1.4.13
See Notes
For the purposes of INSPRU 1.4.11 R to INSPRU 1.4.37 G, a firm with its head office in the United Kingdom must take account of non-credit insurance business carried on by it world-wide.
- 31/12/2006
INSPRU 1.4.14
See Notes
For the purposes of INSPRU 1.4.11 R to INSPRU 1.4.37 G, a firm with its head office outside the United Kingdom need only take account of non-credit insurance business carried on by it from a branch in the United Kingdom.
- 31/12/2006
INSPRU 1.4.15
See Notes
The insurers affected by INSPRU 1.4.11 R include pure reinsurers, UK-deposit insurers, EEA-deposit insurer, and Swiss general insurers.
- 31/12/2006
INSPRU 1.4.16
See Notes
For insurers (including pure reinsurers) with a head office in the United Kingdom, the calculations must be made in respect of world-wide business.
- 31/12/2006
Requirement to maintain non-credit equalisation provision
INSPRU 1.4.17
See Notes
In respect of each financial year, a firm must, unless INSPRU 1.4.18 R applies:
(1) calculate the amount of its non-credit equalisation provision as at the end of that year in accordance with INSPRU 1.4.20 R; and
(2) maintain a non-credit equalisation provision calculated in accordance with INSPRU 1.4.20 R for the following financial year.
- 31/12/2006
INSPRU 1.4.18
See Notes
(1)
INSPRU 1.4.17 R does not apply to any firm in respect of any financial year if, as at the end of that year:
(a) no non-credit equalisation provision has been brought forward from the preceding financial year; and
(b) the amount of the annualised net written premiums for all the non-credit insurance business carried on by it in the financial year is less than the threshold amount.
(2) The threshold amount in respect of any financial year is the higher of:
(a) 1,500,000 Euro; and
(b) 4% of net written premiums in that financial year in respect of all its general insurance business, if this amount is less than 2,500,000 Euro.
- 31/12/2006
INSPRU 1.4.19
See Notes
For non-EEA insurers, the calculation of the threshold amount in INSPRU 1.4.18R (2) is limited by INSPRU 1.4.14 R to the business of the firm carried on in the United Kingdom. Such a firm may do little UK non-credit insurance business, and so would not be required to set up a non-credit equalisation provision under INSPRU 1.4, but may do significant business outside the United Kingdom characterised by high-impact, low-frequency claims. Such a firm is required by INSPRU 1.5.41 R to hold adequate world-wide financial resources to avoid internal-contagion strain on the branch in the United Kingdom. In determining the adequacy of its financial resources, the firm should undertake stress and scenario testing of its underwriting and other risks as set out in GENPRU 1.2.
- 31/12/2006
Calculating the amount of the provision
INSPRU 1.4.20
See Notes
(1) Unless INSPRU 1.4.22 R applies, the amount of a firm'snon-credit equalisation provision as at the end of a financial year is the higher of:
(a) zero; and
(b) whichever is the lower of:
(i) the aggregate of the amounts of the maximum provision for each insurance business grouping as at the end of that financial year; and
(ii) the sum of A and B.
(2) For the purposes of (1)(b)(ii):
(a) A is the amount of the non-credit equalisation provision, if any, brought forward from the financial year immediately preceding that in respect of which the calculation is being performed; and
(b) B is:
(i) the aggregate of the amounts of the provisional transfers-in for each insurance business grouping; minus
(ii) the aggregate of the amounts of the provisional transfers-out for each insurance business grouping.
(3) For any insurance business grouping:
(a) the amount of the maximum provision in (1)(b)(i) is to be determined in accordance with INSPRU 1.4.24 R;
(b) the amount of the provisional transfers-in in (2)(b)(i) is to be determined in accordance with INSPRU 1.4.26 R; and
(c) the amount of the provisional transfers-out in (2)(b)(ii) is to be determined in accordance with INSPRU 1.4.29 R.
- 31/12/2006
INSPRU 1.4.21
See Notes
If provisional transfers-out are in excess of provisional transfers-in, the non-credit equalisation provision as calculated in accordance with INSPRU 1.4.20 R in respect of a particular financial year may be less than that calculated for the preceding financial year although, by virtue of INSPRU 1.4.20R (1)(a), it cannot be negative.
- 31/12/2006
INSPRU 1.4.22
See Notes
(1) The amount of a firm'snon-credit equalisation provision as at the end of a financial year is zero if:
(a) as at the end of that year, the firm meets either of the conditions specified in (2) and (3); and
(b) the annualised net written premiums for all the non-credit insurance business carried on by the firm in that year are less than the threshold amount.
(2) The first condition is that the firm carried on non-credit insurance business in the first financial year of the relevant period and, for each of any two or more financial years of that period, the annualised net written premiums for business of that description were less than the threshold amount.
(3) The second condition is that the firm did not carry on non-credit insurance business in the first financial year of the relevant period and the average of the annualised net written premiums for business of that description carried on by the firm in each financial year of the relevant period was less than the threshold amount.
(4) For the purposes of this rule:
(a) the threshold amount is the amount determined in accordance with INSPRU 1.4.18R (2): and
(b) the relevant period is the period of four financial years ending immediately before the beginning of the financial year in (1).
- 31/12/2006
INSPRU 1.4.23
See Notes
If INSPRU 1.4.22 R applies, a firm may need to make sufficient transfers from its non-credit equalisation provision to bring the non-credit equalisation provision for that financial year to zero.
- 31/12/2006
The calculation: the maximum provision
INSPRU 1.4.24
See Notes
(1) For the purposes of the calculation required by INSPRU 1.4.20 R, the amount of the maximum provision for any insurance business grouping is to be determined in accordance with (2) to (5).
(2) Unless (4) applies, the amount of the maximum provision for the grouping, as at the end of a financial year, is the amount determined by multiplying X and Y.
(3) For the purposes of (2):
(a) X is the percentage specified in Table INSPRU 1.4.25 R in relation to the grouping; and
(b) Y is the average of the amount of the annualised net written premiums for non-credit insurance business in the grouping carried on by the firm in each financial year of the relevant period.
(4) Where Y is a negative amount, the maximum provision for that insurance business grouping is zero.
(5) For the purposes of (3)(b), the relevant period is the five-year period comprising:
(a) the financial year in (2); and
(b) the previous four financial years.
- 31/12/2006
INSPRU 1.4.25
See Notes
Table : Calculation of maximum provision for any insurance business grouping
| Insurance Business Grouping | Percentage of average annualised net written premiums |
| A | 20 |
| B | 20 |
| C | 40 |
| D | 600 |
| E | 75 |
- 31/12/2006
The calculation: provisional transfers-in
INSPRU 1.4.26
See Notes
(1) For the purposes of the calculation required by INSPRU 1.4.20 R, the amount of the provisional transfers-in for any insurance business grouping is to be determined in accordance with (2).
(2) The amount of the provisional transfers-in for the grouping, as at the end of a financial year, is the amount determined by multiplying X and Y.
(3) For the purposes of (2):
(a) X is the percentage specified in Table INSPRU 1.4.27 R in relation to the grouping; and
(b) Y is the amount of the net written premiums for non-credit insurance business in the grouping that was carried on by the firm in the financial year in (2), including adjustments in respect of previous financial years.
- 31/12/2006
INSPRU 1.4.27
See Notes
Table : Provisional transfers-in for any insurance business grouping
| Insurance Business Grouping | Percentage of net written premiums |
| A | 3 |
| B | 3 |
| C | 6 |
| D | 75 |
| E | 11 |
- 31/12/2006
INSPRU 1.4.28
See Notes
Since each insurance business grouping should be assessed individually, negative net written premiums in relation to any insurance business grouping should be transferred in to the non-credit equalisation provision.
- 31/12/2006
The calculation: provisional transfers-out
INSPRU 1.4.29
See Notes
(1) For the purposes of the calculation required by INSPRU 1.4.20 R, the amount of the provisional transfers-out for any insurance business grouping is to be determined in accordance with (2).
(2) The amount of the provisional transfers-out for the grouping, as at the end of a financial year, is the lower of:
(a) the amount of the maximum provision for the grouping under INSPRU 1.4.24 R for that financial year; and
- 31/12/2006
INSPRU 1.4.30
See Notes
R For each insurance business grouping, the abnormal loss as at the end of a financial year in relation to which an equalisation provision is calculated is:
(1) (for business within the insurance business grouping accounted for on an accident year basis) the amount, if any, by which the amount of net claims incurred exceeds the greater of:
(a) zero; and
(b) the percentage of net earned premiums in that financial year specified in the Table in INSPRU 1.4.31 R; or
(2) (for business within the insurance business grouping accounted for on an underwriting year basis) the amount, if any, by which the amount of net claims paid (plus adjustment for change in net technical provisions, other than any change in provisions for claims handling expenses or equalisation) exceeds the greater of:
(a) zero; and
(b) the percentage of net written premiums in that financial year specified in the Table in INSPRU 1.4.31 R.
- 31/12/2006
INSPRU 1.4.31
See Notes
Table : Abnormal loss for any insurance business grouping
| Insurance Business Grouping | Percentage of net written premiums |
| A | 72.5 |
| B | 72.5 |
| C | 95 |
| D | 25 |
| E | 100 |
- 31/12/2006
Adjustments to calculations
INSPRU 1.4.32
See Notes
Transfers of business from the firm
(1) This rule applies to modify the application of INSPRU 1.4.24 R and INSPRU 1.4.26 R in any case where a firm has transferred to another undertaking any rights and obligations under general insurance contracts falling within any insurance business grouping.
(2) As at the end of the financial year in which the transfer takes place, net written premiums in respect of the transferred contracts in any grouping must be deducted from total net written premiums for that grouping before calculating the maximum provision under INSPRU 1.4.24 R or provisional transfers-in under INSPRU 1.4.26 R.
- 31/12/2006
INSPRU 1.4.33
See Notes
If all the rights and obligations of a firm in relation to non-credit insurance business in any insurance business grouping have been transferred, the maximum provision for the grouping under INSPRU 1.4.24 R is zero.
- 31/12/2006
Transfers of business to the firm
INSPRU 1.4.34
See Notes
(1) This rule applies to modify the application of INSPRU 1.4.24 R, INSPRU 1.4.26 R and INSPRU 1.4.29 R in any case where another undertaking has transferred to a firm any rights and obligations under general insurance contracts falling within any insurance business grouping.
(2) As at the end of the financial year in which the transfer takes place a sum equal to that part of the consideration for the transfer that relates to business in an insurance business grouping must be:
(a) excluded from
net written premiums
before performing the calculations required by INSPRU 1.4.24 R (maximum provision) and INSPRU 1.4.26 R (provisional transfers in);
(b) included in net premiums (written or earned) before performing the calculation required by INSPRU 1.4.30 R (abnormal loss); and
(c) excluded from net claims (paid or incurred) before performing the calculation required by INSPRU 1.4.30 R (abnormal loss).
- 31/12/2007
INSPRU 1.4.35
See Notes
For the purposes of INSPRU 1.4.34 R, the consideration payable should be apportioned between insurance business groupings according to the groupings within which the general insurance contracts which are the subject of the acquisition fall. In appropriate cases, apportionment may reflect the split of liabilities acquired, including unearned premium.
- 31/12/2006
INSPRU 1.4.36
See Notes
Where business is accounted for on an accounting year basis, in any year following the transfer, net earned premiums must include an appropriate amount in respect of the transfer.
- 31/12/2006
INSPRU 1.4.37
See Notes
INSPRU 1.4.32 R to INSPRU 1.4.34 R apply to transfers by way of transfer under Part VII of the Act and by novation.
- 31/12/2006
Credit equalisation provisions
INSPRU 1.4.38
See Notes
Firms carrying on credit insurance business
INSPRU 1.4.39 R to INSPRU 1.4.47 G apply to any firm which carries on the business of effecting or carrying out general insurance contracts falling within general insurance businessclass 14 (which business is referred to in INSPRU 1.4 as "credit insurance business"), unless it is:
INSPRU 1.4.39 R to INSPRU 1.4.47 G apply to any firm which carries on the business of effecting or carrying out general insurance contracts falling within general insurance businessclass 14 (which business is referred to in INSPRU 1.4 as "credit insurance business"), unless it is:
(1) a non-directive insurer; or
(2) a pure reinsurer which became a firm in run-off before 31 December 2006 and whose
Part IV permission
has not subsequently been varied to add back the regulated activity of effecting contracts of insurance.
- 31/12/2006
INSPRU 1.4.39
See Notes
For the purposes of INSPRU 1.4.43 R and INSPRU 1.4.44 R, a firm whose head office is in the United Kingdom must take account of the credit insurance business carried on by it world-wide.
- 31/12/2006
INSPRU 1.4.40
See Notes
(1) For the purposes of INSPRU 1.4.43 R:
(a) a Swiss general insurer or an EEA-deposit insurer must take account of the credit insurance business carried on by it in the United Kingdom; and
(b) any other firm whose head office is outside the United Kingdom (including a UK-deposit insurer) must take account of the credit insurance business carried on by it world-wide.
(2) For the purposes of INSPRU 1.4.44 R:
(a) a UK-deposit insurer need only take account of the credit insurance business carried on by it in all EEA States, taken together; and
(b) any other firm whose head office is outside the United Kingdom (including an EEA-deposit insurer and a Swiss general insurer) need only take account of the credit insurance business carried on by it in the United Kingdom.
- 31/12/2006
INSPRU 1.4.41
See Notes
For firms whose head office is in the United Kingdom both calculations must be made in respect of world-wide business.
- 31/12/2006
INSPRU 1.4.42
See Notes
The requirements of INSPRU 1.4.39 R and INSPRU 1.4.40 R are summarised in the table in INSPRU 1.4.7 G.
- 31/12/2006
Requirement to maintain credit equalisation provision
INSPRU 1.4.43
See Notes
In respect of each financial year, a firm must, unless INSPRU 1.4.44 R applies:
(1) calculate the amount of its credit equalisation provision as at the end of that year in accordance with INSPRU 1.4.45 R; and
(2) maintain a credit equalisation provision calculated in accordance with INSPRU 1.4.45 R for the following financial year.
- 31/12/2006
INSPRU 1.4.44
See Notes
INSPRU 1.4.43 R does not apply to a firm in respect of any financial year if, as at the end of that year, the annualised net written premiums for its credit insurance business are less than 4% of annualised net written premiums in that financial year in respect of all its general insurance business, if this amount is less than 2,500,000 Euro.
- 31/12/2006
Calculating the amount of the provision
INSPRU 1.4.45
See Notes
(1) The amount of a firm'scredit equalisation provision as at the end of a financial year ("financial year A") is the higher of:
(a) zero; and
(b) whichever is the lower of:
(i) 150% of the highest amount of net written premiums for credit insurance business carried on by the firm in financial year A or in any of the previous four financial years; and
(ii) the amount of the credit equalisation provision brought forward from the preceding financial year, after making either of the adjustments in (2).
(2) The adjustments are:
(a) the deduction of the amount of any technical deficit arising in financial year A; or
(b) the addition of the lower of:
(i) 75% of the amount of any technical surplus arising in financial year A; and
(ii) 12% of the amount of the net written premiums for credit insurance business carried on by the firm in financial year A.
(3) For the purposes of (2) the amount of technical deficit or technical surplus is to be determined in accordance with INSPRU 1.4.46 R.
- 31/12/2006
INSPRU 1.4.46
See Notes
For the purposes of the adjustments in INSPRU 1.4.45R (2), technical surplus (or technical deficit) in respect of credit insurance business is the amount by which the aggregate of net earned premiums and other technical income exceeds (or falls short of) the sum of net claims incurred, claims management costs and any technical charges.
- 31/12/2006
INSPRU 1.4.47
See Notes
The calculation of technical surplus or technical deficit should be made before tax and before any transfer to or from the credit equalisation provision. Investment income should not be included in these calculations.
- 31/12/2006
Euro conversion
INSPRU 1.4.48
See Notes
For the purposes of INSPRU 1.4, 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.
- 31/12/2006
Application of INSPRU 1.4 to Lloyd's
INSPRU 1.4.49
See Notes
INSPRU 1.4 applies to the Society in accordance with INSPRU 8.1.2 R:
(1) with the modification set out in INSPRU 1.4.50 R; and
- 31/12/2006
INSPRU 1.4.50
See Notes
The Society must calculate a credit equalisation provision for the aggregate insurance business of all members; it is not required to calculate a credit equalisation provision separately for the business of each member.
- 31/12/2006
INSPRU 1.4.51
See Notes
The Society must allocate the result of INSPRU 1.4.50 R between itself and each of the members on a fair and reasonable basis.
- 31/12/2006
INSPRU 1.5
Internal-contagion risk
- 31/12/2006
Application
INSPRU 1.5.1
See Notes
INSPRU 1.5 applies to an insurer.
- 31/12/2006
INSPRU 1.5.2
See Notes
INSPRU 1.5 does not apply, to the extent stated, to any insurer in (1) to (4):
(1) none of the provisions apply to non-directive friendly societies;
(2) none of the provisions, apart from INSPRU 1.5.33 R (payment of financial penalties) apply to firms which qualify for authorisation under Schedule 3 or 4 of the Act;
(4)
INSPRU 1.5.41 R to INSPRU 1.5.57 R (UKbranches of certain non-EEA insurers) do not apply to:
(a)
UK insurers; or
(b)
non-EEA insurers whose insurance business in the United Kingdom is restricted to reinsurance; or
(c)
EEA-deposit insurers; or
- 31/12/2006
INSPRU 1.5.3
See Notes
The scope of application of INSPRU 1.5 is not restricted to firms that are subject to the relevant
EU
directives.
- 01/12/2009
INSPRU 1.5.4
See Notes
In its application to a firm with its head office in the United Kingdom, this section applies to the whole of the firm's business carried on world-wide.
- 31/12/2006
INSPRU 1.5.5
See Notes
In the application of this section to activities carried on by a non-EEA insurer:
(1)
INSPRU 1.5.13 R to INSPRU 1.5.15 G and INSPRU 1.5.41 R apply in relation to the whole of its business carried on world-wide;
(2) all other provisions of this section apply only in relation to:
(a) in the case of any UK-deposit insurer, activities carried on from branches in any EEA State; and
- 31/12/2006
INSPRU 1.5.6
See Notes
- 31/12/2006
INSPRU 1.5.7
See Notes
The requirements of this section apply to a firm on a solo basis.
- 31/12/2006
Purpose
INSPRU 1.5.8
See Notes
This section sets out requirements for a firm relating to 'internal-contagion risk'. This is the risk that losses or liabilities from one activity might deplete or divert financial resources held to meet liabilities from another activity. It arises where the two activities are carried on within the same firm. It may also arise from the combination of activities within the same group, but this aspect of internal-contagion risk falls outside the scope of this section. Requirements relevant to group contagion risk are set out in INSPRU 6.
- 31/12/2006
INSPRU 1.5.9
See Notes
Internal-contagion risk includes in particular the risk that arises where a firm carries on:
(1) both insurance and non-insurance activities; or
(2) two or more different types of insurance activity; or
- 31/12/2006
INSPRU 1.5.10
See Notes
This section requires firms other than pure reinsurers to limit non-insurance activities to those that directly arise from their insurance business, e.g. investing assets, employing insurance staff etc. It also requires that an adequate provision be established for non-insurance liabilities. pure reinsurers must limit their activities to the business of reinsurance and related operations.
- 31/12/2006
INSPRU 1.5.11
See Notes
This section also sets out requirements for the separation of different types of insurance activity. However, in most circumstances the combination of different types of insurance activity within the same firm is a source of strength. Adequate pooling and diversification of insurance risk is fundamental to sound business practice. The requirements, therefore, only apply in two specific cases where without adequate protection the combination might operate to the detriment of policyholders. They apply where a firm carries on both:
(2) linked and non-linked insurance business.
- 31/12/2006
INSPRU 1.5.12
See Notes
Finally, the section sets out requirements to protect policyholders of branches of non-EEA firms where these are supervised by the
FSA
. These apply only to a non-EEAfirm that has established a branch in the United Kingdom.
- 31/12/2006
Requirements: Non-insurance activities
Restriction of business
INSPRU 1.5.13
See Notes
(1) A firm other than a pure reinsurer must not carry on any commercial business other than insurance business and activities directly arising from that business.
(2) (1) does not prevent a friendly society which was on 15 March 1979 carrying on long-term insurance business from continuing to carry on savings business.
- 31/12/2006
INSPRU 1.5.13A
See Notes
A pure reinsurer must not carry on any business other than the business of reinsurance and related operations.
- 31/12/2006
INSPRU 1.5.13B
See Notes
In INSPRU 1.5.13A R related operations include, for example, activities such as provision of statistical or actuarial advice, risk analysis or research for its clients. It may also include a holding company function and activities with respect to financial sector activities within the meaning of Article 2, point 8, of the Financial Groups Directive. But it does not allow the carrying on of, for example, unrelated banking and financial activities.
- 31/12/2006
Financial limitation of non-insurance activities
INSPRU 1.5.14
See Notes
A firm must limit, manage and control its non-insurance activities so that there is no significant risk arising from those activities that it may be unable to meet its liabilities as they fall due.
- 31/12/2006
INSPRU 1.5.15
See Notes
For the purpose of INSPRU 1.5.14 R a firm should consider how the financial impact of non-insurance activities might diverge from expectations. However, it need only take into account unexpected variations in amount and timing in so far as they are reasonably possible and may take into account effective mitigating factors.
- 31/12/2006
Requirements: long-term insurance business
INSPRU 1.5.16
See Notes
INSPRU 1.5.18 R, INSPRU 1.5.21 R, INSPRU 1.5.30 R and INSPRU 1.5.31 R require a firm to identify the assets attributable to the receipts of the long-term insurance business, called long-term insurance assets, and only to apply those assets for the purpose of that business. This has the effect of prohibiting a composite firm from using long-term insurance assets to meet general insurance liabilities. It also keeps long-term insurance assets separate from shareholder funds.
- 31/12/2006
Permissions not to include both types of insurance
INSPRU 1.5.17
See Notes
(1) Under section 19 of the Act, a firm may not carry on a regulated activity unless it has permission to do so (or is exempt in relation to the particular activity). Both general insurance business and long-term insurance business are regulated activities and permission will extend to the effecting or carrying out of one or more particular classes of contracts of insurance.
(2) A firm'spermission can be varied so as to add other classes. The permission of an existing composite firm may be varied by adding classes of both general insurance business and long-term insurance business.
(3) It is FSA policy, in compliance with
EU
directives on insurance, not to grant or vary permission if that would allow a newly established firm, or an existing firm engaging solely in general insurance business or solely in long-term insurance business, to engage in both general insurance business and long-term insurance business. This does not apply where a firm'spermission to carry on long-term insurance business is or is to be restricted to reinsurance. It also does not apply where a firm'spermission to carry on general insurance business is or is to be restricted to effecting or carrying outaccident or sicknesscontracts of insurance(see article 18(2) of the Consolidated Life Directive).
(4) Where a firm'spermission extends to effecting or carrying outlife and annuitycontracts of insurance this will normally include permission to effect or carry outaccidentcontracts of insurance or sicknesscontracts of insurance on a supplementary basis (see article 2(1)(c) of the Consolidated Life Directive).
- 01/12/2009
Separately identify and maintain long term insurance assets
INSPRU 1.5.18
See Notes
A firm carrying on long-term insurance business must identify the assets relating to its long-term insurance business which it is required to hold by virtue of :
(1) in the case of a pure reinsurer:
(b)
INSPRU 3.1.61A R; and
(2) in any other case:
- 31/12/2007
INSPRU 1.5.19
See Notes
(1)
INSPRU 1.1.16 R requires a firm to establish adequate technical provisions for its long-term insurance contracts. INSPRU 1.1.20 R requires a firm which is not a composite firm to hold admissible assets of a value at least equal to the amount of the technical provisions and its other long-term insurance liabilities. INSPRU 1.1.21 R ensures that a composite firm identifies separate admissible assets with a value at least equal to the technical provisions for long-term insurance business and its other long-term insurance liabilities as well as holding other admissible assets of a value at least equal to the amount of its technical provisions for general insurance business and its other general insurance liabilities.
(2) In the case of a firm carrying on long-term insurance business which is not a pure reinsurer, there are excluded from the scope of INSPRU 1.1.20 R and INSPRU 1.1.21 Rproperty-linked liabilities and index-linked liabilities and the assets held to cover them under INSPRU 3.1.57 R and INSPRU 3.1.58 R. The latter two rules do not apply to a pure reinsurer (see INSPRU 3.1.58A R). However, a pure reinsurer is required by INSPRU 3.1.61A R to invest all its assets in accordance with the requirements of that rule.
(3) The overall impact of these provisions in INSPRU 1.1 and INSPRU 3.1, when read together with INSPRU 1.5.18 R, is that any firm writing long-term insurance business must identify separately assets of a value at least equal to the amount of its long-term insurance businesstechnical provisions, including those in respect of any property-linked liabilities or index-linked liabilities, and its other long-term insurance liabilities.
- 31/12/2007
INSPRU 1.5.20
See Notes
INSPRU 1.5.18 R does not prohibit a firm from identifying other assets as being available to meet the liabilities of its long-term insurance business. It may transfer such other assets to a long-term insurance fund (see INSPRU 1.5.21 R and INSPRU 1.5.22 R ) and the transfer will take effect when it is recorded in the firm's accounting records (see INSPRU 1.5.23 R). After the transfer takes effect, a firm may not transfer the assets out of a long-term insurance fund except where they represent an established surplus (see INSPRU 1.5.27 R).
- 31/12/2006
INSPRU 1.5.21
See Notes
(1) A firm's long-term insurance assets are the items in (2), adjusted to take account of:
(b) any transfers made in accordance with INSPRU 1.5.27 R.
(2) The items are:
(a) the assets identified under INSPRU 1.5.18 R (including assets into which those assets have been converted) but excluding any assets identified as being held to cover liabilities in respect of subordinated debt;
(b) any other assets identified by the firm as being available to cover its long-term insurance liabilities (including assets into which those assets have been converted) including, if the firm so elects, assets which are excluded under (a);
(d) other receipts of the long-term insurance business; and
(e) all income and capital receipts in respect of the items in (2).
- 31/12/2007
INSPRU 1.5.22
See Notes
(1) Unless (2) applies, all the long-term insurance assets of the firm constitute its long-term insurance fund.
(2) Where a firm identifies particular long-term insurance assets in connection with different parts of its long-term insurance business, the assets identified in relation to each such part constitute separate long-term insurance funds of the firm.
- 31/12/2006
INSPRU 1.5.23
See Notes
A firm must maintain a separate accounting record in respect of each of its long-term insurance funds (including any with-profits fund).
- 31/12/2006
INSPRU 1.5.24
See Notes
Firms must ensure that long-term insurance assets are separately identified and allocated to a long-term insurance fund at all times. Assets in external accounts, for example at banks, custodians, or brokers should be segregated in the firm's books and records into separate accounts for long-term insurance business and general insurance business. Where a firm has more than one long-term insurance fund, a separate accounting record must be maintained for each fund. Accounting records should clearly document the allocation.
- 31/12/2006
INSPRU 1.5.25
See Notes
Where the surplus arising from business is shared between policyholders and shareholders in different ways for different blocks of business, it may be necessary to maintain a separate fund to ensure that policyholders are, and will be, treated fairly. For example, if a proprietary company writes some business on a with-profits basis, this should be written in a with-profits fund separate from any business where the surplus arising from that business is wholly owned by shareholders.
- 31/12/2006
INSPRU 1.5.26
See Notes
Where a firm merges separate funds for different types of business, it will need to ensure that the merger will not result in policyholders being treated unfairly. When considering merging the funds, the firm should consider the impact on its PPFM (see
COBS 20.3
) and on its obligations to notify the
FSA
(see SUP 15.3). In particular, a firm would need to consider how any inherited estate would be managed and how the fund would be run in future, such that policyholders are treated fairly.
- 01/11/2007
INSPRU 1.5.27
See Notes
A firm may not transfer assets out of a long-term insurance fund unless:
(1) the assets represent an established surplus; and
(2) no more than three months have passed since the determination of that surplus.
- 31/12/2006
INSPRU 1.5.28
See Notes
As a result of INSPRU 1.5.27R (2), an actuarial investigation undertaken to determine an established surplus remains in-date for three months from the date as at which the determination of the surplus was made. However, even where the investigation is still in-date, the firm should not make the transfer unless there is sufficient surplus at the time of the transfer to allow it to be made without breach of INSPRU 1.1.20 R or INSPRU 1.1.21 R.
- 31/12/2006
INSPRU 1.5.29
See Notes
INSPRU 1.1.27 R and INSPRU 1.1.28 R provide further constraints on the transfer of assets out of a with-profits fund. INSPRU 1.1.27 R requires a firm to have admissible assets in each of its with-profits funds to cover the technical provisions and other long-term insurance liabilities relating to all the business in that fund.
INSPRU 1.1.28 R requires a realistic basis life firm to ensure that the realistic value of assets for each of its with-profits funds is at least equal to the realistic value of liabilities of that fund.
- 31/12/2006
Exclusive use of long-term insurance assets
INSPRU 1.5.30
See Notes
(1) A firm must apply a long-term insurance asset only for the purposes of its long-term insurance business.
(2) For the purpose of (1), applying an asset includes coming under any obligation (even if only contingently) to apply that asset.
- 31/12/2006
INSPRU 1.5.31
See Notes
A firm must not agree to, or allow, any mortgage or charge on its long-term insurance assets other than in respect of a long-term insurance liability.
- 31/12/2006
INSPRU 1.5.32
See Notes
The purposes of the long-term insurance business include the payment of claims, expenses and liabilities arising from that business, the acquisition of lawful access to fixed assets to be used in that business and the investment of assets. The payment of liabilities may include repaying a loan but only where that loan was incurred for the purpose of the long-term insurance business. The purchase or investment of assets may include an exchange at fair market value of assets (including money) between the long-term insurance fund and other assets of the firm. A firm may also lend securities held in a long-term insurance fund under a stock lending transaction or transfer assets as collateral for a stock lending transaction where the firm is the borrower, where such lending or transfer is for the benefit of the long-term insurance business.
- 31/12/2006
Payment of financial penalties
INSPRU 1.5.33
See Notes
If the
FSA
imposes a financial penalty on a long-term insurer, the firm must not pay that financial penalty from a long-term insurance fund.
- 31/12/2006
INSPRU 1.5.34
See Notes
INSPRU 1.5.2 R
states that this provision applies to all firms, except mutuals, and includes firms qualifying for authorisation under Schedule 3 or 4 to the Act.
- 31/12/2006
Requirements: property-linked funds
INSPRU 1.5.35
See Notes
INSPRU 3.1.57 R requires a firm to cover, as closely as possible, its property-linked liabilities by the property to which those liabilities are linked. In order to comply with this rule, a firm should identify the assets it holds to cover property-linked liabilities and should not apply those assets (as long as they are needed to cover the property-linked liabilities) for any purpose other than to meet those liabilities.
- 31/12/2006
INSPRU 1.5.36
See Notes
A firm must select, allocate and manage the assets to which its property-linked liabilities are linked taking into account:
(2) its regulatory duty to treat customers fairly, including in the way it makes discretionary decisions as to how it selects, allocates and manages assets.
- 31/12/2006
INSPRU 1.5.37
See Notes
Property-linked liabilities may be linked either to specified assets (with no contractual discretion given to the firm as to the choice of assets) or to assets of a specified kind where the selection of the actual assets is left to the firm.
- 31/12/2006
Requirements: UK branches of certain non-EEA firms
INSPRU 1.5.38
See Notes
The purpose of the rules and guidance set out in INSPRU 1.5.38 G to INSPRU 1.5.57 R is to protect against the risk that the financial resources required in respect of the activities of the United Kingdom (or EEA) branch(es) might be depleted by the other activities of the non-EEA direct insurer.
- 31/12/2006
INSPRU 1.5.39
See Notes
By virtue of INSPRU 1.5.2R (4), the rules in INSPRU 1.5.41 R to INSPRU 1.5.57 R apply to non-EEA direct insurers except for Swiss general insurers and EEA-deposit insurers. Responsibility for determining the adequacy of the world-wide financial resources of Swiss general insurers or EEA-deposit insurers rests exclusively with the Swiss authorities or the authorities in the EEA State (other than the United Kingdom) in which the deposit was made.
- 31/12/2006
INSPRU 1.5.40
See Notes
(1)
INSPRU 1.5.41 R requires a non-EEA direct insurer to hold adequate world-wide resources to meet the needs of the world-wide business without the need to rely on UK or EEAbranch assets other than to meet branch liabilities.
(2)
INSPRU 1.5.42 R to INSPRU 1.5.47 R require non-EEA direct insurers to calculate a local MCR and to hold assets representing that requirement in the EEA or the United Kingdom.
(3)
INSPRU 1.5.48 R to INSPRU 1.5.52 R require non-EEA direct insurers to hold a minimum level of assets in the United Kingdom or EEA.
(5)
INSPRU 1.5.56 R and INSPRU 1.5.57 R require non-EEA direct insurers to keep adequate accounting records in the United Kingdom.
- 31/12/2006
Worldwide financial resources
INSPRU 1.5.41
See Notes
(1) A non-EEA direct insurer must maintain adequate worldwide financial resources, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.
(2) For the purpose of (1):
(a) a UK-deposit insurer must not rely upon the assets held under INSPRU 1.1.20 R as available to meet liabilities other than those arising from the activities of its branches in EEA States;
(b) other non-EEA direct insurers to whom (1) applies must not rely upon the assets held under INSPRU 1.1.20 R as available to meet liabilities other than those arising from the activities of any UKbranch.
- 31/12/2006
UK or EEA MCR to be covered by admissible assets
INSPRU 1.5.42
See Notes
A non-EEA direct insurer must:
(2) hold admissible assets (in addition to those required under INSPRU 1.1.20 R) to represent its UK or EEA MCR calculated under (1).
- 31/12/2006
INSPRU 1.5.43
See Notes
The assets held under INSPRU 1.5.42R (2) must be identified and valued as if the non-EEA direct insurer was a firm with its head office in the United Kingdom.
- 31/12/2006
INSPRU 1.5.44
See Notes
For the purposes of INSPRU 1.5.42 R, a non-EEA direct insurer (except a UK-deposit insurer) must calculate a UK MCR:
(1) for long-term insurance business, in accordance with GENPRU 2.1.36 R but only in relation to business carried on by the firm in the United Kingdom;
(2) for general insurance business, in accordance with GENPRU 2.1.34 R but only in relation to business carried on by the firm in the United Kingdom.
- 31/12/2006
INSPRU 1.5.45
See Notes
For a composite firm, the UK MCR is the sum of the amounts arrived at under INSPRU 1.5.44R (1) and INSPRU 1.5.44R (2).
- 31/12/2006
INSPRU 1.5.46
See Notes
For the purposes of INSPRU 1.5.42 R, a UK-deposit insurer must calculate an EEA MCR:
(1) for long-term insurance business, in accordance with GENPRU 2.1.36 R but only in relation to business carried on by the firm in all EEA States, taken together;
(2) for general insurance business, in accordance with GENPRU 2.1.34 R but only in relation to business carried on by the firm in all EEA States, taken together.
- 31/12/2006
INSPRU 1.5.47
See Notes
For a composite firm, the EEA MCR is the sum of the amounts arrived at under INSPRU 1.5.46R (1) and INSPRU 1.5.46R (2).
- 31/12/2006
Localisation of assets
INSPRU 1.5.48
See Notes
A non-EEA direct insurer (except a UK-deposit insurer) must hold:
(1)
admissible assets which are required to cover its technical provisions in accordance with INSPRU 1.1.20R (1) or INSPRU 1.1.21R (1)(a) and (2)(a); and
(2) other admissible assets not required to cover property-linked liabilities or index-linked liabilities in accordance with INSPRU 3.1.57 R or INSPRU 3.1.58 R which represent its UK MCR as calculated in accordance with INSPRU 1.5.44 R;
as follows:(b) (where the assets represent the amount of the UK MCR in excess of the guarantee fund) in any EEA State.
- 31/12/2006
INSPRU 1.5.49
See Notes
A UK-deposit insurer must hold:
(1)
admissible assets which are required to cover its technical provisions in accordance with INSPRU 1.1.20R (1) or INSPRU 1.1.21R (1)(a) and INSPRU 1.1.21R (2)(a); and
(2) other admissible assets not required to cover property-linked liabilities or index-linked liabilities in accordance with INSPRU 3.1.57 R or INSPRU 3.1.58 R which represent its EEA MCR as calculated in accordance with INSPRU 1.5.46 R;
as follows:(a) (where the assets cover the technical provisions and the guarantee fund) within the EEA states where the firm carries on insurance business;
(b) (where the assets represent the amount of the EEA MCR in excess of the guarantee fund) in any EEA State.
- 31/12/2006
INSPRU 1.5.50
See Notes
INSPRU 1.5.48 R and INSPRU 1.5.49 R do not apply to assets covering technical provisions which are debts owed by reinsurers.
- 31/12/2006
INSPRU 1.5.51
See Notes
The admissible assets in excess of the technical provisions and UK or EEA MCR may be held outside the EEA.
- 31/12/2006
INSPRU 1.5.52
See Notes
For the purpose of INSPRU 1.5.48 R and INSPRU 1.5.49 R:
(1) a tangible asset is to be treated as held in the country or territory where it is situated;
(2) an admissible asset consisting of a claim against a debtor is to be regarded as held in any country or territory where it can be enforced by legal action;
(3) a
security which is listed is to be treated as held in any country or territory where there is a regulated market in which the security is dealt; and
- 31/12/2008
INSPRU 1.5.53
See Notes
INSPRU 3.1.53 R to INSPRU 3.1.55R (currency matching of assets and liabilities) apply to the assets held to match insurance liabilities calculated under INSPRU 1.1.12 R or INSPRU 1.1.16 R.
- 31/12/2006
Deposit of assets as security
INSPRU 1.5.54
See Notes
A non-EEA direct insurer must keep assets of a value at least equal to one quarter of the base capital resources requirement on deposit in the United Kingdom with a BCD credit institution.
- 31/12/2006
INSPRU 1.5.55
See Notes
The assets deposited as security may count towards the assets required under INSPRU 1.5.48 R and INSPRU 1.5.49 R. If, after the deposit is made, the value of the deposited assets falls below one quarter of the base capital resources requirement, the firm should deposit further admissible assets in order to comply with INSPRU 1.5.48 R and INSPRU 1.5.49 R. Deposited assets may be exchanged for other admissible assets and excess assets may be withdrawn, provided that the exchange or deposit does not cause a breach of INSPRU 1.5.48 R or INSPRU 1.5.49 R.
- 31/12/2006
Branch accounting records in the United Kingdom
INSPRU 1.5.56
See Notes
A non-EEA direct insurer must maintain at a place of business in the United Kingdom adequate records relating to:
(2) if it is an EEA-deposit insurer, the activities carried on from the branches in other EEA States.
- 31/12/2006
INSPRU 1.5.57
See Notes
The records maintained as required by INSPRU 1.5.56 R must include a record of:
(2) the assets identified under INSPRU 1.1.20 R as available to meet those liabilities.
- 31/12/2006
Application of INSPRU 1.5 to Lloyd's
INSPRU 1.5.58
See Notes
- 31/12/2006
INSPRU 1.5.59
See Notes
The Society and managing agents must take all reasonable steps to ensure that:
(1) a corporate member does not carry on any commercial business other than insurance business and activities arising directly from that business; and
(2)
individual members do not, in their capacity as underwriting members, carry on any commercial business other than insurance business and activities arising directly from that business.
- 31/12/2006
INSPRU 1.5.60
See Notes
A managing agent must not permit both general insurance business and long-term insurance business to be carried on together through any syndicate managed by it.
- 31/12/2006
INSPRU 1.6
Insurance Special Purpose Vehicles
- 31/12/2006
Application and Purpose
INSPRU 1.6.1
See Notes
(2)
INSPRU 1.6.13 G to INSPRU 1.6.18 G apply to an insurer which has a contract of reinsurance with an ISPV.
- 31/12/2006
INSPRU 1.6.2
See Notes
An ISPV is a special purpose vehicle which assumes risks from insurance undertakings or reinsurance undertakings and which fully funds its exposure to such risks through the proceeds of a debt issuance or some other financing mechanism where the repayment rights of the providers of such debt or other financing mechanism are subordinated to the reinsurance obligations of that vehicle. The special feature of an ISPV, when compared to other reinsurers, is that it is fully funded to meet its reinsurance liabilities. It is, therefore, not subject to insurance risk to the same extent as other reinsurers. The Reinsurance Directive permits ISPVs to be subject to different rules to those applying to other reinsurers.
- 31/12/2006
INSPRU 1.6.3
See Notes
To satisfy the definition of an ISPV under the Reinsurance Directive the ISPV must be fully funded. The
FSA
considers that to be fully funded an ISPV must have actually received the proceeds of the debt issuance or other mechanism by which it is financed. The
FSA
would not, therefore, grant a
Part IV permission
to an ISPV where part of the financing for its reinsurance liabilities was on a contingent basis, for example, a standby facility or letter of credit.
- 31/12/2006
INSPRU 1.6.4
See Notes
The purpose of INSPRU 1.6 is:
(1) to set out the rules applying to UK ISPVs in respect of:
(a) their assets and liabilities; and
(b) their contractual arrangements; and
(2) to set out the conditions that must be met in order for an insurer to claim credit for reinsurance with an ISPV.
- 31/12/2006
Assets and liabilities
INSPRU 1.6.5
See Notes
A UK ISPV must ensure that at all times its assets are equal to or greater than its liabilities.
- 31/12/2006
INSPRU 1.6.5A
See Notes
The purpose of INSPRU 1.6.5 R is to ensure that a UK ISPV may be viewed as a going concern at all times.
- 31/12/2007
INSPRU 1.6.6
See Notes
In addition to liability under its contracts of reinsurance, an ISPV will incur liability for other expenses, for example, staff and accommodation costs, claims handling arrangements and professional advisers' fees. INSPRU 1.6.5 R requires a UK ISPV to ensure that it always has sufficient assets to meet its liabilities.
- 31/12/2006
INSPRU 1.6.7
See Notes
A UK ISPV must invest its assets in accordance with the requirements set out in INSPRU 3.1.61AR.
- 31/12/2006
INSPRU 1.6.8
See Notes
A UK ISPV's assets must be held by, or on behalf of:
(1) the UK ISPV; or
(2) the insurance undertaking or reinsurance undertaking which cedes to the UK ISPV the risks in respect of which the relevant assets are held.
- 31/12/2006
Contractual arrangements
INSPRU 1.6.9
See Notes
A UK ISPV must include in each of its contracts of reinsurance terms which secure that its aggregate maximum liability at any time under those contracts of reinsurance does not exceed the amount of its assets at that time.
- 31/12/2006
INSPRU 1.6.10
See Notes
INSPRU 1.6.9 R requires that a UK ISPV's contracts of reinsurance should include terms that secure that its maximum reinsurance liability is capped at a level that is no greater than the ISPV's assets. In the
FSA's
view, this is a necessary condition of the ISPV being fully funded, as it means that the ISPV should not find that its assets are insufficient to meet its reinsurance liabilities.
- 31/12/2006
INSPRU 1.6.11
See Notes
A UK ISPV must ensure that under the terms of any debt issuance or other financing arrangement used to fund its reinsurance liabilities the rights of the providers of that debt or other financing are fully subordinated to the claims of creditors under its contracts of reinsurance.
- 31/12/2006
INSPRU 1.6.12
See Notes
A UK ISPV must only enter into contracts or otherwise assume obligations which are necessary for it to give effect to the reinsurance arrangements which represent the special purpose for which it has been established.
- 31/12/2006
Reinsurance with an ISPV
INSPRU 1.6.13
See Notes
As a result of GENPRU 1.3.55 R, GENPRU 2 Annex 7, INSPRU 1.1.92A R and INSPRU 1.2.28 R an insurer may not:
unless it first obtains a waiver from the FSA . INSPRU 1.6.14 G to INSPRU 1.6.18 G set out the information which the FSA will expect to receive as part of the application for the waiver. Those paragraphs also set out the factors, in addition to the statutory tests under section 148 of the Act, to which the FSA will have regard in deciding:
(1) treat amounts recoverable from an ISPV as:
(a) an admissible asset, or
(2) otherwise ascribe a value to such amounts,
unless it first obtains a waiver from the FSA . INSPRU 1.6.14 G to INSPRU 1.6.18 G set out the information which the FSA will expect to receive as part of the application for the waiver. Those paragraphs also set out the factors, in addition to the statutory tests under section 148 of the Act, to which the FSA will have regard in deciding:
(i) whether to grant such a waiver (assuming the section 148 conditions are met); and
- 31/12/2006
INSPRU 1.6.14
See Notes
Where the ISPV is a UK ISPV, the
FSA
will wish to be satisfied that the UK ISPV complies with INSPRU 1.6.5 R to INSPRU 1.6.12 R. The
FSA
may rely on information supplied in connection with its application for authorisation. However, if the application for a waiver is made some time after authorisation was granted, the
FSA
may request confirmation that there has been no material change to the information originally supplied.
- 31/12/2006
INSPRU 1.6.15
See Notes
Where the ISPV is not a UK ISPV, the
FSA
will expect to receive confirmation that the ISPV has received an official authorisation in accordance with article 46 of the Reinsurance Directive in the EEA State in which it has been established. In addition, it will need details of the debt issuance or other financing mechanism by which the ISPV'sreinsurance liabilities are funded. The
FSA
will also expect to receive information about the ISPV's key management and control functions, including details of the ISPV's auditors and arrangements for claims handling, and any material outsourcing agreements. The
FSA
will also need information about the structure of any group of which the ISPV is a member.
- 31/12/2006
INSPRU 1.6.16
See Notes
No credit may be taken for a contract of reinsurance with an ISPV unless the contract meets the risk transfer principle set out in INSPRU 1.1.19A R. The
FSA
will require evidence that the contract of reinsurance and the extent of the credit that the firm proposes to take for it satisfy the risk transfer principle.
- 31/12/2006
INSPRU 1.6.17
See Notes
The
FSA
will require information about the impact of the ISPV arrangement on the ceding firm's individual capital assessment carried out in accordance with INSPRU 7.1. This should include evidence that all residual risks associated with the arrangement (including credit, market, liquidity and operational risks) are reflected in that assessment.
- 31/12/2006
INSPRU 1.6.18
See Notes
The
FSA
will also expect to receive an analysis of the potential for risk to revert to the firm or any of its associates under realistic adverse scenarios or for liabilities to arise in respect of the risks transferred for which no provision has been made.
- 31/12/2006
INSPRU 1 Annex 1
INSPRU 1.2 (Mathematical reserves) and INSPRU 1.3 (With-profits insurance capital component)
- 31/12/2006
See Notes
- 31/12/2006
INSPRU 2
Credit risk in insurance
INSPRU 2.1
Application
- 31/12/2006
INSPRU 2.1.1
See Notes
INSPRU 2.1 applies to an insurer unless it is:
(1) a non-directive friendly society; or
(2) an incoming EEA firm; or
(3) an incoming Treaty firm.
- 31/12/2006
INSPRU 2.1.2
See Notes
All of INSPRU 2.1, except INSPRU 2.1.20 R and INSPRU 2.1.23 R to INSPRU 2.1.32 G, applies to:
(1) an EEA-deposit insurer; and
(2) a Swiss general insurer;
but only in respect of the activities of the firm carried on from a branch in the United Kingdom.- 31/12/2006
INSPRU 2.1.3
See Notes
The scope of application of INSPRU 2.1 is not restricted to firms that are subject to relevant
EU
directives.
- 01/12/2009
INSPRU 2.1.4
See Notes
(1) This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.
(2) Where a firm carries on both long-term insurance business and general insurance business, this section applies separately to each type of business.
- 31/12/2006
Purpose
INSPRU 2.1.5
See Notes
The purpose of this section is to protect policyholders and potential policyholders by setting out the requirements applicable to a firm in respect of credit risk. Credit risk is incurred whenever a firm is exposed to loss if a counterparty fails to perform its contractual obligations including failure to perform them in a timely manner. Credit risk may therefore have an impact upon a firm's ability to meet its valid claims as they fall due. Credit risk can also arise from underlying causes that have an impact upon the creditworthiness of all counterparties of a particular description or geographical location. A detailed explanation of credit risk is given at SYSC 15.1.4 G.
- 31/12/2006
INSPRU 2.1.6
See Notes
The requirements in this section address both current and contingent exposure to credit risk.
PRIN and
SYSC require a firm to establish adequate internal systems and controls for exposure to credit risk. This section requires a firm to restrict its exposure to different counterparties and assets to prudent levels and to ensure that those exposures are adequately diversified. It also requires a firm to make deductions from the value of assets in respect of exposures to one asset, counterparty or group of closely related counterparties in excess of prescribed limits.
- 31/12/2006
INSPRU 2.1.7
See Notes
This section also sets limits on the market risk arising from holding assets including securities issued or guaranteed by counterparties. This market risk is incurred whenever a firm is exposed to loss if an asset were to reduce in value or even become worthless. These market risk limits are set out in this section rather than the market risk sections in INSPRU because they are closely linked to the counterparty limits set out in this section.
- 31/12/2006
Overall limitation of credit risk
INSPRU 2.1.8
See Notes
Taking into account relevant risks, a firm must restrict its counterparty exposures and asset exposures to prudent levels and ensure that those exposures are adequately diversified.
- 31/12/2006
INSPRU 2.1.9
See Notes
(1) For the purposes of INSPRU 2.1, counterparty exposure is the amount a firm would lose if a counterparty were to fail to meet its obligations (either to the firm or to any other person) and if simultaneously securities issued or guaranteed by the counterparty were to become worthless.
(2) For the purposes of INSPRU 2.1, asset exposure is the amount a firm would lose if an asset or class of identical assets (whether or not held directly by the firm) were to become worthless.
(3) For the purposes of (1) and (2), the amount of loss is the amount, if any, by which the firm's capital resources (as calculated in accordance with the capital resources table but without making any deduction for assets in excess of market risk and counterparty limits) would decrease as a result of the counterparty failing to meet its obligations and the securities or assets becoming worthless.
(4) In determining the amount of loss in accordance with (3), the firm must take into account decreases in its capital resources that would result not only from its own direct exposures but also from:
(a) exposures held by any of its subsidiary undertakings; and
(b) synthetic exposures arising from derivatives or quasi-derivatives held or entered into by the firm or any of its subsidiary undertakings.
(5) If a firm elects under INSPRU 2.1.35 R to make a deduction in respect of collateral, the firm must deduct from the amount of loss determined in accordance with (3) so much of the value of that collateral as:
(b) does not exceed any of the relevant limits in INSPRU 2.1.22R (3).
- 31/12/2006
INSPRU 2.1.10
See Notes
Exposure is defined in terms of loss (which is decrease in capital). It does not include exposures arising from assets that are not represented in capital or exposures which if crystallised in a loss would be offset by a consequent gain, reduction in liabilities or release of provisions, but only in so far as that gain, reduction or release would itself lead to an offsetting increase in capital resources. Examples include:
(1) exposure from the holding of assets to which the firm has attributed no value;
(3) exposure in respect of which (and to the extent that) the firm has established a provision.
- 31/12/2006
INSPRU 2.1.11
See Notes
In assessing the adequacy of diversification required by INSPRU 2.1.8 R, a firm should take into account concentrations of exposure including those arising from:
(1) different types of exposure to the same counterparty, such as deposits, loans, securities, reinsurance and derivatives;
(2) links between counterparties such that default by one might have an impact upon the creditworthiness of another; and
(3) possible changes in circumstance that would have an impact upon the creditworthiness of all counterparties of particular description or geographical location.
- 31/12/2006
INSPRU 2.1.12
See Notes
A firm should consider how the spreading of credit risk will impact on overall counterparty quality.
- 31/12/2006
INSPRU 2.1.13
See Notes
In assessing its exposure to a counterparty for the purpose of INSPRU 2.1.8 R, a firm should take into account:
(1) the period for which the exposure to that counterparty might continue;
(2) the likelihood of default during that period by the counterparty; and
(3) the loss that might result in the event of default.
- 31/12/2006
INSPRU 2.1.14
See Notes
In assessing the loss that might result from the default of a counterparty for the purposes of INSPRU 2.1.8 R, a firm should take into account the circumstances that might lead to default and, in particular, how these might have an impact upon:
(1) the amount of exposure to the counterparty; and
(2) the effectiveness of any loss mitigation techniques employed by the firm.
- 31/12/2006
INSPRU 2.1.15
See Notes
Often the same circumstances which lead to the crystallisation of contingent credit exposure, e.g. a significant claims event or a significant movement in interest, currency or asset values, also lead to an increase in the risk of default by the counterparty. In particular, if a reinsurer or derivativecounterparty is being relied upon to provide protection against the consequences of an event or circumstance, a firm should take into account how that event or circumstance might have an impact upon the creditworthiness of the reinsurer or derivativecounterparty.
- 31/12/2006
INSPRU 2.1.16
See Notes
For the purposes of INSPRU 2.1.8 R and of determining counterparty exposure and asset exposure in accordance with INSPRU 2.1.9 R and reinsurance exposure in accordance with INSPRU 2.1.25 R, a firm must only rely upon a loss mitigation technique where it has good reason to believe that, taking into account the possible circumstances of default, it is likely to be effective.
- 31/12/2006
INSPRU 2.1.17
See Notes
Loss mitigation techniques include:
(1) the right, upon default, to preferential access to some or all of the counterparty's assets, for example by exercising rights of set off, holding collateral or assets deposited back, or exercising rights under fixed or floating charges;
(2) rights against third parties upon default by the counterparty, such as guarantees, credit insurance and credit derivatives; and
(3) where the counterparty is a reinsurer, having back-up or flexible reinsurance which covers the gap in coverage left by the reinsurer's default, for example 'top and drop' reinsurance.
- 31/12/2006
INSPRU 2.1.18
See Notes
For the purposes of INSPRU 2.1.8 R and of determining counterparty exposure and asset exposure in accordance with INSPRU 2.1.9 R and reinsurance exposure in accordance with INSPRU 2.1.25 R, a firm must not rely upon preferential access to assets unless it has taken into account appropriate professional advice as to its effectiveness.
- 31/12/2006
INSPRU 2.1.19
See Notes
In particular, a firm should consider whether any preferential access to a counterparty's assets would be effective even if the counterparty were wound up by a court or other legal process or it were to be subject to any other insolvency process. A firm should also consider, where it is relying upon a right against a third party, whether, in the circumstances of the counterparty's default, the creditworthiness of that third party might be impaired.
- 31/12/2006
Large exposure limits
INSPRU 2.1.20
See Notes
(1) A firm must take reasonable steps to limit its counterparty exposure or asset exposure to:
(a) a single counterparty;
(b) each of the counterparties within a group of closely related counterparties; and
(c) an asset or class of identical assets;
to a level where, if a total default were to occur, the firm would not become unable to meet its liabilities as they fall due.(2) In (1), a total default occurs where:
(a) the single counterparty or all of the counterparties within the group of closely related counterparties fail to meet its or their obligations and simultaneously any securities issued or guaranteed by it or any of them become worthless; or
(b) the asset becomes worthless or all of the assets within the identical class become worthless at the same time.
(3) (1) does not apply to:
(a) a reinsurance exposure; or
- 31/12/2006
INSPRU 2.1.21
See Notes
In assessing its exposure to a counterparty or group of closely related counterparties, a firm should consider exposures from different sources including deposits, loans, securities and derivatives.
- 31/12/2006
Market risk and counterparty limits
INSPRU 2.1.22
See Notes
(1) A firm must calculate the amount of the deduction from total capital required by stage L in the capital resources table in respect of assets in excess of market risk and counterparty limits as the aggregate amount by which its counterparty exposures and asset exposures exceed the relevant limits set out in (3).
(2) Except where the contrary is expressly stated in INSPRU, whenever:
(a) a rule in INSPRU refers to assets of a firm, or of any part of a firm, or of any fund or part of a fund within a firm, which are assets of a kind referred to in any of the limits in (3); and
(b) the firm'scounterparty exposure (or aggregate exposure arising from the counterparty exposures to each member of a group of closely related persons) or asset exposure in respect of those assets exceeds any of the limits in (3);
the firm must deduct from the measure of the value of those assets (as determined in accordance with GENPRU 1.3) the amount by which that exposure exceeds the relevant limit in (3), or that portion of the deduction that relates to the part of the firm or fund or part of a fund in question.(3) The limits referred to in (1) and (2) are the following, expressed as a percentage of the firm's business amount:
(a) for a counterparty exposure to an individual, unincorporated body of individuals or the aggregate exposure arising from the counterparty exposures to each member of a group of closely related individuals or unincorporated bodies of individuals:
(i) ¼% for that part of the exposure that arises from unsecured debt;
(ii) 1% for the whole exposure (after deduction of the excess arising from the limit in (a)(i));
(b) for a counterparty exposure to an approved counterparty or the aggregate exposure arising from the counterparty exposures to each member of a group of closely related
approved counterparties
:
(i) 40% for that part of the exposure arising from covered bonds;
(ii) 5% for that part of the exposure not arising from covered bonds or, if the counterparty is an approved credit institution, from short term deposits; this limit is increased to 10% if the total of such exposures which are greater than 5% arising from applying a 10% limit, when taken together with any exposures arising from covered bonds which are within the 40% limit in (i), does not exceed 40%;
(iii) 20% or 2 million, if larger, for the whole exposure (but excluding any exposure arising from covered bonds and after deduction of the excess arising from the limit in (b) (ii));
(c) for a counterparty exposure to a person, or the aggregate exposure arising from the counterparty exposures to each member of a group of closely related persons, who do not fall into the categories of counterparty to whom (a) and (b) apply:
(i) 1% for that part of the exposure arising from unsecured debt; this limit is increased to 2.5% in the case of an exposure to a regulated institution;
(ii) 1% for that part of the exposure arising from shares and other variable yield participations, bonds, debtsecurities and other money market instruments and capital market instruments from the same counterparty that are not dealt in on a regulated market, or a beneficial interest in a collective investment scheme to which INSPRU 2.1.39 R applies; the limit for that part of the exposure arising from debt securities (other than hybrid securities) issued by the same regulated institution is increased to 5%;
(iii) 5% for the whole exposure (after deduction of the excesses arising from the limits in (c)(i) and (ii));
(d) 5% for the aggregate of all counterparty exposures that fall within (c)(i) whether or not they arise from persons who are closely related, but excluding amounts that are in excess of the limit in (c)(i);
(e) 10% for the aggregate of all counterparty exposures and asset exposures that fall within (c)(ii) above or (j) below, whether or not they arise from persons who are closely related, but excluding amounts that are in excess of the limit in (c)(ii) above or, in the case of an asset exposure, (j) below;
(f) 5% for the aggregate of all counterparty exposures arising from unsecured loans, other than those falling within (3)(b);
(g) 3% for the asset exposure arising from all cash in hand;
(h) 10% for the asset exposure (including an exposure arising from a reversionary interest) arising from any one piece of land or building, or a number of pieces of land or buildings close enough to each other to be considered effectively as one investment;
(i) 5% for the asset exposure arising from a beneficial interest in any single non-UCITS retail scheme or recognised scheme which does not fall within the UCITS Directive; and
(j) 1% for the asset exposure arising from a beneficial interest in any single collective investment scheme which does not fall within the UCITS Directive and is not a non-UCITS retail scheme or a recognised scheme.
(4) In (3) a firm's business amount means the sum of:
(b) the amount of its other liabilities (except those included in the calculation of capital resources in accordance with the capital resources table); and
(c) such amount as the firm may select not exceeding, in the case of a firm which is not a participating insurance undertaking, the amount of the firm's total capital after deductions as calculated at stage M of the capital resources table or, in the case of a firm which is a participating insurance undertaking, the amount calculated in accordance with (5A) or, in either case, if higher:
(i) in the case of a firm carrying on general insurance business, the amount of its general insurance capital requirement; and
(ii) in the case of a firm carrying on long-term insurance business, the amount of its long-term insurance capital requirement and, where it is a regulatory basis only life firm, the amount of its resilience capital requirement.
(5) For the purpose of (4)(a), a firm's total gross technical provisions exclude technical provisions in respect of index-linked liabilities or property-linked liabilities, except that where the linked long-term contract of insurance in question includes a guarantee of investment performance or some other guaranteed benefit, the total gross technical provisions include the technical provisions in respect of that guaranteed element.
(5A) For the purpose of (4)(c), a firm which is a participating insurance undertaking must calculate the amount of the firm's group capital resources less the difference between:
(5B) In (3)(b)(ii) short term deposit means a deposit which may be withdrawn at the discretion of the lender without penalty or loss of accrued interest by giving notice of withdrawal of one month or less.
(6) In (3)(c)(ii) hybrid security means a debt security, other than an approved security, the terms of which provide, or have the effect that, the holder does not, or would not, have an unconditional entitlement to payment of interest and repayment of capital in full within 75 years of the date on which the security is being valued.
(7) In (3)(a)(i) and (3)(c)(i) an unsecured debt is any debt in respect of which the conditions in INSPRU 2.1.35 R or INSPRU 2.1.36 R and INSPRU 2.1.37 R are not satisfied or, if satisfied only in relation to part of the debt, that part of the debt which is not covered by collateral or a guarantee, letter of credit or credit derivative in accordance with those rules.
- 31/12/2009
INSPRU 2.1.22A
See Notes
INSPRU 2.1.22 R does not apply to a pure reinsurer.
- 31/12/2006
Large exposure calculation for reinsurance exposures
INSPRU 2.1.23
See Notes
A firm must notify the
FSA
in accordance with
SUP 15.7
as soon as it first becomes aware that:
(1) a reinsurance exposure to a reinsurer or group of closely related reinsurers is reasonably likely to exceed 100% of its capital resources; or
(2) if (1) does not apply, that it has exceeded this limit.
- 31/12/2006
INSPRU 2.1.24
See Notes
Upon notification under INSPRU 2.1.23 R, a firm must:
(1) demonstrate that prudent provision has been made for the reinsurance exposure in excess of the 100% limit, or explain why in the opinion of the firm no provision is required; and
(2) explain how the reinsurance exposure is being safely managed.
- 31/12/2006
INSPRU 2.1.25
See Notes
(1) For the purposes of INSPRU 2.1, a reinsurance exposure is the amount of loss which a firm would suffer if a reinsurer or group of closely related reinsurers were to fail to meet its or their obligations under contracts of reinsurance reinsuring any of the firm's contracts of insurance.
(2) For the purposes of (1), the amount of loss is the amount, if any, by which the firm's capital resources (as calculated in accordance with the capital resources table but without making any deduction for assets in excess of market risk and counterparty limits) would decrease as a result of the reinsurer or group of closely related reinsurers failing to meet its or their obligations under the contracts of reinsurance.
(3) If a firm elects under INSPRU 2.1.35 R to make a deduction in respect of collateral, the firm must deduct from the amount of loss determined in accordance with (2) so much of the value of that collateral as:
(b) does not exceed any of the relevant limits in INSPRU 2.1.22R (3).
- 31/12/2006
INSPRU 2.1.26
See Notes
A firm must, in determining its reinsurance exposures for the purposes of INSPRU 2.1, aggregate any reinsurance exposure where the identity of the reinsurer is not known by the firm with the highest reinsurance exposure where it does know the identity of the reinsurer.
- 31/12/2006
INSPRU 2.1.27
See Notes
INSPRU 2.1.8 R provides that, taking into account relevant risks, a firm must restrict to prudent levels, and adequately diversify, its exposure to counterparties.
- 31/12/2006
INSPRU 2.1.28
See Notes
(1) In each financial year, a firm should restrict the gross earned premiums which it pays to a reinsurer or group of closely related reinsurers to the higher of:
(b) 4 million.
(2) Compliance with this provision may be relied upon as tending to establish compliance with INSPRU 2.1.8 R.
- 31/12/2006
INSPRU 2.1.29
See Notes
A firm must notify the
FSA
immediately in accordance with SUP 15.7 if it has exceeded, or anticipates exceeding, the limit expressed in INSPRU 2.1.28 E.
- 31/12/2006
INSPRU 2.1.30
See Notes
Upon notification under INSPRU 2.1.29 R, a firm must explain to the
FSA
how, despite the excess reinsurance concentration, the credit risk is being safely managed.
- 31/12/2006
INSPRU 2.1.31
See Notes
For the purposes of INSPRU 2.1.24 R and INSPRU 2.1.30 R, a firm's explanation of how a reinsurance exposure is being safely managed should also describe the reinsurance market in which the exposure has occurred, and the nature of the reinsurance contract. If appropriate, the firm should also provide a detailed plan and timetable explaining how the excess exposure will be reduced to an acceptable level. The explanation should be approved by a person at the firm of appropriate seniority.
- 31/12/2006
INSPRU 2.1.32
See Notes
Where a firm can demonstrate that the arrangement does not give rise to unacceptable levels of credit risk it is unlikely that further action will be required.
- 31/12/2006
Exposures excluded from limits
INSPRU 2.1.33
See Notes
In INSPRU 2.1.20 R and INSPRU 2.1.22 R, references to a counterparty exposure or an asset exposure do not include such an exposure arising from:
(1) [deleted]
(2)
premium debts;
(3) advances secured on, and not exceeding the surrender value of, long-term insurance contracts of the firm;
(4) rights of salvage or subrogation;
(6) assets held to cover index-linked liabilities or property-linked liabilities, except that where the linked long-termcontract of insurance in question includes a guarantee of investment performance or some other guaranteed benefit, INSPRU 2.1.20 R and INSPRU 2.1.22 R will nevertheless apply to assets held to cover that guaranteed element;
(8) an approved security;
- 31/12/2006
INSPRU 2.1.34
See Notes
In INSPRU 2.1.22 R references to a counterparty exposure or an asset exposure do not include such an exposure resulting from debts arising from reinsurance ceded and the reinsurer's share of technical provisions.
- 31/12/2008
INSPRU 2.1.35
See Notes
If:
(1) a firm has a counterparty exposure, an asset exposure or a reinsurance exposure in respect of which it has rights over collateral (except where that collateral is a letter of credit see INSPRU 2.1.36 R and INSPRU 2.1.37 R); and
the firm may, in determining the amount of that exposure, deduct the value of that collateral in accordance with INSPRU 2.1.9R (5) or, in the case of a reinsurance exposure, INSPRU 2.1.25R (3).- 31/12/2006
INSPRU 2.1.36
See Notes
If a firm has a counterparty exposure, asset exposure or reinsurance exposure the whole or any part of which is:
(1) guaranteed by a credit institution or an investment firm subject in either case to the Capital Adequacy Directive or supervision by a third country (non-EEA) supervisory authority with a Capital Adequacy Directive-equivalent regime; or
(2) adequately mitigated by a credit derivative;
the firm may, for the purposes of INSPRU 2.1.20 R, INSPRU 2.1.22 R and INSPRU 2.1.23 R, treat that exposure, or that part of the exposure which is so guaranteed or mitigated, as an exposure to the guarantor or derivative counterparty, rather than to the original counterparty, asset or reinsurer.- 31/12/2006
INSPRU 2.1.37
See Notes
For the purposes of INSPRU 2.1.36 R, references to an exposure being guaranteed include an exposure secured by a letter of credit, but to fall within INSPRU 2.1.36 R the guarantee or letter of credit must be direct, explicit, unconditional and irrevocable.
- 31/12/2006
INSPRU 2.1.38
See Notes
The portion of exposure which is guaranteed or mitigated by a credit derivative is itself, as an exposure to the guarantor or derivative counterparty, subject to the limits in INSPRU 2.1.20 R and INSPRU 2.1.22 R.
- 31/12/2006
INSPRU 2.1.39
See Notes
For the purposes of INSPRU 2.1.20 R and INSPRU 2.1.22 R, units in a collective investment scheme that does not fall within the UCITS Directive must be treated as a counterparty exposure to the issuer of the units in that scheme if the issuer and those units are to be regarded as constituting a single risk because they are so interconnected that, if the issuer were to experience financial problems, this would be likely to affect the value of the units.
- 31/12/2006
INSPRU 2.1.39A
See Notes
Where the value of units in a collective investment scheme other than one falling within the UCITS Directive would be likely to be adversely affected by financial problems experienced by the issuer of those units, for the purposes of INSPRU 2.1.20 R and INSPRU 2.1.22 R, the units must be treated as a counterparty exposure to the issuer, with the result that the exposure is subject to the limit in INSPRU 2.1.22R (3)(c)(ii). In all other cases, the units would fall to be treated as an asset exposure, with the result that they are subject to the relevant limit under INSPRU 2.1.22R (3)(i) or (j).
- 31/12/2006
Meaning of closely related
INSPRU 2.1.40
See Notes
For the purposes of INSPRU 2.1, a group of persons is closely related if it consists solely of two or more persons who, unless it is shown otherwise, constitute a single risk because as between any two of them one or other of the following relationships apply:
(1) one of them, directly or indirectly, has control, as defined in INSPRU 2.1.41 R, over the other or they are both controlled by the same third party; or
(2) there is no relationship of control as defined in INSPRU 2.1.41 R but they are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other would be likely to encounter repayment difficulties.
- 31/12/2006
INSPRU 2.1.41
See Notes
For the purposes of INSPRU 2.1.40 R, control means the relationship between a parent undertaking and a subsidiary undertaking, as defined in Article 1 of the Consolidated Accounts Directive (83/349/EEC), or a similar relationship between any natural or legal person and an undertaking.
- 31/12/2006
Meaning of reinsurance
INSPRU 2.1.41A
See Notes
For the purposes of INSPRU 2.1, references to reinsurance include analogous non-reinsurance financing agreements, including contingent loans, securitisations and any other arrangements in respect of contracts of insurance that are analogous to contracts of reinsurance in terms of the risks transferred and the finance provided and references to reinsurer shall be construed accordingly.
- 31/12/2007
Application of INSPRU 2.1 to Lloyd's
INSPRU 2.1.42
See Notes
Subject to INSPRU 2.1.43 R, INSPRU 2.1 applies to managing agents and to the Society in accordance with:
- 31/12/2006
INSPRU 2.1.43
See Notes
INSPRU 2.1.23 R to INSPRU 2.1.32 G (Large exposure calculation for reinsurance exposures) do not apply to the Society.
- 31/12/2006
Overall limitation of credit risk
INSPRU 2.1.44
See Notes
For Lloyd's, counterparty exposure is:
(1) for managing agents, the amount by which the net assets managed by or under the direction of a managing agent in respect of a syndicate together with any relevant balancing amount would decrease if the counterparty were to default;
(2) for the Society, the amount by which its net assets (which include those of its subsidiary undertakings) would decrease if the counterparty were to default; and
(3) for the Society's management of each member'sfunds at Lloyd's, the amount by which the member's net assets would decrease if the counterparty were to default.
- 31/12/2006
Large exposures
INSPRU 2.1.45
See Notes
For the purposes of INSPRU 2.1.20 R (Large exposure limits: counterparty exposure and asset exposure), the Society may determine the exposure to any letters of credit, guarantees or members' life assurance policies as an exposure of the members in aggregate.
- 31/12/2006
INSPRU 2.1.46
See Notes
For the purposes of INSPRU 2.1.22 R (Large exposure limits: market risk and counterparty limits), the Society must calculate the amount of and deduct from capital resources:
(1) an exposure (expressed as a percentage of the relevant member'scapital resources held as funds at Lloyd's), other than to the assets identified in INSPRU 2.1.46R (2)(a) to INSPRU 2.1.46R (2)(c), of a member'scapital resources held as funds at Lloyd's to a counterparty, in excess of the limits in INSPRU 2.1.22 R;
(2) an exposure in excess of 20% (expressed as a percentage of the aggregate of capital resources held as funds at Lloyd's) of the aggregate of capital resources held as funds at Lloyd's to a single issuer of:
(a) letters of credit;
(b) guarantees; or
(c)
members' life assurance policies;
(3) an exposure of its own to a counterparty, in excess of the limits in INSPRU 2.1.22 R, expressed as a percentage of the Society's own assets.
- 31/12/2006
INSPRU 2.1.47
See Notes
For the purposes of INSPRU 2.1.22 R (Large exposure limits: market risk and counterparty limits), managing agents must calculate the amount of and deduct from capital resources an exposure (expressed as a percentage of the admissible assets held in respect of the relevant syndicate) of admissible assets held in respect of a syndicate to a counterparty in excess of the limits in INSPRU 2.1.22 R.
- 31/12/2006
INSPRU 2.1.48
See Notes
If the exposures of capital resources held as funds at Lloyd's for members in the aggregate do not exceed the limits in INSPRU 2.1.22R (3)(c), then, for each individual member, that limit may be replaced by 10%.
- 31/12/2006
Exposures excluded from the large exposure limits
INSPRU 2.1.49
See Notes
For managing agents, in INSPRU 2.1.33 R and INSPRU 2.1.35 R, references to an exposure do not include exposure arising from balancing amounts.
- 31/12/2006
INSPRU 2.2
Asset-related Capital Requirement
- 31/12/2006
Application
INSPRU 2.2.1
See Notes
INSPRU 2.2 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.
- 31/12/2006
INSPRU 2.2.2
See Notes
The scope of application of INSPRU 2.2 is not restricted to firms that are subject to the relevant
EU
directives.
- 01/12/2009
INSPRU 2.2.3
See Notes
- 31/12/2006
INSPRU 2.2.4
See Notes
- 31/12/2006
INSPRU 2.2.5
See Notes
The requirements in INSPRU 2.2 apply to a firm on a solo basis.
- 31/12/2006
Purpose
INSPRU 2.2.6
See Notes
GENPRU 2.1.13 R requires that a firm must maintain at all times capital resources equal to or in excess of its capital resources requirement. GENPRU 2.1.17 R provides that for a firm carrying on general insurance business the firm'scapital resources requirement is the minimum capital requirement.
- 31/12/2006
INSPRU 2.2.7
See Notes
The
FSA
will use the enhanced capital requirement as the benchmark for individual capital guidance for a firm carrying on general insurance business, other than a non-directive insurer. The enhanced capital requirement is the sum of the asset-related capital requirement and the insurance-related capital requirement less the firm's equalisation provisions. This section sets out rules and guidance relating to the asset-related capital requirement. Rules and guidance relating to the insurance-related capital requirement are set out in INSPRU 1.1.
- 31/12/2006
INSPRU 2.2.8
See Notes
The asset-related capital requirement is a measure of the capital that a firm should hold against the risk of loss if another party fails to perform its financial obligations to the firm or from adverse movements in the value of assets.
- 31/12/2006
INSPRU 2.2.9
See Notes
The asset-related capital requirement is calculated by applying capital charge factors, expressed as a percentage, to different categories of a firm's assets. A firm should refer to GENPRU 1.3 which sets out how a firm must recognise and value assets and liabilities.
- 31/12/2006
Calculation of asset-related capital requirement
INSPRU 2.2.10
See Notes
- 31/12/2006
INSPRU 2.2.11
See Notes
(1) The value of each of the firm's assets of a kind listed in the table in INSPRU 2.2.16 R must be multiplied by the corresponding capital charge factor.
(2) If any amount which is to be multiplied by a capital charge factor is a negative amount, that amount shall be treated as zero.
(3) No account shall be taken of:
(a) the value of any asset which is not an admissible asset;
(b) the amount (if any) by which the value of any assets exceeds the limits on exposures to a type of asset or counterparty as set out in INSPRU 2.1.22 R.
(4) Where a firm has entered into a derivative, then for the purposes of applying the appropriate capital charge factor as set out in INSPRU 2.2.16 R, it must treat the value of the derivative and the value of the asset associated with the derivative as a single asset of a type and value which most closely reflects the economic risk to the firm of the combined rights and obligations associated with the derivative and the asset associated with the derivative.
(5) The amounts resulting from multiplying each of the asset items referred to in (1) by the corresponding capital charge factor must be aggregated.
(6) The asset-related capital requirement is the amount resulting from the aggregation in (5).
- 31/12/2006
INSPRU 2.2.12
See Notes
Options: some derivatives may allow a firm an option whether to buy or sell a particular asset. If an option has a positive market value (that is, in-the-money) it is likely that the firm will exercise the option in the future and the current value of the derivative and associated asset will generally acquire new characteristics and volatility (a 'synthetic asset'). For instance, an option to acquire shares at a price below their current market value is likely to be exercised and the appropriate asset-related capital requirement calculation would be to combine the cash cost of acquiring the number of shares covered by the option with the value of the derivative and apply a factor of 16% to that combined value. If an option has no market value (that is, out-of-the-money) then it is unlikely that a firm would exercise the option in which case the appropriate asset-related capital requirement charge would be zero in respect of the derivative, and the corresponding capital charge contained in Table INSPRU 2.2.16 R in relation to the asset associated with the derivative.
- 31/12/2006
INSPRU 2.2.13
See Notes
Futures and swaps: futures or swaps may not allow the firm such an option in which case the appropriate asset-related capital charge factor to apply is the one corresponding to the asset that would be held on fulfilment of the contract and the value to which this should be applied would be the value of the asset held after the contract is fulfilled.
- 31/12/2006
INSPRU 2.2.14
See Notes
(1) The asset-related capital charge factor for money market funds set out in the Table INSPRU 2.2.16 R must be applied to exposures to funds that meet the definition in (2).
(2) In INSPRU 2.2 an investment in a money market fund means a participation in a collective investment scheme which satisfies the following conditions:
(a) the primary investment objective of the collective investment scheme is:
(i) to maintain the net asset value of the collective investment scheme constant at par (net of earnings); or
(ii) to maintain the net asset value of the collective investment scheme at the value of investors' initial capital plus earnings;
(b) in order to pursue its primary investment objective the collective investment scheme invests exclusively in cash or in short term instruments with characteristics similar to cash or both; and
(c) the collective investment scheme undertakes to abide by the following conditions:
(i) not to allow the assets held in the collective investment scheme to exceed a weighted average maturity of 60 days;
(ii) not to invest in equity or securities with characteristics similar to equity; and
(iii) on a basis of marking-to-market at least weekly, not to permit the value of each collective investment scheme unit at any point in time to move by more than 50 basis points (0.5% of total collective investment scheme value).
- 31/12/2006
INSPRU 2.2.15
See Notes
In INSPRU 2.2.16 R an insurance dependant means a regulated related undertaking which is an insurance undertaking or an insurance holding company.
- 31/12/2006
INSPRU 2.2.16
See Notes
Table: Asset-related capital charge factors
| Asset item | ECR asset-related capital charge factor | |||
| Investments | Land and Buildings | 7.5% | ||
| Investments in groupundertakings and participating interests | Shares in groupundertakings excluding participating interests | Insurance dependants | 0% | |
| Other | 7.5% | |||
| Debt securities issued by, and loans to, groupundertakings | 3.5% | |||
| Participating interests | 7.5% | |||
| Debt securities issued by, and loans to, undertakings in which the insurer has a participating interest | 3.5% | |||
| Other financial investments | Shares and other variable-yield securities and units in unit trusts | 16.0% | ||
| Money market funds | 0% | |||
| Debt securities and other fixed income securities | Approved securities | 3.5% | ||
| Other | 3.5% | |||
| Participation in investment pools | 16.0% | |||
| Loans secured by mortgages | 2.5% | |||
| Other loans | 2.5% | |||
| Deposits with approved credit institutions and approved financial institutions | 0% | |||
| Other | 7.5% | |||
| Deposits with ceding undertakings | 3.5% | |||
| Reinsurers' share of technical provisions | Provision for unearned premium | 2.5% | ||
| Claims outstanding | 2.5% | |||
| Other | 2.5% | |||
| Debtors | Debtors arising out of direct insurance operations | Policyholders | 4.5% | |
| Intermediaries | 3.5% | |||
| Debtors arising out of reinsurance operations | 2.5% | |||
| Other debtors | 1.5% | |||
| Called up share capital not paid | 0% | |||
| Other Assets | Tangible assets | 7.5% | ||
| Cash at bank and in hand | 0% | |||
| Other | 0% | |||
| Prepayments and accrued income | Accrued interest and rent | 0% | ||
| Deferred acquisition costs | 0% | |||
| Other prepayments and accrued income | 0% | |||
- 31/12/2006
Application of INSPRU 2.2 to Lloyd's
INSPRU 2.2.17
See Notes
- 31/12/2006
INSPRU 2.2.18
See Notes
This chapter applies to the Society for each member, including the capital charge relating to central assets, to the extent that those assets are held to support a particular member.
- 31/12/2006
INSPRU 3
Market risk
INSPRU 3.1
Market risk in insurance
- 31/12/2006
INSPRU 3.1.1
See Notes
INSPRU 3.1 applies to an insurer, unless it is:
(1) a non-directive friendly society; or
(2) an incoming EEA firm; or
(3) an incoming Treaty firm.
- 31/12/2006
INSPRU 3.1.2
See Notes
INSPRU 3.1 applies to pure reinsurers, with the exception of INSPRU 3.1.53 R, INSPRU 3.1.57 R and INSPRU 3.1.58 R.
- 31/12/2006
INSPRU 3.1.3
See Notes
(1)
INSPRU 3.1 applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.
(2) Where a firm carries on both long-term insurance business and general insurance business, INSPRU 3.1 applies separately to each type of business.
- 31/12/2006
Purpose
INSPRU 3.1.4
See Notes
This section sets out rules and guidance relating to market risk. Under INSPRU 1.1.20 R and INSPRU 1.1.21 R, a firm is required to hold admissible assets of a value sufficient to cover its technical provisions and its other long-term insurance or general insurance liabilities. In addition, INSPRU 1.1.34 R sets the requirement that a firm must hold assets of appropriate amount, currency, term, safety and yield, to ensure that the cash inflows from those assets will be sufficient to meet expected cash outflows from its insurance liabilities as they are due.
- 31/12/2006
INSPRU 3.1.5
See Notes
Market risk is the risk that as a result of market movements a firm may be exposed to fluctuations in the value of its assets, the amount of its liabilities, or the income from its assets. Sources of general market risk include movements in interest rates, equities, exchange rates and real estate prices. It is important to note that none of these sources of risk is independent of the others. For example, fluctuations in interest rates often have an impact upon equity and currency values and vice versa. Giving due consideration to these correlations is an important aspect of the prudent management of market risk.
- 31/12/2006
INSPRU 3.1.6
See Notes
A firm may also be exposed to specific market risk, which is the risk that the market value of a specific asset, or income from that asset, may fluctuate for reasons that are not dependent on general market movements. The limits in INSPRU 2.1.22 R cover market risk as well as counterparty risk.
- 31/12/2006
INSPRU 3.1.7
See Notes
INSPRU 3.1 addresses the impact of market risk on insurance business in the ways set out below:
(1) Any firm that carries on long-term insurance business which is a regulatory basis only life firmmust comply with the resilience capital requirement. This requires the firm to hold capital to cover market risk. The resilience capital requirement is dealt with in INSPRU 3.1.9 G to INSPRU 3.1.26 R.
(2) For a firm that carries on long-term insurance business, the assets that it must hold must be of a value sufficient to cover the firm'stechnical provisions and other long-term insurance liabilities. INSPRU 1.2 contains rules and guidance as to the methods and assumptions to be used in calculating the mathematical reserves. One of these assumptions is the assumed rate of interest to be used in calculating the present value of future payments by or to a firm. INSPRU 3.1.28 R to INSPRU 3.1.48 G set out the methodology to be used in relation to long-term insurance liabilities.
(3)
Firms carrying on either long-term insurance business or general insurance business are also subject to currency risk. That is, the risk that fluctuations in exchange rates may impact adversely on a firm. INSPRU 3.1.49 G to INSPRU 3.1.56 G set out the requirements a firm must meet so as to cover this risk.
(4) For a firm carrying on general insurance business, the Enhanced Capital Requirement already captures some elements of market risk. In addition, the requirements as to the assumed rate of interest used in calculating the present value of general insurance liabilities are contained in the insurance accounts rules, and these requirements are outlined in INSPRU 3.1.27 G.
(5)
Firms carrying on long-term insurance business that have property-linked liabilities or index-linked liabilities must cover these liabilities by holding appropriate assets. INSPRU 3.1.57 R and INSPRU 3.1.58 R set out these cover requirements.
(6) The Reinsurance Directive applies to pure reinsurers "prudent person" investment principles in relation to the investment of their assets.
INSPRU 3.1.61A R sets out these principles.
- 31/12/2006
Definitions
INSPRU 3.1.8
See Notes
For the purposes of INSPRU 3.1:
(1) real estate means an interest in land, buildings or other immovable property;
(2) a significant territory is any country or territory in which more than 2.5% of a firm'slong-term insurance assets (by market value), excluding assets held to cover index-linked liabilities or property-linked liabilities (see INSPRU 3.1.57 R and INSPRU 3.1.58 R), are invested;
(3) the long term gilt yield means the annualised equivalent of the fifteen year gilt yield for the United Kingdom Government fixed-interest securities index jointly compiled by the Financial Times, the Institute of Actuaries and the Faculty of Actuaries; and
(4) the member states of the European Union which have adopted the Euro as the official currency may be treated as a single territory.
- 31/12/2006
Resilience capital requirement (only applicable to the long-term insurance business of regulatory basis only life firms)
INSPRU 3.1.9
See Notes
The resilience capital requirement forms part of the calculation of the capital resources requirement for regulatory basis only life firms. GENPRU 2.1.23 R specifies that the CRR for a regulatory basis only life firm is equal to the MCR in GENPRU 2.1.25 R. The resilience capital requirement forms part of the MCR for a regulatory basis only life firm (see GENPRU 2.1.25R (2)(b)).
- 31/12/2006
INSPRU 3.1.10
See Notes
(1) A regulatory basis only life firm must calculate a resilience capital requirement in accordance with (2) to (5).
(2) The firm must identify relevant assets (see INSPRU 3.1.10A R) which, after applying the scenarios in (3), have a value that is equal to the firm'slong-term insurance liabilities under those scenarios.
(3) For the purpose of (2), the scenarios are:
(a) for those relevant assets invested in the United Kingdom, the market risk scenario set out in INSPRU 3.1.16 R;
(b) subject to (c) and to INSPRU 3.1.26 R, for those relevant assets invested outside of the United Kingdom, the market risk scenario set out in INSPRU 3.1.23 R; and
(c) where the relevant assets in (b) are:
the market risk scenario set out in INSPRU 3.1.16 R.(ii) not invested in a significant territory outside the United Kingdom;
(4) The resilience capital requirement is the result of deducting B from A, where:
(a) A is the value of the relevant assets which will produce the result described in (2); and
(5) In calculating the value of the firm'slong-term insurance liabilities under any scenario, a firm is not required to adjust the provision made under GENPRU 1.3.4 R in respect of a defined benefits pension scheme.
- 31/12/2006
INSPRU 3.1.10A
See Notes
In INSPRU 3.1.10 R relevant assets means a range of assets which must be selected by the firm from the assets specified in (1) and (2) in the order specified:
(1) its long-term insurance assets; and
(2) only where the firm has selected all the assets within (1), its shareholder assets, other than assets of an amount and kind required:
(a) to cover its liabilities arising outside its long-term insurance funds; or
(b) to meet any regulatory capital requirements in respect of business written outside its long-term insurance funds.
- 31/12/2006
INSPRU 3.1.11
See Notes
The purpose of the resilience capital requirement is to cover adverse deviation from:
arising from the effects of market risk for equities, real estate and fixed interest securities. Other risks are not explicitly addressed by the resilience capital requirement.
(1) the value of long-term insurance liabilities;
(2) the value of assets held to cover long-term insurance liabilities; and
(3) the value of assets held to cover the resilience capital requirement;
arising from the effects of market risk for equities, real estate and fixed interest securities. Other risks are not explicitly addressed by the resilience capital requirement.
- 31/12/2006
INSPRU 3.1.12
See Notes
The amount of the resilience capital requirement calculated by the firm will depend on the firm's choice of assets held to cover the resilience capital requirement. The resilience capital requirement is held to cover not only the shortfall between the change in the value of long-term insurance liabilities and the change in the value of the assets identified to cover those liabilities, but also the change in the value of the assets identified to cover the resilience capital requirement itself.
- 31/12/2006
INSPRU 3.1.13
See Notes
As part of the assessment of the financial resources a firm needs to hold to comply with the overall financial adequacy rule, the general stress and scenario testing rule requires a firm to carry out stress tests and scenario analyses appropriate to the major sources of risk to its ability to meet its liabilities as they fall due identified in accordance with the overall Pillar 2 rule. In considering the stress tests and scenario analyses relevant to the major sources of risk in the category of market risk, a firm should consider the extent to which the market risk scenarios set out in INSPRU 3.1.16 R to INSPRU 3.1.26 R are appropriate to the nature of its asset portfolio. A firm may judge that given the nature of its portfolio, a more severe stress should be adopted. The firm may also wish to bring in other asset classes, such as index-linked bonds, which should be stressed on appropriate bases, and to consider the impact of currency mismatching and any derivative positions held.
- 31/12/2006
INSPRU 3.1.13A
See Notes
In the market risk scenarios set out in INSPRU 3.1.16 R to INSPRU 3.1.26 R, a firm is required to assess the changed value of its assets and liabilities in the economic conditions of the scenarios set out in INSPRU 3.1.16 R and INSPRU 3.1.23 R. A firm is required to assess the changed value of each relevant asset (as defined in INSPRU 3.1.10A R), notwithstanding any uncertainty about the appropriate valuation basis for that asset. In valuing an asset in the specified scenarios, a firm should have regard to the economic substance of the asset, rather than its legal form, and assess its value accordingly. Consider, for example, a convertible bond that is close to its conversion date and where the conversion option has value. The value of the convertible bond in the specified scenarios is likely to be sensitive primarily to equity market scenarios and to a lesser extent to interest rate scenarios. The firm should value the asset according to its expected market value in the economic conditions underlying the specified scenarios.
- 31/12/2006
INSPRU 3.1.13B
See Notes
In determining where particular assets are invested for the purpose of determining which market risk scenario should be applied to those assets, or whether a country or territory in which a firm has invested part of its long-term insurance assets is a significant territory, a firm should generally treat:
Where, however, the nature of a firm's investment is such that the economic risks to which it is principally exposed are risks relating to assets invested in, or the currency of, a different country or territory to that in which are invested the assets directly invested in by the firm, then the firm should consider whether it would be more reasonable to treat the assets as invested in that other country or territory. For example, if a firm has invested in the securities of a collective investment scheme which are dealt in on a regulated market in country A, but the scheme principally invests in real estate situated in country B, the firm should consider whether its principal exposure is in fact to the country in which the underlying assets are situated (that is, country B). Another example might be where a firm has invested in a bond or other fixed interest security that is denominated in the currency of a country or territory other than that in which the security would be treated as invested under (1) or (2) above. The firm may wish to consider whether that bond or fixed interest security should be treated as invested in the country or territory of the currency of denomination.
(1) a security dealt in on a regulated market as invested in any country or territory in which a regulated market on which the security is dealt is situated;
(2) a security which is not dealt in on a regulated market as invested in the country or territory in which the issuer has its head office;
(3) an asset consisting of a claim against a debtor as invested in any country or territory where it can be enforced by legal action;
(4) real estate as invested in the country or territory in which the land, buildings or other immovable property is situated;
(5) a tangible asset as invested in the country or territory where it is situated; and
(6) a derivative or quasi-derivative as invested in the country or territory in which the assets to which the firm is exposed by reason of having entered into the derivative or quasi-derivative are situated.
Where, however, the nature of a firm's investment is such that the economic risks to which it is principally exposed are risks relating to assets invested in, or the currency of, a different country or territory to that in which are invested the assets directly invested in by the firm, then the firm should consider whether it would be more reasonable to treat the assets as invested in that other country or territory. For example, if a firm has invested in the securities of a collective investment scheme which are dealt in on a regulated market in country A, but the scheme principally invests in real estate situated in country B, the firm should consider whether its principal exposure is in fact to the country in which the underlying assets are situated (that is, country B). Another example might be where a firm has invested in a bond or other fixed interest security that is denominated in the currency of a country or territory other than that in which the security would be treated as invested under (1) or (2) above. The firm may wish to consider whether that bond or fixed interest security should be treated as invested in the country or territory of the currency of denomination.
- 31/12/2006
INSPRU 3.1.14
See Notes
[intentionally blank]
- 31/12/2006
INSPRU 3.1.15
See Notes
Where the resilience capital requirement is affected by the presence of derivative or quasi-derivative instruments, the firm will need to consider whether the protection afforded is of suitable length or security. The firm should include the exposure to counterparties in the credit considerations of INSPRU 3.1.41 R both before and after calculating the resilience capital requirement. If the derivative protection is very short term the firm should consider whether issues arise under INSPRU 1.2.26 R (Avoidance of future valuation strain); when a derivative expires the financial position of the firm may deteriorate as a result of, for example, falls in asset values. Unless the firm holds a further reserve, the firm is likely to need to have either undertaken a fresh protection strategy or carried through the alternative to the derivative protection (such as selling equities in place of a put option) if the existing protection expires before the financial year end. If the existing derivative protection continues beyond the time of financial year end the firm must have sufficient confidence that it can renew its derivative protection or an alternative to achieve the same effect.
- 31/12/2006
Market risk scenario for assets invested in the United Kingdom
INSPRU 3.1.16
See Notes
In INSPRU 3.1.10R (3)(a), the market risk scenario for assets invested in the United Kingdom and for assets (including assets invested outside the United Kingdom) held to cover index-linked liabilities or property-linked liabilities which a firm must assume is:
(1) a fall in the market value of equities of at least 10% or, if greater, the lower of:
(a) a percentage fall in the market value of equities which would produce an earnings yield on the FTSE Actuaries All Share Index equal to 4/3 rds of the long-term gilt yield; and
(b) a fall in the market value of equities of 25% less the equity market adjustment ratio (see INSPRU 3.1.19 R);
(2) a fall in real estate values of 20% less the real estate market adjustment ratio for an appropriate real estate index (see INSPRU 3.1.21 R);
(3)
(a) the more onerous of either a fall or rise in yields on all fixed interest securities by the percentage point amount determined in (b);
(b) for the purpose of (a), the percentage point amount is equal to 20% of the long-term gilt yield.
- 31/12/2006
INSPRU 3.1.17
See Notes
For the purposes of INSPRU 3.1.16R (1) and INSPRU 3.1.16R (2), a firm must:
(1) assume that earnings for equities and rack rents for real estate fall by 10%, but dividends for equities remain unaltered (see INSPRU 3.1.36 R to INSPRU 3.1.38 R); and
(2) model a fall in equity and real estate markets as if the fall occurred instantaneously.
- 31/12/2006
INSPRU 3.1.18
See Notes
An example of INSPRU 3.1.16R (3) is that, where the long-term gilt yield is currently 6%, a firm would assume an increase of 20% in that yield, that is, a change of 1.2 percentage points. For the purpose of the scenario in INSPRU 3.1.16R (3)(a), the firm would assume a fall or rise of 1.2 percentage points in yields on all fixed interest securities.
- 31/12/2006
Equity market adjustment ratio
INSPRU 3.1.19
See Notes
The equity market adjustment ratio referred to in INSPRU 3.1.16R (1)(b) is:
(1) if the ratio calculated in (a) and (b) lies between 75% and 100%, the result of 100% less the ratio (expressed as a percentage) of:
(a) the current value of the FTSE Actuaries All Share Index; to
(b) the average value of the FTSE Actuaries All Share Index over the preceding 90 calendar days;
(2) 0%, if the ratio calculated in (1)(a) and (b) is more than 100%; and
(3) 25%, if the ratio calculated in (1)(a) and (b) is less than 75%.
- 31/12/2006
INSPRU 3.1.20
See Notes
In INSPRU 3.1.19 R, the average value of the FTSE Actuaries All Share Index over any period of 90 calendar days means the arithmetic mean based on levels at the close of business on each of the days in that period on which the London Stock Exchange was open for trading.
- 31/12/2006
Real estate market adjustment ratio
INSPRU 3.1.21
See Notes
The real estate market adjustment ratio for a real estate index referred to in INSPRU 3.1.16R (2) and INSPRU 3.1.23R (2) is:
(1) if the ratio calculated in (a) and (b) lies between 90% and 100%, the result of 100% less the ratio (expressed as a percentage) of:
(a) the current value of the real estate index; to
(b) the average value of that real estate index over the three preceding financial years;
(2) 0%, if the ratio calculated in (1)(a) and (b) is more than 100%; and
(3) 10%, if the ratio calculated in (1)(a) and (b) is less than 90%.
- 31/12/2006
INSPRU 3.1.22
See Notes
For the purpose of calculating the real estate market adjustment ratio in INSPRU 3.1.21 R, a firm should select an appropriate index of real estate values such that:
(1) the constituents of the index are reasonably representative of the nature and territory of the real estate included in the range of assets identified in accordance with INSPRU 3.1.10 R; and
(2) the frequency of, and historical data relating to, published values of the index are sufficient to enable an average value(s) of the index to be calculated over the three preceding financial years.
- 31/12/2006
Market risk scenario for assets invested outside the United Kingdom
INSPRU 3.1.23
See Notes
In INSPRU 3.1.10R (3)(b), subject to INSPRU 3.1.26 R, the market risk scenario for assets invested outside the United Kingdom (other than assets held to cover index-linked liabilities or property-linked liabilities) which a firm must assume is, for each significant territory in which assets are invested outside the United Kingdom:
(1) an appropriate fall in the market value of equities invested in that territory, which is at least equal to the percentage fall determined in INSPRU 3.1.16 R;
(2) a fall in real estate values in that territory of 20% less the real estate market adjustment ratio for an appropriate real estate index for that territory (see INSPRU 3.1.21 R); and
(3)
(a) the more onerous of either a fall or a rise in yields on all fixed interest securities by the percentage point amount determined in (b);
(b) for the purpose of (a), the percentage point amount is equal to 20% of the nearest equivalent (in respect of the method of calculation) to the long term gilt yield.
- 31/12/2006
INSPRU 3.1.24
See Notes
For the purposes of INSPRU 3.1.23R (1), an appropriate fall in the market value of equities invested in a significant territory must be determined having regard to:
(1) an appropriate equity market index for that territory; and
(2) the historical volatility of the equity market index selected in (1).
- 31/12/2006
INSPRU 3.1.25
See Notes
For the purpose of INSPRU 3.1.24R (1), an appropriate equity market index for a territory is such that:
(1) the constituents of the index are reasonably representative of the nature of the equities held in that territory which are included in the range of assets identified in accordance with INSPRU 3.1.10 R; and
(2) the frequency of, and historical data relating to, published values of the index are sufficient to enable an average value(s) and historical volatility of the index to be calculated over at least the three preceding financial years.
- 31/12/2006
INSPRU 3.1.26
See Notes
Where the assets of a firm invested in a significant territory of a kind referred to in INSPRU 3.1.23R (1), INSPRU 3.1.23R (2) or INSPRU 3.1.23R (3)(a) represent less than 0.5% of the firm'slong-term insurance assets (excluding assets held to cover index-linked liabilities or property-linked liabilities), measured by market value, the firm may assume for those assets the market risk scenario for assets of that kind invested in the United Kingdom set out in INSPRU 3.1.16 R instead of the market risk scenario set out in INSPRU 3.1.23 R.
- 31/12/2006
Interest rates: general insurance liabilities
INSPRU 3.1.27
See Notes
The rates of interest to be used for the calculation of the present values of general insurance liabilities are specified in the insurance accounts rules, except where benefits resulting from a claim must be paid in the form of an annuity, in which case the rules require calculation by recognised actuarial methods. In the case of claims not payable in the form of an annuity, the insurance accounts rules state that the rate of interest to be used must not exceed the lowest of:
(1) a rate prudently estimated by the firm to be earned by assets of the firm that are appropriate in magnitude and nature to cover the provisions for claims being discounted, during the period necessary for the payment of such claims;
(2) a rate justified by the performance of such assets over the preceding five years; and
(3) a rate justified by the performance of such assets during the year preceding the balance sheet date.
- 31/12/2006
Interest rates: long-term insurance liabilities
INSPRU 3.1.28
See Notes
(1)
The rates of interest required by INSPRU 1.2.33 R to be used by a firm for the calculation of the present value of a long-term insurance liability must not exceed 97.5% of the risk-adjusted yield (see INSPRU 3.1.30 R to INSPRU 3.1.48 G) that is expected to be achieved on:
(a) the assets allocated to cover that liability;
(b) the reinvestment of sums expected to be received from those assets (see INSPRU 3.1.45 R to INSPRU 3.1.48 G); and
(2) (1) does not apply to a long-term insurance contract in respect of which the firm has calculated a negative value for the mathematical reserves in accordance with INSPRU 1.2.24 R.
- 31/12/2006
INSPRU 3.1.29
See Notes
For the purposes of INSPRU 3.1.28 R, the rates of interest assumed must allow appropriately for the rates of tax that apply to the investment return on policyholder assets. The rates of tax assumed must be such that the firm's total implied liability for tax arising from the allocation of assets to liabilities is not less than the firm's actual expected liability for tax for the period in respect of which tax is to be assessed.
- 31/12/2006
INSPRU 3.1.29A
See Notes
INSPRU 3.1.28 R only applies to a long-term insurance contract in respect of which a firm has calculated mathematical reserves with a positive value. A firm may, however, also have long-term insurance contracts where the value of future cash inflows under and in respect of the contract exceeds that of outflows, allowing the firm to calculate a negative value for the mathematical reserves for that contract (see INSPRU 1.2.24 R). In calculating the present value of future net cash flows under and in respect of the contract, the firm must include margins for adverse variation in accordance with INSPRU 1.2.13 R. These margins should include margins for market risk and, where relevant, credit risk. For those margins to be sufficiently prudent as required by INSPRU 1.2.13 R, the rate of interest used may need to be higher than that which would apply under INSPRU 3.1.28 R.
- 31/12/2006
Risk-adjusted yield
INSPRU 3.1.30
See Notes
A risk-adjusted yield on an asset must be calculated by:
(1) taking the asset together with any covering derivatives, forward transactions and quasi-derivatives;
(2) assuming that the factors which affect the yield will remain unchanged after the valuation date (see INSPRU 3.1.33 R);
(3) valuing the asset (together with any offsetting transaction) in accordance with GENPRU 1.3 (Valuation);
(4) making reasonable assumptions as to whether, and if so when, any options or other rights embedded in the asset (or in any offsetting transaction) will be exercised.
- 31/12/2006
INSPRU 3.1.31
See Notes
Examples of calculating a combined yield for the purposes of INSPRU 3.1.30R (1):
(1) 1000 1 shares (fully paid) of ABC plc covered by a sold future on the shares. Calculating the combined yield effectively results in a position that behaves like cash (with dividend income but no capital gain or loss on the value of the assets); and
(2) where a covering derivative contains an option exercisable by the firm (e.g. a bought put option or receiver swaption), the calculation of the risk adjusted yield should take into account the fact that on the valuation assumptions any time value will reduce over time (known as the 'wasting' nature of the time value of the option), for example, an at-the money option will expire worthless and hence the covering derivative will effectively be a negative yielding asset. There are various ways of allowing for this, for example a firm could treat the covering derivative and the asset as a single asset and calculate an internal rate of return on this combined asset. Alternatively, an explicit reserve could be set up equal and opposite to the time value of the covering derivative which would be written off in the same way as the time value on the covering derivative.
- 31/12/2006
INSPRU 3.1.32
See Notes
The requirements in relation to offsetting transactions are set out in INSPRU 3.2. The options and other rights referred to in INSPRU 3.1.30R (4) include those exercisable by the firm as well as those exercisable by other parties.
- 31/12/2006
INSPRU 3.1.33
See Notes
For the purpose of INSPRU 3.1.30R (2), the factors that affect yield should be ascertained as at the valuation date (that is, the date to which present values of cash flows are being calculated). All changes known to have occurred by that date must be taken into account including:
(1) changes in the rental income from real estate;
(2) changes in dividends or audited profit on equities;
(3) known or forecast changes in dividends which have been publicly announced by the issuer by the valuation date;
(4) known or forecast changes in earnings which have been publicly announced by the issuer by the valuation date;
(5) alterations in capital structure; and
(6) the value (at the most recent date at or before the valuation date for which it is known) of any determinant of the amount of any future interest or capital payment.
- 31/12/2006
INSPRU 3.1.34
See Notes
The risk-adjusted yield is either:
(1) (for equities and real estate) a running yield (see INSPRU 3.1.36 R to INSPRU 3.1.38 R, INSPRU 3.1.41 R and INSPRU 3.1.44 R); or
(2) (for all other assets) the internal rate of return (see INSPRU 3.1.39 R, INSPRU 3.1.41 R and INSPRU 3.1.44 R).
- 31/12/2006
INSPRU 3.1.35
See Notes
The risk-adjusted yield on a basket of assets is the arithmetic mean of the risk-adjusted yield on each asset weighted by that asset's market value.
- 31/12/2006
The running yield for real estate
INSPRU 3.1.36
See Notes
For real estate the running yield is the ratio of:
(1) the rental income arising from the real estate over the previous 12 months; to
(2) the market value of the real estate.
- 31/12/2006
The running yield for equities
INSPRU 3.1.37
See Notes
For equities the running yield is:
(1) the dividend yield, if the dividend yield is more than the earnings yield;
(2) otherwise, the sum of the dividend yield and the earnings yield, divided by two.
- 31/12/2006
INSPRU 3.1.38
See Notes
For the purposes of INSPRU 3.1.37 R:
(1) the dividend yield is the ratio (expressed as a percentage) of dividend income over the previous 12 months from the equities for which the running yield is being calculated ("the relevant equities") to the market value of those equities;
(2) the earnings yield is the ratio (expressed as a percentage) of the audited profit (including exceptional items and extraordinary items) for the preceding financial year of the issuer of the relevant equities to the market value of those equities;
(3) the earnings yield must be calculated in accordance with whichever is most appropriate (to the issuer of the relevant equities) of United Kingdom, US or international generally accepted accounting practice.
- 31/12/2006
The internal rate of return
INSPRU 3.1.39
See Notes
The internal rate of return on an asset is the annual rate of interest which, if used to calculate the present value of future income (before deduction of tax) and of repayments of capital (before deduction of tax) would result in the sum of those amounts being equal to the market value of the asset.
- 31/12/2006
INSPRU 3.1.40
See Notes
The risk adjusted yield for a collective investment scheme may be determined as the weighted average of the yields on each of the investments held by the collective investment scheme.
- 31/12/2006
Credit risk
INSPRU 3.1.41
See Notes
In both the running yield and internal rate of return the yield must be reduced to exclude that part of the yield that represents compensation for credit risk arising from the asset.
- 31/12/2006
INSPRU 3.1.42
See Notes
An allowance for credit risk should be made for all securities except risk-free securities.
- 31/12/2006
INSPRU 3.1.43
See Notes
Provision for credit risk for credit-rated securities may be made by reference to historic default rates of securities with a similar credit rating. However, allowance should be made both for any recent or expected changes in market conditions that may invalidate historic default rates and for the likelihood that the credit ratings on securities may deteriorate or (following such deterioration) that the issuer may default.
- 31/12/2006
INSPRU 3.1.44
See Notes
Provision for credit risk for securities that are not credit-rated must be made on principles at least as prudent as those adopted for credit-rated securities.
- 31/12/2006
Investment and reinvestment
INSPRU 3.1.45
See Notes
Except as provided in INSPRU 3.1.46 R:
(1) the risk-adjusted yield assumed for the investment or reinvestment of sterling sums (other than sums expected to be received within the next three years) must not exceed the lowest of:
(a) the higher of:
(i) the long-term gilt yield; and
(ii) the greater of:
(A) the forward gilts yield; and
(B) the forward rate on sterling interest rate swaps, reduced to exclude that part of the rate that represents compensation for credit risk;
where the forward yields and forward rates corresponding to the time when the sums are expected to be received are weighted so as to reflect the investment and reinvestment characteristics of the liabilities covered;
(b) 3% per annum, increased by two thirds of the excess, if any, of the percentage in (a) over 3% per annum; and
(c) 6.5% per annum; and
(2) the risk-adjusted yield assumed for the investment or reinvestment of those sterling sums expected to be received within the next three years must not exceed the risk-adjusted yield on the assets actually held adjusted linearly over the three-year period to the risk-adjusted yield determined under (1).
- 31/12/2009
INSPRU 3.1.46
See Notes
For the
with-profits insurance contracts
of a realistic basis life firm, the risk-adjusted yield assumed for the investment or reinvestment of sums denominated in sterling must be no more than the greater of:
(1)
the forward gilts yield; and
(2) the forward rate on sterling interest rate swaps, reduced to exclude that part of the rate that represents compensation for credit risk;
where the forward yields and forward rates corresponding to the times when the sums are expected to be received are weighted so as to reflect the investment and reinvestment characteristics of the liabilities covered.- 31/12/2009
INSPRU 3.1.47
See Notes
The risk-adjusted yield assumed for the investment or reinvestment of sums denominated in a currency other than sterlingmust be at least as prudent as in INSPRU 3.1.45 R and INSPRU 3.1.46 R taking into account the yields on government securities denominated in that currency.
- 31/12/2009
INSPRU 3.1.47A
See Notes
For the purpose of INSPRU 3.1.47 R the yields on the government securities must be reduced to exclude that part of the yield that represents compensation for credit risk unless the following conditions are satisfied in relation to the issuer of those securities:
(1) a credit rating is available from at least one of the rating agencies listed in INSPRU 1.3.93 R; and
(2) the credit rating description in the first column of Table INSPRU 1.3.90 R corresponding to the lowest such credit rating is either exceptional or extremely strong or very strong.
- 31/12/2009
INSPRU 3.1.48
See Notes
The purpose of INSPRU 3.1.45 R to INSPRU 3.1.47 R is to help protect against 'reinvestment risk'. Reinvestment risk is the risk that, when the sums are actually received, interest rates (and so yields available on assets) might have fallen below current expectations.
- 31/12/2006
Currency risk
INSPRU 3.1.49
See Notes
Fluctuations in foreign exchange rates may impact adversely upon a firm, including where it holds an open position in a foreign currency. This is where future cash outflows (that is liabilities) in one currency are matched by future cash inflows (that is assets) in a different currency. The circumstances in which this could arise include where the firm:
(1) has entered into contracts for the purchase or sale of foreign currency; or
(2) has entered into contracts of insurance under which claims are payable in, or determined by reference to a value or price expressed in, a foreign currency; or
(3) holds assets denominated in a foreign currency.
- 31/12/2006
Cover for spot and forward currency transactions
INSPRU 3.1.50
See Notes
- 31/12/2006
INSPRU 3.1.51
See Notes
The requirements in relation to cover and offsetting transactions are set out in INSPRU 3.2.
- 31/12/2006
Currency matching of assets and liabilities
INSPRU 3.1.52
See Notes
INSPRU 1.1.34 R requires a firm to cover its liabilities with assets that enable it to match, in timing, amount and currency, the cash inflows and outflows from those assets and liabilities. This permits some currency mismatching of assets and liabilities, but only if sufficient excess assets are held to cover the exposure arising from such mismatching. The level of permitted currency mismatching is also limited by INSPRU 3.1.53 R.
- 31/12/2006
INSPRU 3.1.53
See Notes
(1) Subject to INSPRU 3.1.54 R, a firm must hold admissible assets in each currency of an amount equal to at least 80% of the amount of its liabilities in that currency arising under or in connection with contracts of insurance (but excluding, for a firm that carries on general insurance business, any
non-credit equalisation provision
), except where the amount of those assets does not exceed 7% of the assets in other currencies.
(2) In (1) references to an asset in a currency are to an asset which is expressed in or capable of being realised (without exchange risk) in that currency, and an asset is capable of being so realised if it is reasonably capable of being realised in that currency without risk that changes in exchange rates would reduce the cover for liabilities in that currency.
- 31/12/2008
INSPRU 3.1.53A
See Notes
For the purpose of INSPRU 3.1.53 R, a firm may allocate the total credit equalisation provisions to different currencies in proportion to the split by currency of the technical provisions for credit insurance business established in accordance with GENPRU 1.3.4 R. Alternatively, another allocation which the firm is able to justify as broadly appropriate may be used.
- 31/12/2008
INSPRU 3.1.54
See Notes
INSPRU 3.1.53 R does not apply to:
(1) a pure reinsurer; or
- 31/12/2006
INSPRU 3.1.55
See Notes
For the purpose of INSPRU 3.1.53 R, the currency of the liability under a contract of insurance is the currency in which the cover under the contract of insurance is expressed or, if the contract does not specify a currency:
(1) the currency of the country or territory in which the risk is situated; or
(2) if the firm on reasonable grounds so decides, the currency in which the premium payable under the contract is expressed; or
(3) if, taking into account the nature of the risks insured, the firm considers it more appropriate:
(a) the currency (based on past experience) in which it expects the claims to be paid; or
(b) if there is no past experience, the currency of the country or territory in which the firm or relevant branch is established:
(i) for contracts covering risks falling within general insurance business classes 4, 5, 6, 7, 11, 12 and 13 (producer's liability only); and
(ii) for contracts covering risks falling within any other general insurance business class where, in accordance with the nature of the risks, the firm's liabilities are liabilities to be provided in a currency other than that which would result from the application of (1) or (2); or
- 31/12/2006
INSPRU 3.1.56
See Notes
The reasonable grounds in INSPRU 3.1.55R (2) include if, from the time the contract is entered into, it appears likely that a claim will be paid in the currency of the premium and not in the currency of the country in which the risk is situated.
- 31/12/2006
Covering linked liabilities
INSPRU 3.1.57
See Notes
A firm must cover its property-linked liabilities with:
(1) (as closely as possible) the assets to which those liabilities are linked; or
(2) a property-linked reinsurance contract; or
(3) a combination of (1) and (2).
- 31/12/2006
INSPRU 3.1.58
See Notes
A firm must cover its index-linked liabilities with:
(1) either:
(a) the assets which represent that index; or
(b) assets of appropriate security and marketability which correspond, as closely as possible, to the assets which are comprised in, or which form, the index or other reference of value to which those liabilities are linked; or
(2) a portfolio of assets whose value or yield is reasonably expected to correspond closely with the index-linked liability; or
(3) an index-linked reinsurance contract; or
(4) an index-linked approved derivative; or
(5) an index-linked approved quasi-derivative; or
(6) a combination of any of (1) to (5).
- 31/12/2006
INSPRU 3.1.58A
See Notes
- 31/12/2006
INSPRU 3.1.59
See Notes
For the purposes of INSPRU 3.1.57 R and INSPRU 3.1.58 R, a firm is not permitted to hold different assets and to cover the mismatch by holding excess assets.
- 31/12/2006
INSPRU 3.1.60
See Notes
If a firm has incurred a policy liability which cannot be exactly matched by appropriate assets (for example the Limited Price Index (LPI)), the firm should seek to match assets that at least cover the liabilities. For example, an LPI limited to 5% per annum may be matched by an RPI bond or a fixed interest investment matching cash flows increasing at 5% per annum compound. Orders made by the Department for Work and Pensions under section 148 of the Social Security Administration Act 1992, and which are limited to 5% per annum, may also be matched by a fixed interest investment matching cash flows increasing at 5% per annum compound (see also INSPRU 3.1.61-A G).
- 06/04/2008
INSPRU 3.1.61
See Notes
In selecting the appropriate cover, the firm should ensure that both credit risk, and the risk that the value or yield in the assets will not, in all circumstances, match fluctuations in the relevant index, are within acceptable limits. Rules and guidance relating to credit risk are set out in INSPRU 2.1.
- 31/12/2006
INSPRU 3.1.61-A
See Notes
Where liabilities are linked to orders made under section 148 of the Social Security Administration Act 1992, firms are required by COBS 21.3.5R to notify their supervisorsbefore effecting any such business and to explain how the risks associated with this business will be safely managed. This requirement does not apply in respect of liabilities for which a limited revaluation premium has been paid to the Department for Work and Pensions so that the liability for revaluation, while still linked to section 148 orders, is limited to 5%. The risks may be mitigated by holding assets to cover an alternative index which is reasonably expected to at least cover the section 148 order (e.g. RPI plus a margin) over the duration of the link. The firm's exposure to an order under section 148 exceeding this index should be appropriately limited by putting a cap on the liabilities linked to the order so that risks are within acceptable limits.
- 06/04/2008
Pure reinsurers
INSPRU 3.1.61A
See Notes
A pure reinsurer must invest its assets in accordance with the following requirements:
(1) the assets must take account of the type of business carried out by the firm, in particular the nature, amount and duration of expected claims payments, in such a way as to secure the sufficiency, liquidity, security, quality, profitability and matching of its investments;
(2) the firm must ensure that the assets are diversified and adequately spread and allow the firm to respond adequately to changing economic circumstances, in particular developments in the financial markets and real estate markets or major catastrophic events; the firm must assess the impact of irregular market circumstances on its assets and must diversify the assets in such a way as to reduce such impact;
(3) investment in assets which are not admitted to trading on a regulated market must be kept to prudent levels;
(4) investment in derivatives and quasi-derivatives must contribute to a reduction of investment risks or facilitate efficient portfolio management and such investments must be valued on a prudent basis, taking into account the underlying assets, and included in the valuation of the firm's assets. The firm must avoid excessive risk exposure to a single counterparty and to other derivative or quasi-derivative operations;
(5) the assets must be properly diversified in such a way as to avoid:
(b) accumulations of risk in the portfolio as a whole.
Investments in assets issued by the same issuer or by issuers belonging to the same group must not expose the firm to excessive risk concentration; and(6) (5) does not apply to investment in government bonds.
- 31/12/2006
Application of INSPRU 3.1 to Lloyd's
INSPRU 3.1.62
See Notes
- 31/12/2006
Resilience capital requirement (applicable to long-term business only)
INSPRU 3.1.63
See Notes
Managing agents must calculate the amount of the resilience capital requirement for the long-term insurance business carried on through the syndicates they manage.
- 31/12/2006
INSPRU 3.1.64
See Notes
The Society must determine the resilience capital requirement for the insurance business of each member under INSPRU 3.1.10 R as the member's proportionate share of the resilience capital requirement calculated by the managing agent for the long-term insurance business carried on through the syndicate.
- 31/12/2006
Currency risk: matching of assets and liabilities
INSPRU 3.1.65
See Notes
For the purposes of INSPRU 3.1.53 R, a managing agent must ensure that:
(1)
syndicate liabilities are covered by matching syndicate assets as required by INSPRU 3.1.53 R; or that
- 31/12/2006
INSPRU 3.1.66
See Notes
On receipt of a notification by a managing agent under INSPRU 3.1.65R (2), the Society must ensure that the liabilities in respect of the insurance business of the members in aggregate are covered with matching assets complying with INSPRU 3.1.53 R.
- 31/12/2006
INSPRU 3.2
Derivatives in insurance
- 31/12/2006
Application
INSPRU 3.2.1
See Notes
This section applies to an insurer, unless it is:
(1) a non-directive friendly society; or
(2) an incoming EEA firm; or
(3) an incoming Treaty firm; or
(4) a pure reinsurer.
- 31/12/2006
INSPRU 3.2.2
See Notes
The scope of application of INSPRU 3.2 is not restricted to firms that are subject to the relevant
EU
directives.
- 01/12/2009
INSPRU 3.2.3
See Notes
(1) This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.
(2) Where a firm carries on both long-term insurance business and general insurance business, this section applies separately to each type of business.
- 31/12/2006
Purpose
INSPRU 3.2.4
See Notes
GENPRU 2.2.17 R requires a firm to calculate its capital resources for the purpose of GENPRU in accordance with the capital resources table, subject to the limits in GENPRU 2.2.32 R to GENPRU 2.2.41 R. The capital resources table and GENPRU 2.2.251 R require a firm to deduct from total capital resources the value of any asset included in an insurance fund which is not an admissible asset as listed in GENPRU 2 Annex 7. GENPRU 2 Annex 7 provides that a derivative, quasi-derivative or stock lending transaction will only be an admissible asset if it is approved. This section sets out the criteria for determining when a derivative, quasi-derivative or stock lending transaction is approved for this purpose. INSPRU 3.2.5 R to INSPRU 3.2.35 R set out the criteria for derivatives and quasi-derivatives. INSPRU 3.2.36 R to INSPRU 3.2.41 R set out the criteria for stock lending transactions.
- 31/12/2006
Derivatives and quasi-derivatives
INSPRU 3.2.5
See Notes
For the purpose of GENPRU 2 Annex 7 (Admissible assets in insurance), and also in relation to permitted links, a derivative or quasi-derivative is approved if:
(1) it is held for the purpose of efficient portfolio management (INSPRU 3.2.6 R to INSPRU 3.2.7 R) or reduction of investment risk (INSPRU 3.2.8 R to INSPRU 3.2.13 G);
(3) it is effected or issued:
(a) on or under the rules of a regulated market; or
(b) off-market with an approved counterparty and, except for a forward transaction, on approved terms and is capable of valuation (INSPRU 3.2.34 R to INSPRU 3.2.35 R).
- 06/10/2007
INSPRU 3.2.5A
See Notes
(1)
GENPRU 2 Annex 7 R (3) requires firms to consider first whether an asset is a derivative or quasi-derivative transaction notwithstanding that it is also capable of falling within one or more other categories in GENPRU 2 Annex 7 R (1). If it is a derivative or quasi-derivative transaction it is only admissible if it satisfies the conditions for it to be approved under INSPRU 3.2.5 R. Firms should be able to justify whether or not their assets are derivatives or quasi-derivatives.
(2) A quasi-derivative is defined as a contract or asset that has the effect of a derivative contract. Quasi-derivatives may be regarded as those contracts or assets which are not derivatives but which effectively contain an embedded derivative component which significantly impacts the contracts or assets cash flow and risk profile so as to mirror the economic effect of a derivative. A derivative is defined in the Glossary as a contract for differences, a future or an option and includes a securitised derivative, which is an option or contract for differences that is listed. A securitised derivative may also be a debenture.
(3) A deposit with interest or other return calculated by reference to an index or other factor is excluded from the definition of contract for differences by article 85(2) of the Regulated Activities Order. However, if the return on the deposit is in the nature of that on a derivative (for example, an option or a future) then the deposit is a quasi-derivative.
(4) A holding in a fund investing in derivatives may or may not be a quasi-derivative depending on its ongoing investment policy and governance and any investment decisions from time to time which might deviate significantly from the investment policy. It should be treated as a quasi-derivative if its risk profile is such that the value of units in the fund is expected to mirror the value of a derivative.
(5) The assets in the following list, which is illustrative and not exhaustive, all have features which could lead to their being assumed to be quasi-derivatives:
(a) a bond whose redemption proceeds are directly linked to the performance of the FTSE 100 index but with a guaranteed minimum;
(b) an investment fund that is managed to give high leverage that mirrors a call option;
(c) an investment whose value it is reasonably foreseeable could become negative; and
(d) a credit-linked note, that is, a security with an embedded credit default swap.
- 31/12/2008
Efficient portfolio management
INSPRU 3.2.6
See Notes
A derivative or quasi-derivative is held for the purpose of efficient portfolio management if the firm reasonably believes the derivative or quasi-derivative (either alone or together with any other covered transactions) enables the firm to achieve its investment objectives by one of the following (or, in relation to permitted links, in a manner which includes but is not limited to):
(1) generating additional capital or income in one of the ways described in INSPRU 3.2.7 R; or
(3) acquiring or disposing of rights in relation to admissible assets or permitted links, or their equivalent, more efficiently or effectively.
- 06/10/2007
Generation of additional capital or income
INSPRU 3.2.7
See Notes
The generation of additional capital or income falls within INSPRU 3.2.6R (1) where it arises from:
(1) taking advantage of pricing imperfections in relation to the acquisition and disposal (or disposal and acquisition) of rights in relation to assets the same as, or equivalent to, admissible assets or permitted links; or
(2) receiving a premium for selling a covered call option or its equivalent, the underlying of which is an admissible asset or permitted link, even if that additional capital or income is obtained at the expense of surrendering the chance of greater capital or income.
- 06/10/2007
Reduction of investment risk
INSPRU 3.2.8
See Notes
A derivative or quasi-derivative is held for the purpose of reducing investment risk if the derivative or quasi-derivative (either alone or together with other fully covered transactions) reduces any aspect of investment risk without significantly increasing any other aspect of that risk.
- 31/12/2006
Significant increase in risk
INSPRU 3.2.9
See Notes
For the purposes of INSPRU 3.2.8 R, an increase in risk from a derivative or quasi-derivative is significant unless:
(1) relative to any reduction in investment risk it is both small and reasonable; or
(2) the risk is remote.
- 31/12/2006
INSPRU 3.2.10
See Notes
INSPRU 3.2.8 R does not require that a derivative or quasi-derivative has no possible adverse consequences. Often a derivative or quasi-derivative is effected to protect against a severe adverse consequence that only arises in one circumstance. In all other circumstances it may itself lead to adverse consequences, even if only because it expires worthless resulting in the loss of the purchase price. Conversely a derivative or quasi-derivative may reduce risk in a wide range of circumstances but lead to adverse consequences when a particular circumstance arises, e.g. the default of the counterparty. Only rarely does a derivative or quasi-derivative give rise to no adverse consequences in any circumstances. The test is merely that the increase in risk should not be significant, that is it should be both small and reasonable, or the risk should be remote.
- 31/12/2006
INSPRU 3.2.11
See Notes
Firms are reminded that INSPRU 2.1 (Credit risk in insurance) sets out the different types of loss mitigation techniques.
- 31/12/2006
Investment risk
INSPRU 3.2.12
See Notes
For the purposes of INSPRU 3.2.8 R, investment risk is the risk that the assets held by a firm:
(1) (where they are admissible assets held by the firm to cover its technical provisions) might not be:
(a) of a value at least equal to the amount of those technical provisions as required by INSPRU 1.1.20 R; or
(b) of appropriate safety, yield and marketability as required by INSPRU 1.1.34R (1)(a); or
(c) of an appropriate currency match as required by INSPRU 3.1.53 R;
(2) (where they are held to cover index-linked liabilities) might not be appropriate cover for those liabilities as required by INSPRU 3.1.58 R; and
(3) (where they are held to cover property-linked liabilities) might not be appropriately selected in accordance with contractual and constructive liabilities as required by INSPRU 1.5.36 R and appropriate cover for those liabilities as required by INSPRU 3.1.57 R.
- 31/12/2006
INSPRU 3.2.13
See Notes
In assessing whether investment risk is reduced, the impact of a transaction on both the assets and liabilities should be considered. In particular, where the amount of liabilities depends upon the fluctuations in an index or other factor, investment risk is reduced where assets whose value fluctuates in the same way match those liabilities. In appropriate circumstances this may include:
(1) a derivative or quasi-derivative that is linked to the same index as the liabilities from the index-linked contracts; and
(2) a derivative or quasi-derivative whose value depends upon the factors which give rise to general insurance claims, e.g. a weather quasi-derivative.
- 31/12/2006
Cover
INSPRU 3.2.14
See Notes
A firm must cover an obligation to transfer assets or pay monetary amounts that arises from:
(2) a contract (other than a contract of insurance) for the purchase, sale or exchange of assets.
- 31/12/2006
INSPRU 3.2.15
See Notes
An obligation to transfer assets or pay monetary amounts (see INSPRU 3.2.14 R) must be covered:
- 31/12/2006
INSPRU 3.2.16
See Notes
- 31/12/2006
INSPRU 3.2.17
See Notes
An obligation to pay a monetary amount (whether or not falling in INSPRU 3.2.16 R) is covered if:
(1) the firm holds admissible assets or permitted links that are sufficient in value so that the firm reasonably believes that following reasonably foreseeable adverse variations (relying solely on cashflows from, or from realising, those assets) it could pay the monetary amount in the right currency when it falls due; or
(2) the obligation to pay the monetary amount is offset by a liability. An obligation is offset by a liability where an increase in the amount of that obligation would be offset by a decrease in the amount of that liability; or
(3) a provision at least equal to the value of the assets in (1) is implicitly or explicitly set up. A provision is implicitly set up to the extent that the obligation to pay the monetary amount is recognised under GENPRU 1.3 (Valuation) either by offset against an asset or as a separate liability. A provision is explicitly set up if it is in addition to an implicit provision.
- 06/10/2007
INSPRU 3.2.18
See Notes
A firm must implicitly or explicitly set up a provision equal to the value of the assets or offsetting transactions held to cover a non-approved derivative or quasi-derivative transaction.
- 31/12/2006
INSPRU 3.2.19
See Notes
A firm is required to cover a derivative under INSPRU 3.2.14R whether it satisfies the other conditions for approval under INSPRU 3.2.5R or not. Under INSPRU 3.2.17R a firm may cover an obligation to pay a monetary amount by setting up a provision. If the derivative is not covered at any time by other means then a provision needs to be set up to complete the cover taking into account obligations to pay monetary amounts that would arise if, for example, an obligation to transfer assets could not be met in full. By doing so, a derivative becomes covered. If it satisfies the other conditions under INSPRU 3.2.5R it is an approved derivative and may be taken into account for solvency purposes to the extent permitted by the large exposure limits and market risk and counterparty limits.
- 31/12/2007
INSPRU 3.2.20
See Notes
Exposure to a transaction includes exposure that arises from a right at the firm's (or its subsidiary undertaking's) option to dispose of assets.
- 31/12/2006
INSPRU 3.2.21
See Notes
Cover serves three purposes. First, it protects against exposure to loss from the transaction which is being covered. The value of the cover increases (or if the cover is a liability the amount of that liability decreases) to match any increase in obligations under the transaction.
- 31/12/2006
INSPRU 3.2.22
See Notes
The second purpose of cover is that it prevents excessive gearing in the investment portfolio by the use of options and their equivalent. A firm is required to cover all obligations under an admissible transaction including obligations that would arise only at the option of the firm, e.g. the liability to pay the exercise price under a bought option.
- 31/12/2006
INSPRU 3.2.23
See Notes
The third purpose of cover is that it protects against the risk that the firm may not be able to deliver assets (including money in any currency) of the right type when the obligation falls due under the transaction. An obligation to deliver assets is covered only if the firm holds those assets or has entered into an offsetting transaction that would deliver those assets when needed. An obligation to pay money is offset only if the firm holds cash in the right currency, its equivalent or assets that could reliably be converted into cash in the right currency.
- 31/12/2006
INSPRU 3.2.24
See Notes
Cover used for one transaction must not be used for cover in respect of another transaction or any other agreement to acquire, or dispose of, assets or to pay or repay money.
- 31/12/2006
Offsetting transactions
INSPRU 3.2.25
See Notes
An offsetting transaction means:
(2) a covered transaction with an approved counterparty for the purchase of assets.
- 31/12/2006
INSPRU 3.2.26
See Notes
- 31/12/2006
INSPRU 3.2.27
See Notes
A transaction offsets an obligation to pay a monetary amount only if it provides for that monetary amount to be paid to the firm at or before the earliest date on which the obligation might fall due.
- 31/12/2006
Lending and borrowing assets
INSPRU 3.2.28
See Notes
Assets that have been lent by the firm are not available for cover, unless:
(1) they are non-monetary assets that have been lent under a transaction that fulfils the conditions in INSPRU 3.2.36 R; and
(2) the firm reasonably believes the assets to be obtainable (by return or re-acquisition) in time to meet the obligation for which cover is required.
- 31/12/2006
INSPRU 3.2.29
See Notes
Assets that have been borrowed by the firm are not available for cover except as allowed by INSPRU 3.2.30 R.
- 31/12/2006
INSPRU 3.2.30
See Notes
Borrowed money may be used as cover only where:
(1) the money has been advanced or an approved credit institution has committed itself to advance the money; and
(2) the borrowing is or would be covered.
- 31/12/2006
INSPRU 3.2.31
See Notes
INSPRU 3.2.30 R in effect allows borrowings to be used to bridge the gap between an obligation under a transaction that might fall due at one date and cash or its equivalent that would only become due at a later date. Borrowings may not be used to gear the investment portfolio.
- 31/12/2006
Examples of cover requirements
INSPRU 3.2.32
See Notes
Examples of cover by assets for the purposes of INSPRU 3.2.16 R:
(1) a bought put option (or a sold call option) on 1000 1 shares (fully paid) of ABC plc is covered by an existing holding in the fund of 1000 1 shares (fully paid) of ABC plc;
(2) a bought call option (or sold put option) on 1000 ordinary 1 shares (fully paid) of ABC plc is covered by cash (or its equivalent) which is sufficient in amount to meet the purchase price of the shares on exercise of the option;
(3) a bought or sold contract for differences on short-dated sterling is covered by cash (or its equivalent), the value of which together at least match the notional principal of the contract. For example, a LIFFE short sterling contract, or a successive series of such contracts, is covered by 500,000; and
(4) a sold future on the FT-SE 100 index is covered by holdings of equities, which satisfy the reasonable approximation test for cover in INSPRU 3.2.16R (2) in relation to that future, and the values of which together at least match the current mark to market valuation of the future. For example, if the multiplier per full point is 10, and if the eventual obligation under the future is currently 2800, the valuation of the futures position is 2800 x 10 = 28,000.
- 31/12/2006
INSPRU 3.2.33
See Notes
Examples of cover by offsetting transactions for the purpose of INSPRU 3.2.25 R would include a bought future which is guaranteed to deliver to the firm at the relevant time sufficient assets to cover liabilities under a sold call option.
- 31/12/2006
Off-market transactions
INSPRU 3.2.34
See Notes
For the purpose of INSPRU 3.2.5R (3)(b), a derivative or quasi-derivative is on approved terms only if the firm reasonably believes that it could, in all reasonably foreseeable circumstances and under normal market conditions, readily enter into a further transaction with the counterparty or a third party to close out the derivative or quasi-derivative at a price not less than the value attributed to it by the firm, taking into account any valuation adjustments or reserves established by the firm under GENPRU 1.3.29 R to GENPRU 1.3.34 R.
- 31/12/2006
INSPRU 3.2.34A
See Notes
In considering whether the first transaction could be readily closed out in all reasonably foreseeable circumstances under normal market conditions, the firm should satisfy itself that it cannot reasonably foresee any circumstances in which it would need to close out all or part of the contract at a few days' notice, and would not be able to do so.
- 31/12/2006
INSPRU 3.2.35
See Notes
For the purpose of INSPRU 3.2.5R (3)(b), a derivative or quasi-derivative is capable of valuation only if the firm:
(1) is able to value it with reasonable accuracy on a reliable basis in compliance with GENPRU 1.3.4 R; and
(2) reasonably believes that it will be able to do so throughout the life of the transaction.
- 31/12/2006
INSPRU 3.2.35A
See Notes
The purpose of INSPRU 3.2.34 R and INSPRU 3.2.35 R is to ensure the appropriate application of GENPRU 1.3 to derivatives and quasi-derivatives effected or issued off-market with an approved counterparty.
- 31/12/2006
Stock lending
INSPRU 3.2.36
See Notes
(1) For the purposes of GENPRU 2 Annex 7 (Admissible assets in insurance), a stock lending transaction (including a repo transaction) is approved if:
(a) the assets lent are admissible assets;
(b) , the counterparty is an authorised person, an approved counterparty, a person registered as a broker-dealer with the Securities and Exchange Commission of the United States of America or a bank, or a branch of a bank, supervised, and authorised to deal in investments as principal, with respect to OTC derivatives by at least one of the following federal banking supervisory authorities of the United States of America:
(i) the Office of the Comptroller of the Currency;
(ii) the Federal Deposit Insurance Corporation;
(iii) the Board of Governors of the Federal Reserve System; and
(iv) the Office of Thrift Supervision; and
(c) adequate and sufficiently immediate collateral (INSPRU 3.2.38 R to INSPRU 3.2.41 R) is obtained to secure the obligation of the counterparty.
(2)
INSPRU 3.2.36R (1)(c) does not apply to a stock lending transaction made through Euroclear Bank SA/NV's Securities Lending and Borrowing Programme.
- 31/12/2008
INSPRU 3.2.36A
See Notes
(1)
For the purposes of the rules on permitted links, a stock lending transaction (including a repo transaction) is approved if:
(a) the assets lent are permitted links;
(b) the counterparty is an authorised person, an approved counterparty, a person registered as a broker-dealer with the Securities and Exchange Commission of the United States of America or a bank, or a branch of a bank, supervised, and authorised to deal in investments as principal, with respect to OTC derivatives by at least one of the following federal banking supervisory authorities in the United States of America:
(i) the Office of the Comptroller of the Currency;
(ii) the Federal Deposit Insurance Corporation;
(iii) the Board of Governors of the Federal Reserve System; and
(iv) the Office of Thrift Supervision; and
(c) adequately and sufficiently immediate collateral (INSPRU 3.2.38 R to INSPRU 3.2.41 R) is obtained to secure the obligation of the counterparty; and
(d) provided that, for the purposes of property-linked assets only:
(i) where the linked policyholder bears the whole of the risk associated with the stock lending transaction, they must receive the whole of the recompense (net of fees and expenses);
(ii) the extent of any risk that the linked policyholder bears in relation to the stock lending transaction must be disclosed to them; and
(iii) where the risk associated with the stock lending transaction is borne outside the linked fund, the linked fund should receive a fair and reasonable recompense for the use of the linked policyholders' funds.
(2)
INSPRU 3.2.36R (1)(c) does not apply to a stock lending transaction made through Euroclear Bank SA/NVs Securities Lending and Borrowing Programme.
- 06/10/2007
INSPRU 3.2.37
See Notes
INSPRU 3.2.36 R refers only to stock lending transactions where the firm is the lender. There are no special rules for a transaction under which the firm borrows securities.
- 31/12/2006
Collateral
INSPRU 3.2.38
See Notes
For the purposes of INSPRU 3.2.36R (1)(c), collateral is adequate only if it:
(1) is transferred to the firm or its agent or, in the case of a letter of credit, meets the conditions described in INSPRU 3.2.38A R;
(2) is, at the time of the transfer or, in the case of a letter of credit, at the time of issue, at least equal in value to the value of the securities transferred, or consideration provided, by the firm; and
(3) is of adequate quality.
- 31/12/2006
INSPRU 3.2.38A
See Notes
The conditions referred to in INSPRU 3.2.38R (1) are that the letter of credit is:
(1) direct, explicit, unconditional and irrevocable; and
(2) issued by an undertaking which is:
(b) either an approved credit institution or a bank, or a branch of a bank, whether chartered by the federal government of the United States of America or a US state, that is supervised and examined by at least one of the following US federal banking supervisory authorities:
(i) the Office of the Comptroller of the Currency;
(ii) the Federal Deposit Insurance Corporation;
(iii) the Board of Governors of the Federal Reserve System; and
(iv) the Office of Thrift Supervision.
- 31/12/2006
INSPRU 3.2.39
See Notes
For the purposes of assessing adequate quality in INSPRU 3.2.38R (3), reference should be made to the criteria for credit risk loss mitigation set out in INSPRU 2.1.16 R. The valuation rules in GENPRU 1.3 apply for the purpose of determining the value of both collateral received, and the securities transferred, by the firm. In addition, where collateral takes the form of assets transferred, under the rules in GENPRU any such asset that is not an admissible asset (see GENPRU 2 Annex 7) does not have a value.
- 31/12/2006
INSPRU 3.2.40
See Notes
For the purposes of INSPRU 3.2.36R (1)(c), collateral is sufficiently immediate only if:
(1) it is transferred or, in the case of a letter of credit, issued before, or at the same time as, the transfer of the securities by the firm; or
(2) it will be transferred or, in the case of a letter of credit, issued, at latest, by the close of business on the day of the transfer.
- 31/12/2006
INSPRU 3.2.41
See Notes
Collateral continues to be adequate only if its value is at all times at least equal to the value of the securities transferred by the firm. This will be satisfied in respect of collateral where the validity of the collateral or the firm's interest in the collateral is about to expire or has expired if sufficient collateral will again be transferred or issued at the latest by the close of business on the day of expiry.
- 31/12/2006
INSPRU 3.2.42
See Notes
References in INSPRU 3.2.40R (2) and INSPRU 3.2.41 R to the close of business on the day of the transfer or the day of expiry are to close of business on that day in all time regions.
- 31/12/2006
Application of INSPRU 3.2 to Lloyd's
INSPRU 3.2.43
See Notes
- 31/12/2006
INSPRU 4
Liquidity risk management
INSPRU 4.1
Application
- 31/12/2006
INSPRU 4.1.1
See Notes
- 31/12/2006
INSPRU 4.1.2
See Notes
All of INSPRU 4.1, except INSPRU 4.1.16 G, applies to:
(1) an EEA-deposit insurer; and
(2) a Swiss general insurer;
but only in respect of the activities of the firm carried on from a branch in the United Kingdom.- 31/12/2006
INSPRU 4.1.3
See Notes
If a firm carries on:
(1)
long-term insurance business; and
this section applies separately to each type of business.- 31/12/2006
INSPRU 4.1.4
See Notes
This section does not apply to:
(1) a non-directive friendly society; or
(2) an incoming EEA firm; or
(3) an incoming Treaty firm.
- 31/12/2006
Purpose
INSPRU 4.1.5
See Notes
The purpose of this section is to amplify parts of INSPRU in their application to liquidity risk and, in so doing, to suggest minimum standards for management of that risk. The main relevant part, SYSC 14 (Prudential risk management and associated systems and controls), itself amplifies
Principle 3 (Management and control) and
SYSC (Senior management arrangements, Systems and Controls).
- 31/12/2006
INSPRU 4.1.6
See Notes
Appropriate management of liquidity risk will vary with the scale, nature and complexity of the firm's activities. Most of the material in this section is, therefore, guidance. The section lays out some of the main issues that the
FSA
expects a firm to consider in relation to liquidity risk. A firm should assess the appropriateness of any particular item of guidance in the light of the scale, nature and complexity of its activities as well as its obligations as set out in Principle 3 to organise and control its affairs responsibly and effectively.
- 31/12/2006
INSPRU 4.1.7
See Notes
For insurers, references to liquidity risk in this section are intended to cover only those aspects of liquidity risk that do not fall under the heading of insurance risk. For such firms, the
FSA
sees the coverage of this section, broadly, as the management of risk arising from short-term cash-flows, rather than the risk arising from longer-term matching of assets and liabilities, which is part of insurance risk. guidance on systems and controls for managing insurance risk is set out in SYSC 17 (Insurance risk systems and controls).
- 31/12/2006
INSPRU 4.1.8
See Notes
This section addresses the need to deal both with liquidity management issues under normal market conditions, and with stressed or extreme situations resulting from either general market turbulence or firm-specific difficulties.
- 31/12/2006
Requirements
INSPRU 4.1.9
See Notes
High level requirements for prudential systems and controls including for liquidity risk are set out in SYSC 14 (Prudential risk management and associated systems and controls). In particular:
(1)
SYSC 14.1.18 R requires a firm, among other things, to take reasonable steps to ensure the establishment of a business plan and appropriate systems for the management of prudential risk; and
(2)
SYSC 14.1.19R (2) requires a firm, among other things, to document its policy for managing liquidity risk, including its appetite or tolerance for this risk and how it identifies, measures, monitors and controls this risk.
- 31/12/2006
INSPRU 4.1.10
See Notes
This section sets out guidance on each of these areas, and notes a number of matters which the
FSA
would expect a firm to deal with in its liquidity risk policy statement as follows:
(1) its liquidity risk strategy (see INSPRU 4.1.12 G to INSPRU 4.1.14 G), including:
(a) the role of marketable, or otherwise realisable, assets (see INSPRU 4.1.21 G); and
- 31/12/2006
Managing liquidity risk
INSPRU 4.1.11
See Notes
This section amplifies the general requirements in SYSC 14 by describing the key high level arrangements that the
FSA
would normally expect to be in place to ensure that a firm'sliquidity risk management system is adequate.
- 31/12/2006
Governing body and senior management oversight
INSPRU 4.1.12
See Notes
SYSC 14.1.11 G amplifies SYSC 2.1.1 R and SYSC 2.1.3 R which require the apportionment, and allocation, of significant responsibilities to be such that the business and affairs of the firm can be adequately monitored and controlled by the directors, relevant senior executives and governing body of the firm. Effective liquidity risk management entails an informed board, capable management and appropriate staffing. The governing body and senior management are responsible for understanding the nature and level of liquidity risk assumed by the firm and the tools used to manage that risk.
- 31/12/2006
INSPRU 4.1.13
See Notes
In relation to liquidity risk, the governing body's responsibilities should normally include:
(1) approving the firm'sliquidity risk policy, which includes taking reasonable steps to ensure that it is consistent with the firm's expressed risk tolerance (see INSPRU 4.1.15 G to INSPRU 4.1.17 G);
(2) establishing a structure for the management of liquidity risk including the allocation of appropriate senior managers who have the authority and responsibility to manage liquidity risk effectively, including the establishment and maintenance of the firm'sliquidity risk policy;
(3) monitoring the firm's overall liquidity risk profile on a regular basis and being made aware of any material changes in the firm's current or prospective liquidity risk profile; and
(4) taking reasonable steps to ensure that liquidity risk is adequately identified, measured, monitored and controlled.
- 31/12/2006
INSPRU 4.1.14
See Notes
A firm should have an appropriate senior management structure in place to oversee the daily and long-term management of liquidity risk in line with the governing body- approved liquidity risk policy (see INSPRU 4.1.15 G to INSPRU 4.1.17 G). The
FSA
would normally expect the senior management to:
(1) oversee the development, establishment and maintenance of procedures and practices that translate the goals, objectives and risk tolerances approved by the governing body into operating standards that are consistent with the governing body's intent and understood by the relevant members of a firm's personnel;
(2) adhere to the lines of authority and responsibility that the governing body has established for managing liquidity risk;
(3) oversee the establishment and maintenance of management information (see INSPRU 4.1.53 G to INSPRU 4.1.55 G) and other systems that identify, measure, monitor and control the firm'sliquidity risk; and
(4) oversee the establishment of effective internal controls over the liquidity risk management process (see INSPRU 4.1.56 G to INSPRU 4.1.68 G (Controlling liquidity risk)).
- 31/12/2006
Liquidity risk policy
INSPRU 4.1.15
See Notes
SYSC 3.2.17 G gives guidance, which amplifies SYSC 3.2.6 R, on the need for a firm to plan its business appropriately so that it is able to identify, measure, monitor and control risks of regulatory concern. A firm should, therefore, have an agreed policy for the day-to-day and longer term management of liquidity risk which is appropriate to the nature, scale and complexity of the activities carried on.
- 31/12/2006
INSPRU 4.1.16
See Notes
The liquidity risk policy should cover the general approach that the firm will take to liquidity risk management, including, as appropriate, various quantitative and qualitative targets. This general approach should be communicated to all relevant functions within the organisation and be included in the firm'sliquidity risk policy statement.
- 31/12/2006
INSPRU 4.1.17
See Notes
The policy for managing liquidity risk should cover specific aspects of liquidity risk management. So far as appropriate to the nature, scale and complexity of the activities carried on, such aspects might include:
(1) the basis for managing liquidity (for example, regional or central);
(2) the degree of concentrations, potentially affecting liquidity risk, that are acceptable to the firm;
(4) the role of marketable, or otherwise realisable, assets (see INSPRU 4.1.21 G);
(5) ways of managing both the firm's aggregate foreign currency liquidity needs and its needs in each individual currency;
(6) ways of managing market access;
(8) the management of intra-day liquidity, where this is appropriate, for instance where the firm is a member of or participates (directly or indirectly) in a system for the intra-day settlement of payments or transactions in investments.
- 31/12/2006
Identifying liquidity risk
INSPRU 4.1.18
See Notes
In order to manage liquidity risk successfully, a firm should be aware of the ways in which its activities can affect its liquidity risk profile, and how outside influences may affect its liquidity position. A firm should consider not only its current liquidity risk, but how existing activities may affect its liquidity risk profile in the future; it should also consider the implications of new products or business lines. This section identifies the main sources of liquidity risk and the key factors that a firm might consider when analysing its liquidity risk profile.
- 31/12/2006
INSPRU 4.1.19
See Notes
The overall financial adequacy rule states that a firm must maintain overall financial resources adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. The firm should, therefore, ensure that, overall, its financial resources are of appropriate maturity, and in a form which is sufficiently marketable or otherwise realisable, having regard to the expected timing of liabilities and the risk that liabilities may fall due earlier than expected (for which prudent allowance must be made when assessing whether assets are of appropriate maturity or sufficiently realisable).
- 31/12/2006
Asset liquidity
INSPRU 4.1.20
See Notes
A firm's asset portfolio can provide liquidity in three major ways:
(a) through the maturity of an asset;
(b) the sale of an asset for cash; or
(c) the use of an asset as collateral to back other transactions, such as for secured borrowing (including repos), or for deposits with insureds or cedants to back insurance or reinsurance transactions.
- 31/12/2006
INSPRU 4.1.21
See Notes
A firm may incur liquidity risk where inflows from the realisation of assets (at either maturity or time of sale) are less than anticipated because of the crystallisation of credit risk or market risk. Inflows arising from the renewal of secured funding, including repos, are similarly affected, if the haircut (the difference between the value of an asset and the amount lent to the firm by the counterparty using that security as collateral) required by a firm's counterparty is larger than anticipated (see INSPRU 4.1.28 G).
- 31/12/2006
INSPRU 4.1.22
See Notes
Asset concentrations often increase these sources of liquidity risk. A firm should, therefore, identify significant concentrations within its asset portfolio, including in relation to:
(1) individual counterparties or related groups of counterparties;
(2) credit ratings of the assets in its portfolio;
(3) the proportion of an issue held;
(4) instrument types;
(5) geographical regions; and
(6) economic sectors.
- 31/12/2006
Marketable assets
INSPRU 4.1.23
See Notes
Criteria for the marketability of its assets should be decided by the firm and may reflect the firm's access to, and expertise in, individual markets. In determining the appropriateness of the marketability or realisability of assets, a firm may take into account:
(1) the depth and liquidity of the market, including:
(a) the speed with which assets may be realised;
(b) the likelihood and extent of forced-sale loss; and
(c) the potential for using the asset as collateral in secured funding and the size of the haircut (see INSPRU 4.1.18 G) likely to be required by the counterparty;
(2) the expected date of maturity, redemption, repayment or disposal;
(3) the proportion of an issue held;
(4) the credit ratings of the assets;
(5) the impact of exchange rate risk on the realised value of the asset, where assets are denominated in different currencies from its liabilities; and
(6) where applicable, the impact on certain assets' liquidity of their use as eligible collateral either in open-market operations conducted by, or in real-time or other payment systems operated by, a central bank.
- 31/12/2006
INSPRU 4.1.24
See Notes
The role of marketable, or otherwise realisable, assets in a firm's liquidity risk policy, in both normal and stressed conditions, should be set out in its liquidity risk policy statement.
- 31/12/2006
INSPRU 4.1.25
See Notes
In considering the marketability of an asset, a firm should assess how its value and liquidity would be affected in a variety of scenarios (see SYSC 11 (Liquidity risk management systems and controls) at SYSC 11.1.18 G, SYSC 11.1.20 G, SYSC 11.1.21 E and SYSC 11.1.22 G.
- 31/12/2006
Adjusting for the behavioural characteristics of assets
INSPRU 4.1.26
See Notes
In order to manage its liquidity risk effectively, a firm should be able to adjust for the behavioural characteristics of the repayment profiles of assets, that is how their actual behaviour may vary from that suggested by their contractual terms. Such an adjustment may be necessary in order to reduce the risk of wrongly estimating the inflows in relation to, in particular:
(1) standby facilities or other commitments that have already been drawn down;
(2) retail and wholesale overdrafts;
(3) mortgages; and
(4) credit cards.
- 31/12/2006
INSPRU 4.1.27
See Notes
The repayment profiles should be considered under both normal market conditions and stressed conditions resulting from either general market turbulence or firm-specific difficulties (see SYSC 11 (Liquidity risk management systems and controls) at SYSC 11.1.18 G, SYSC 11.1.20 G, SYSC 11.1.21 E, SYSC 11.1.22 G , SYSC 11.1.23 G and SYSC 11.1.24 E).
- 31/12/2006
Inflows from off balance sheet items
INSPRU 4.1.28
See Notes
Where a firm has in place a committed facility for the provision of a portion of its funding, it should take care to monitor any covenants included in the agreement. It should also make efforts to retain a good relationship with the provider of the facility and, where possible without jeopardising that relationship, regularly test access to the funds. A firm should also assess the extent to which committed facilities can be relied upon under stressed conditions (see SYSC 11.1.22 G and SYSC 11.1.24 E).
- 31/12/2006
Liability liquidity
INSPRU 4.1.29
See Notes
Holding marketable, or otherwise realisable, assets is not the only way for a firm to mitigate the liquidity risk it faces. There are a number of liability-side strategies that can be used to reduce a firm's liquidity risk, such as ensuring a spread of maturities and lengthening the term structure of its liabilities. In order to manage its liquidity risk effectively a firm should have a liability-side policy that is appropriate to the nature and scale of its activities; this policy should be described in its liquidity risk policy statement.
- 31/12/2006
INSPRU 4.1.30
See Notes
When determining the appropriate mix of liabilities, a firm's management should consider potential concentrations. A concentration exists when a single decision or factor could cause a significant and sudden claim on liabilities. What constitutes a liability concentration depends on the nature and scale of a firm's activities. A firm should, however, normally consider:
(1) the term structure of its liabilities;
(2) the credit-sensitivity of its liabilities;
(3) the mix of secured and unsecured funding;
(4) concentrations among its liability providers, or related groups of liability providers;
(5) reliance on particular instruments or products;
(6) the geographical location of liability providers; and
(7) reliance on intra-group funding.
- 31/12/2006
INSPRU 4.1.31
See Notes
A firm with credit-sensitive liabilities should be aware that, in times of market turbulence, a proportion of that funding may be withdrawn, particularly funding which is unsecured. Secured funding may also be affected, with counterparties seeking better quality collateral or larger haircuts (see INSPRU 4.1.18 G) on collateral. A firm should recognise these characteristics of its credit-sensitive liabilities and take account of them in its stress testing and scenario analysis and contingency funding plan (see SYSC 11 (Liquidity risk management systems and controls) at SYSC 11.1.18 G, SYSC 11.1.20 G, SYSC 11.1.21 E, SYSC 11.1.22 G , SYSC 11.1.23 G and SYSC 11.1.24E).
- 31/12/2006
INSPRU 4.1.32
See Notes
A firm should consider the dynamics of its liquidity risk including, for example, the normal level of roll-overs, and growth, of liabilities.
- 31/12/2006
Adjusting for the behavioural characteristics of liabilities
INSPRU 4.1.33
See Notes
In order to meet the requirement to maintain sufficient liquid financial resources (see INSPRU 4.1.16 G), a firm should consider the behavioural characteristics of its liabilities, that is how their actual behaviour may vary from that suggested by their contractual terms.
- 31/12/2006
INSPRU 4.1.34
See Notes
In assessing how to adjust for the behavioural characteristics of its liabilities in the context of liquidity risk, an insurer may take into account:
(1) the type of insurance business;
(2) the past history of volatility in the pattern of claims payment;
(3) options available to policyholders and the circumstances in which they are likely to be exercised;
(5) any relevant requirements to deposit collateral either with the insured (or cedants) under the terms of the insurance Treaty or by requirements of overseas regulators as a condition for covering risks in a particular territory; and
(6) the other cash flow needs of the business.
- 31/12/2006
Outflows from off balance sheet items
INSPRU 4.1.35
See Notes
The contingent or optional nature of many off balance sheet instruments adds to the complexity of managing off balance sheet cash flows. In particular, in stressed conditions off balance sheet commitments may be a significant drain on liquidity.
- 31/12/2006
INSPRU 4.1.36
See Notes
A firm should consider how its wholesale off balance sheet activities affect its cash flows and liquidity risk profile under both normal and stressed conditions. In particular, as appropriate, it should consider the amount of funding required by:
(1) commitments given;
(2) standby facilities given;
(3) wholesale overdraft facilities given;
(4) proprietary derivatives positions; and
(5) liquidity facilities given for securitisation transactions.
- 31/12/2006
INSPRU 4.1.37
See Notes
Similarly, a firm with retail customers should be able to assess the likely draw-down on retail products under a variety of circumstances and taking into account seasonal factors. In particular, as appropriate, it should consider the amount of funding required in relation to:
(1) mortgages that have been agreed but not yet drawn down;
(2) overdrafts; and
(3) credit cards.
- 31/12/2006
Asset securitisations
INSPRU 4.1.38
See Notes
If controlled properly, asset securitisation can be a useful tool in enhancing a firm's liquidity. However, features of certain securitisations, such as early amortisation triggers, as well as excessive reliance on a single funding vehicle, can increase liquidity risk.
- 31/12/2006
INSPRU 4.1.39
See Notes
The implications of securitisations on a firm's liquidity position should be considered for both day-to-day liquidity management and its contingency planning for liquidity risk. A contemplated securitisation should be analysed for its impact on liquidity risk. A firm using securitisation should consider:
(1) the volume of securities issued in connection with the securitisation that are scheduled to amortise during any particular period;
(2) the existence of early amortisation triggers (see also SYSC 11.1.22 G);
(3) its plans for meeting its funding requirements (including their timing);
(4) strategies for obtaining substantial amounts of liquidity at short notice (see also SYSC 11.1.24 E); and
(5) operational issues associated with the rollover of short-dated securities, particularly commercial paper.
- 31/12/2006
INSPRU 4.1.40
See Notes
If a firm is a provider of liquidity facilities for securitisation transactions it should be able to assess the probability and scale of draw-down and make provision for it.
- 31/12/2006
INSPRU 4.1.41
See Notes
A firm using securitisation should also be aware that its ability to securitise assets may diminish in stressed market conditions and take account of this in its stress testing and contingency funding plan. In addition, the time taken to organise a securitisation transaction may mean that it cannot be relied upon to provide liquidity at short notice.
- 31/12/2006
Foreign currency liquidity
INSPRU 4.1.42
See Notes
Foreign currency liquidity risk arises where a firm faces actual or potential future outflows in a particular currency which it may not be able to meet from likely available inflows in that currency. A firm's exposure to foreign currency liquidity risk depends on the nature, scale and complexity of its business. Where a firm has significant, unhedged liquidity mismatches in particular currencies, it should consider:
(1) the volatilities of the exchange rates of the mismatched currencies;
(2) likely access to the foreign exchange markets in normal and stressed conditions; and
(3) the stickiness of deposits in those currencies with the firm in stressed conditions.
- 31/12/2006
INSPRU 4.1.43
See Notes
A possible strategy for mitigating foreign currency liquidity risk, which is effective and simple, is for a firm to hold assets in a particular currency in an amount equal to, and realisable at maturities no later than, its liabilities in that currency. This strategy may be worth considering particularly where, as a result of the nature, scale and complexity of its business, a firm'sliquidity risk is relatively small.
- 31/12/2006
Intra-day liquidity
INSPRU 4.1.44
See Notes
SYSC 3.1.1 R requires a firm to take reasonable care to establish and maintain systems and controls appropriate to its business. This includes appropriate systems and controls over activities that give rise to significant market, credit, liquidity, insurance, operational or group risk, including over the processes of settling and paying debts and other commitments that arise from those activities.
- 31/12/2006
INSPRU 4.1.45
See Notes
Structural and operational changes in payment systems have increased the importance of intra-day liquidity for many firms. Within real time gross settlement systems, for example, a firm needs to take appropriate steps to ensure that it has sufficient collateral to cover cash positions and has systems capable of monitoring intra-day liquidity positions and cash needs.
- 31/12/2006
INSPRU 4.1.46
See Notes
A firm should be aware that in stressed conditions it is likely to require more intra-day liquidity than in normal market conditions, for a variety of reasons including payments due to the firm being delayed and wholesale depositors withdrawing from the market. A firm should take account of this in its stress testing and scenario analysis.
- 31/12/2006
Measuring liquidity risk
INSPRU 4.1.47
See Notes
A firm should establish and maintain a process for the measurement of liquidity risk, using a robust and consistent method which should be described in its liquidity risk policy statement.
- 31/12/2006
INSPRU 4.1.48
See Notes
A number of techniques can be used for measuring liquidity risk, ranging from simple calculations to highly sophisticated modelling; a firm should use a measurement method which is appropriate to the nature, scale and complexity of its activities.
- 31/12/2006
INSPRU 4.1.49
See Notes
The method that a firm uses for measuring liquidity risk should be capable of:
(1) measuring the extent of the liquidity risk it is incurring;
(2) dealing with the dynamic aspects of a firm's liquidity profile (for example, rollovers of funding and assets or new business);
(3) assessing the behavioural characteristics of its on and off balance sheet instruments; and
- 31/12/2006
Monitoring liquidity risk
INSPRU 4.1.50
See Notes
A firm should establish and maintain an appropriate system for monitoring its liquidity risk, which should be described in its liquidity risk policy statement.
- 31/12/2006
INSPRU 4.1.51
See Notes
A firm should establish and maintain a system of management reporting which provides clear, concise, timely and accurate liquidity risk reports to relevant functions within the firm. These reports should alert management when the firm approaches, or breaches, predefined thresholds or limits, including quantitative limits imposed by the
FSA
or another regulator.
- 31/12/2006
INSPRU 4.1.52
See Notes
Where a firm is a member of a group, it should be able to assess the potential impact on it of liquidity risk arising in other parts of the group.
- 31/12/2006
Management information systems
INSPRU 4.1.53
See Notes
A firm should have adequate information systems for controlling and reporting liquidity risk. The management information system should be used to check for compliance with the firm's established policies, procedures and limits.
- 31/12/2006
INSPRU 4.1.54
See Notes
Reports on liquidity risk should be provided on a timely basis to the firm'sgoverning body, senior management and other appropriate personnel. The appropriate content and format of reports depends on a firm's liquidity management practices and the nature, scale and complexity of the firm's business. Reports to the firm's governing body may be less detailed and less frequent than reports to senior management with responsibility for managing liquidity risk.
- 31/12/2006
INSPRU 4.1.55
See Notes
When considering what else might be included in liquidity risk management information, a firm should consider other types of information that may be important for understanding its liquidity risk profile.
- 31/12/2006
Controlling liquidity risk
INSPRU 4.1.56
See Notes
A firm should establish and maintain an appropriate system for controlling its liquidity risk, which should be described in its liquidity risk policy statement. Such a system should allow the firm'sgoverning body and senior management to review compliance with established limits and operating procedures.
- 31/12/2006
INSPRU 4.1.57
See Notes
A firm should have in place appropriate approval processes, limits and other mechanisms designed to provide reasonable assurance that the firm'sliquidity risk management processes are adhered to.
- 31/12/2006
INSPRU 4.1.58
See Notes
When revisions or enhancements to internal controls are warranted, a firm should implement them in a timely manner.
- 31/12/2006
INSPRU 4.1.59
See Notes
The effectiveness of a firm'sliquidity risk management system should be regularly reviewed and evaluated by individuals unconnected with day-to-day liquidity risk management in order to check that personnel are following established policies and procedures, and that procedures accomplish the intended objectives.
- 31/12/2006
INSPRU 4.1.60
See Notes
In addition to the regular review and evaluation described in INSPRU 4.1.59 G, a firm's internal audit function (see SYSC 3.2.16 G or, as the case may be, SYSC 6.2.1 R) should periodically review the liquidity risk management process in order to identify any weaknesses or problems. Any weaknesses should be addressed by management in a timely and effective manner.
- 01/11/2007
Limit Setting
INSPRU 4.1.61
See Notes
A firm's senior management should decide what limits need to be set, in accordance with the nature, scale and complexity of its activities. The structure of limits should reflect the need for a firm to have systems and controls in place to guard against a spectrum of possible risks, from those arising in day-to-day liquidity risk management to those arising in stressed conditions.
- 31/12/2006
INSPRU 4.1.62
See Notes
SYSC 14.1.18 R states that a firm must take reasonable steps to ensure the establishment and maintenance of a business plan and appropriate systems for the management of prudential risk.
- 31/12/2006
INSPRU 4.1.63
See Notes
(1) If a firm has liquidity risk that arises because it has substantial exposures in foreign currencies, the risk management systems of the firm referred to in SYSC 14.1.18 R should include systems and procedures that are designed to ensure that the firm does not, except in accordance with those procedures, exceed limits that are designed to limit:
(a) the aggregate amount of its liquidity risk for all exposures in foreign currencies; and
(b) the amount of its liquidity risk for each individual currency in which it has a significant exposure.
(2) Contravention of (1) may be relied upon as tending to establish contravention of SYSC 14.1.18 R.
- 31/12/2006
INSPRU 4.1.64
See Notes
A firm should periodically review and, where appropriate, adjust its limits when conditions or risk tolerances change.
- 31/12/2006
INSPRU 4.1.65
See Notes
Policy or limit exceptions should receive the prompt attention of the appropriate management and should be resolved according to processes described in approved policies.
- 31/12/2006
Managing market access
INSPRU 4.1.66
See Notes
A firm should periodically review its efforts to establish and maintain relationships with liability providers, to maintain adequate diversification of liabilities, and to ensure adequate capacity to sell assets, or use them as collateral in secured funding. Where possible the firm should aim regularly to test its access to the individual markets in assets that it holds for liquidity purposes.
- 31/12/2006
INSPRU 4.1.67
See Notes
Market access should be assessed under a variety of normal and stressed conditions.
- 31/12/2006
INSPRU 4.1.68
See Notes
In some circumstances, the disclosure of information about a firm may be useful in managing the public perception of its organisation and soundness. A firm should consider the role of disclosure in managing the liquidity risk to which it is exposed.
- 31/12/2006
Application of INSPRU 4.1 to Lloyd's
INSPRU 4.1.69
See Notes
- 31/12/2006
INSPRU 4.1.70
See Notes
In accordance with INSPRU 8.6.2 R, the rules and guidance in INSPRU 4.1 relating to the establishment and maintenance of a business plan do not apply to the Society.
- 31/12/2006
INSPRU 5
Operational Risk Management
INSPRU 5.1
Application
- 31/12/2006
INSPRU 5.1.1
See Notes
INSPRU 5.1 applies to an insurer unless it is:
(1) a non-directive friendly society; or
(2) an incoming EEA firm; or
(3) an incoming Treaty firm.
- 31/12/2006
INSPRU 5.1.2
See Notes
INSPRU 5.1 applies to:
only in respect of the activities of the firm carried on from a branch in the United Kingdom.
(1) an EEA-deposit insurer; and
(2) a Swiss general insurer;
only in respect of the activities of the firm carried on from a branch in the United Kingdom.
- 31/12/2006
Purpose
INSPRU 5.1.3
See Notes
This section provides guidance on how to interpret SYSC 14.1.18 R and SYSC 14.1.19R (2) (which relate to the design and documentation of risk management systems) in so far as they relate to the management of operational risk in a prudential context. Operational risk has been described by the Basel Committee on Banking Supervision as "the risk of loss, resulting from inadequate or failed internal processes, people and systems, or from external events". Thus this section covers management of risks concerning any of the firm's operations, whether caused by internal or external matters. However, it does not cover management of credit, market, liquidity and insurance risk. Examples of operational risk exposures that this section is meant to address include internal and external fraud; failure to comply with employment law or meet workplace safety standards; damage to physical assets; business disruptions and system failures; and transaction processing failures.
- 31/12/2006
INSPRU 5.1.4
See Notes
Operational risk concerns the
FSA
in a prudential contextbecause inappropriate management of operational risk can adversely affect the solvency or business continuity of a firm, threatening the
regulatory objectives
of market confidence,
consumer protection and financial stability
.
- 06/08/2010
INSPRU 5.1.5
See Notes
This section contains guidance on how a firm should determine, in a prudential context, its policy for operational risk management and its processes for the identification, assessment, monitoring and control of operational risk. In addition, guidance is provided on record keeping in relation to operational risk.
- 31/12/2006
INSPRU 5.1.6
See Notes
The guidance contained within this section is not designed to be exhaustive. When establishing and maintaining its systems and controls for operational risk, a firm should have regard to other parts of the Handbook as well as the material that is issued by other industry or regulatory bodies. In particular, a firm should read this section in conjunction with SYSC 13 (Operational Risk Systems and Controls) which contains high level guidance on the management of people, processes and systems, and external events in relation to operational risk. SYSC 13 also outlines some guidance on the areas that are covered by operational risk systems and controls (including the
FSA's
interpretation of some frequently used risk management terms in relation to operational risk), business continuity management, outsourcing, and the role of insurance in financing operational risk. In addition, a firm should read SYSC 14, which contains the
FSA's
general policy on prudential systems and controls. SYSC 14 contains some rules and guidance on which this section offers additional guidance.
- 31/12/2006
INSPRU 5.1.7
See Notes
- 31/12/2006
INSPRU 5.1.8
See Notes
Appropriate management of operational risk will vary with the scale, nature and complexity of a firm's activities. Therefore the material in this section is guidance. A firm should assess the appropriateness of any particular item of guidance in the light of the scale, nature and complexity of its activities as well as its obligations as set out in Principle 3 to organise and control its affairs responsibly and effectively.
- 31/12/2006
Operational risk policy
INSPRU 5.1.9
See Notes
Much of the management of operational risk is about identifying, assessing, monitoring and controlling failures or inadequacies in a firm's systems and controls. As such, a firm may often find that there is no clear boundary between its risk management systems for operational risk and all its other systems and controls. When drafting its operational risk policy, a firm should try to distinguish between its systems and controls for credit, market, liquidity and insurance risk, and its systems and controls for operational risk. Where such a distinction is not possible a firm should still try to identify those systems and controls that are used in the management of operational risk, even when they have other purposes as well.
- 31/12/2006
INSPRU 5.1.10
See Notes
A firm should document its policy for managing operational risk. This policy should outline a firm's strategy and objectives for operational risk management and the processes that it intends to adopt to achieve these objectives. In complying with SYSC 14.1.19R (2), the documented operational risk policy of a firm should include:
(1) an analysis of the firm's operational risk profile (see the
FSA's
interpretation of this term in SYSC 13.5.1 G (3)), including where relevant some consideration of the effects that operational risk may have on the firm, including consideration of those operational risks within a firm that may have an adverse impact upon the quality of service afforded to its clients;
(2) the operational risks that the firm is prepared to accept and those that it is not prepared to accept, including where relevant some consideration of its appetite or tolerance (see INSPRU 5.1.12 G) for specific operational risks;
(3) how the firm intends to identify, assess, monitor, and control its operational risks, including an overview of the people, processes and systems that are used; and
(4) where assessments of the firm's risk exposures are used for internal capital allocation purposes, a description of how operational risk is incorporated into this methodology.
- 31/12/2006
INSPRU 5.1.11
See Notes
A firm may also wish to set threshold levels in its operational risk policy for particular types of operational risk (based on its risk appetite or tolerance for risk), which when exceeded trigger a response (such as the allocation of more resources to control the risk or a reappraisal of business plans).
- 31/12/2006
INSPRU 5.1.12
See Notes
Given its association with a willingness to take risk, a firm may wish to replace the term appetite for tolerance when drafting its operational risk policy. Tolerance describes the types and degree of operational risk that a firm is prepared to incur (based on factors such as the adequacy of its resources and the nature of its operating environment). Tolerance may be described in terms of the maximum budgeted (that is, expected) costs of an operational risk that a firm is prepared to bear, or by reference to risk indicators such as the cost or number of system failures, available spare capacity and the number of failed trades.
- 31/12/2006
INSPRU 5.1.13
See Notes
The term risk assessment can be used to represent both the qualitative and quantitative evaluation or measurement of operational exposures.
- 31/12/2006
Risk identification
INSPRU 5.1.14
See Notes
In order to understand its operational risk profile, a firm should identify the types of operational risk that it is exposed to as far as reasonably possible. This might include, but is not limited to, consideration of:
(1) the nature of a firm'scustomers, products and activities, including sources of business, distribution mechanisms, and the complexity and volumes of transactions;
(2) the design, implementation, and operation of the processes and systems used in the end-to-end operating cycle for a firm's products and activities;
(3) the risk culture and human resource management practices at a firm; and
(4) the business operating environment, including political, legal, socio-demographic, technological, and economic factors as well as the competitive environment and market structure.
- 31/12/2006
INSPRU 5.1.15
See Notes
A firm should recognise that it may face significant operational exposures from a product or activity that may not be material to its business strategy. A firm should consider the appropriate level of detail at which risk identification is to take place, and may wish to manage the operational risks that it faces in risk categories that are appropriate to its organisational and legal structures.
- 31/12/2006
INSPRU 5.1.16
See Notes
The
FSA's
interpretation of the term operational exposure is provided in SYSC 13.5.1 G (2).
- 31/12/2006
Risk assessment
INSPRU 5.1.17
See Notes
The
FSA
recognises that risk management systems for operational risk are still developing, and that it may be neither feasible nor appropriate to measure certain types of operational risk in a quantitative way. A firm may wish to take a qualitative approach to the assessment of its operational risks using, for example, relative estimates (such as high, medium, low) to understand its exposure to them.
- 31/12/2006
INSPRU 5.1.18
See Notes
In order to understand the effects of its operational exposures a firm should continually assess its operational risks. This might include, but is not limited to, consideration of:
(1) actual operational losses that have occurred within a firm, or events that could have resulted in significant operational losses, but were avoided (for example, the waiving of financial penalties by a third party as a gesture of goodwill or where by chance the firm realised profits);
(2) internal assessment of risks inherent in its operations and the effectiveness of controls implemented to reduce these risks (through activities such as self-assessment or stress testing and scenario analysis);
(3) other risk indicators, such as customer complaints, processing volumes, employee turnover, large numbers of reconciling items, process or system failures, fragmented systems, systems subject to a high degree of manual intervention and transactions processed outside a firm's mainstream systems;
(4) reported external (peer) operational losses and exposures; and
(5) changes in its business operating environment.
- 31/12/2006
INSPRU 5.1.19
See Notes
When assessing its operational risks, a firm may be able to differentiate between expected and unexpected operational losses. A firm should consider whether it is appropriate to adopt a more quantitative approach to the assessment of its expected operational losses, for example by defining tolerance, setting thresholds, and measuring and monitoring operational losses and exposures. In contrast, a firm may wish to take a more qualitative approach to assessing its unexpected losses.
- 31/12/2006
INSPRU 5.1.20
See Notes
Although a firm may currently be unable to assess certain operational risks with a high degree of accuracy or consistency, it should, according to the nature, scale and complexity of its business, consider the use of more sophisticated qualitative and quantitative techniques as they become available.
- 31/12/2006
Risk monitoring
INSPRU 5.1.21
See Notes
In monitoring its operational risks, a firm should:
(1) as appropriate, regularly report to the relevant level of management its operational exposures, loss experience (including if possible cumulative losses), and authorised deviations from the firm's operational risk policy;
(2) engage in exception-based escalation to management of:
(a) unauthorised deviations from the firm's operational risk policy;
(b) likely or actual breaches in predefined thresholds for operational exposures and losses, where set; and
(c) significant increases in the firm's exposure to operational risk or alterations to its operational risk profile.
- 31/12/2006
Risk control
INSPRU 5.1.22
See Notes
A firm should control its operational risks, as appropriate, through activities for the avoidance, transfer, prevention or reduction of the likelihood of occurrence or potential impact of an operational exposure. This might include, but is not limited to, consideration of:
(1) adjusting a firm's risk culture and creating appropriate incentives to facilitate the implementation of its risk control strategy (see SYSC 13.6 People);
(2) adapting internal processes and systems (see SYSC 13.7 Processes and systems);
(3) transferring or changing the operational exposure through mechanisms such as outsourcing (see SYSC 13.9 Outsourcing) and insurance (see SYSC 13.10 Insurance);
(4) the active acceptance of a given operational risk within the firm's stated risk appetite or tolerance; and
(5) providing for expected losses, and maintaining adequate financial resources against unexpected losses that may be encountered in the normal course of a firm's business activities.
- 31/12/2006
Record keeping
INSPRU 5.1.23
See Notes
The
FSA's
high level rules and guidance for record keeping are outlined in SYSC 3.2.20 R (Records). Additional rules and guidance in relation to the prudential context are set out in SYSC 14.1.51 G to SYSC 14.1.64 G (Record keeping). In complying with these rules and all associated guidance, a firm should retain an appropriate record of its operational risk management activities. This may, for example, include records of:
(1) the results of risk identification, measurement, and monitoring activities;
(2) actions taken to control identified risks;
(3) where relevant, any exposure thresholds that have been set for identified operational risks;
(4) an assessment of the effectiveness of the risk control tools that are used; and
(5) actual exposures against stated risk appetite or tolerance.
- 31/12/2006
Application of INSPRU 5.1 to Lloyd's
INSPRU 5.1.24
See Notes
- 31/12/2006
INSPRU 5.1.25
See Notes
In accordance with INSPRU 8.5.2 G, the rules and guidance in INSPRU 5.1 relating to the establishment and maintenance of a business plan do not apply to the Society.
- 31/12/2006
INSPRU 6
Group Risk: Insurance Groups
INSPRU 6.1
Application
- 31/12/2006
INSPRU 6.1.1
See Notes
INSPRU 6.1 applies to an insurer that is either:
(1) a participating insurance undertaking; or
(2) a member of an insurance group which is not a participating insurance undertaking and which is not:
(a) a non-EEA insurer; or
(b) a friendly society.
- 31/12/2006
INSPRU 6.1.2
See Notes
INSPRU 6.1 does not apply to:
(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.
- 31/12/2006
INSPRU 6.1.3
See Notes
INSPRU 6.1 applies to a firm:
(1) on a solo basis, as an adjusted solo calculation, where that firm is a participating insurance undertaking; and
- 31/12/2006
INSPRU 6.1.4
See Notes
For the purposes of INSPRU 6.1, an insurer includes a friendly society (other than a non-directive friendly society) and a non-EEA insurer.
- 31/12/2006
Purpose
INSPRU 6.1.5
See Notes
The purpose of this section is to implement the Insurance Groups Directive on supplementary supervision of firms in an insurance group, as amended by the Financial Groups Directive and the Reinsurance Directive. The Financial Groups Directive (by amending the Insurance Directives and the Insurance Groups Directive) introduces specific requirements for the treatment of related undertakings of an insurance parent undertaking or a participating insurance undertaking that are credit institutions, investment firms or financial institutions. The Reinsurance Directive (by amending the Insurance Directives and the Insurance Groups Directive) introduces supplementary supervision for firms that are reinsurance undertakings in an insurance group.
- 31/12/2006
INSPRU 6.1.6
See Notes
INSPRU 6.1 sets out the sectoral rules for insurers for:
(1)
firms that are participating insurance undertakings carrying out an adjusted solo calculation as contemplated by GENPRU 2.1.13R (2)
(2)
insurance groups; and
(3)
insurance conglomerates
.
- 31/12/2006
INSPRU 6.1.6A
See Notes
In accordance with the definition, an insurance holding company ceases to be an insurance holding company if:
otherwise it remains an insurance holding company for the purposes of this chapter.
(1) it is a mixed financial holding company; and
(2) notice has been given in accordance with Article 4(2) of the Financial Groups Directive that the financial conglomerate of which it is a mixed financial holding company is a financial conglomerate;
otherwise it remains an insurance holding company for the purposes of this chapter.
- 31/12/2006
INSPRU 6.1.7
See Notes
For a firm that is a participating insurance undertaking, the rules in INSPRU 6.1 out the minimum capital adequacy requirements for the firm itself. A firm that satisfies the test in INSPRU 6.1.9 R in relation to its group capital resources is deemed by GENPRU 2.1.13R (2) to be in compliance with the capital adequacy requirement set out in GENPRU 2.1.13R (1).
- 31/12/2006
Requirement to calculate GCR and GCRR
INSPRU 6.1.8
See Notes
A firm must on a regular basis calculate the group capital resources (GCR) and group capital resources requirement (GCRR) of each undertaking referred to in INSPRU 6.1.17 R.
- 31/12/2006
Requirement to maintain group capital
INSPRU 6.1.9
See Notes
Where a firm is the undertaking referred to in INSPRU 6.1.17R (1)(c) or INSPRU 6.1.17R (2), it must maintain at all times tier one capital resources and tier two capital resources of such an amount that its group capital resources are equal to or exceed its group capital resources requirement.
- 31/12/2006
INSPRU 6.1.10
See Notes
A firm that is both:
(1) a composite firm; and
must comply with INSPRU 6.1.9 R separately in respect of its long-term insurance business and its general insurance business.- 31/12/2006
INSPRU 6.1.11
See Notes
For the purposes of INSPRU 6.1.10 R, a firm must include in the calculation of the group capital resources and group capital resources requirement of its long-term insurance business the regulated related undertakings and ancillary services undertakings that are long-term insurance assets.
- 31/12/2006
INSPRU 6.1.12
See Notes
INSPRU 1.5 sets out the detailed requirements for the separation of long-term and general insurance business.
- 31/12/2006
INSPRU 6.1.13
See Notes
In order to comply with INSPRU 6.1.10 R, a composite firm will need to:
(1) establish the group capital resources requirement of its general insurance business and its long-term insurance business separately; and
(2) allocate its group capital resources between its general insurance business and its long-term insurance business so that:
(a) the group capital resources allocated to its general insurance business are equal to or in excess of the group capital resources requirement of its general insurance business; and
(b) the group capital resources allocated to its long-term insurance business are equal to or in excess of the group capital resources requirement of its long-term insurance business.
- 31/12/2006
INSPRU 6.1.14
See Notes
Surplus group capital resources in the long-term insurance business cannot be used towards meeting the requirements of the general insurance business (see INSPRU 6.1.41 R) but surplus group capital resources in the general insurance business may be used towards meeting the amount of the group capital resources requirement that relates to the long-term insurance business.
- 31/12/2006
INSPRU 6.1.15
See Notes
(1) Subject to INSPRU 6.1.27 R, a firm must ensure that at all times its capital resources are of such an amount that the group capital resources of each undertaking referred to in INSPRU 6.1.17 R (excluding those referred to in INSPRU 6.1.9 R) are equal to or exceed that undertaking'sgroup capital resources requirement
(2) (1) does not apply to a pure reinsurer which became a firm in run-off before 10 December 2007 and whose
Part IV permission
has not subsequently been varied to add back the regulated activity of effecting contracts of insurance.
- 31/12/2006
INSPRU 6.1.16
See Notes
Principle 4 requires a firm to maintain adequate financial resources, taking into account any activity of other members of the group of which the firm is a member. INSPRU 6.1 sets out provisions that deal specifically with the way the activities of other members of the group should be taken into account. This results in the firm being required to hold sufficient capital resources so that the group capital resources are at least equal to the group capital resources requirement. However, the adequacy of the group capital resources needs to be assessed both by the firm and the
FSA
. Firms are required to carry out an assessment of the adequacy of their financial resources under the overall financial adequacy rule, the overall Pillar 2 rule and GENPRU 1.2.39 R, and the
FSA
will review this and may provide individual guidance on the amount and quality of capital resources the
FSA
considers adequate. As part of such reviews, the
FSA
may also form a view on the appropriateness of the group capital resources requirement and group capital resources. Where necessary, the
FSA
may also give individual guidance on the capital resources a firm should hold in order to comply with
Principle 4 expressed by reference to INSPRU 6.1.9 R and INSPRU 6.1.15 R.
- 31/12/2006
Scope - undertakings whose group capital is to be calculated and maintained
INSPRU 6.1.17
See Notes
The undertakings referred to in INSPRU 6.1.8 R, INSPRU 6.1.9 R, INSPRU 6.1.10 R and INSPRU 6.1.15 R are:
(1) for any firm that is not within (2), each of the following:
(b) its ultimate EEA insurance parent undertaking (if different); and
(2) the firm itself, where the firm is a participating insurance undertaking and is:
(a) a non-EEA insurer; or
(b) a friendly society.
- 31/12/2006
INSPRU 6.1.18
See Notes
Article 3(3) of the Insurance Groups Directive allows an undertaking to be excluded from supplementary supervision if:
(1) its head office is in a non-EEA State where there are legal impediments to the transfer of the necessary information; or
(2) in the opinion of the competent authority responsible for exercising supplementary supervision, having regard to the objectives of supplementary supervision:
(a) its inclusion would be inappropriate or misleading; or
(b) it is of negligible interest.
- 31/12/2006
INSPRU 6.1.19
See Notes
If an application is made for a waiver, it is the policy of the
FSA
to consider the effect, in the circumstances described in INSPRU 6.1.18 G, of granting a waiver allowing the exclusion of a related undertaking from the calculation of group capital resources and the group capital resources requirement required by INSPRU 6.1.8 R.
- 31/12/2006
INSPRU 6.1.20
See Notes
Examples of related undertakings which may be excluded from supplementary supervision by Article 3(3) of the Insurance Groups Directive include insurance holding companies in the insurance group that are not the ultimate insurance parent undertaking or, if different, the ultimate EEA insurance parent undertaking of a firm.
- 31/12/2006
INSPRU 6.1.21
See Notes
If more than one member of the insurance group is to be excluded in the circumstances described in INSPRU 6.1.18G (2)(b), they may only be excluded if, considered together, they are of negligible interest in the context of the insurance group.
- 31/12/2006
INSPRU 6.1.22
See Notes
When giving a waiver in the circumstances described in INSPRU 6.1.18 G, the
FSA
may impose a condition requiring the firm to provide information about any member of the insurance group excluded pursuant to a waiver granted in the circumstances described in INSPRU 6.1.18 G.
- 31/12/2006
Optional alternative method of calculation for firms subject to supplementary supervision by another EEA competent authority
INSPRU 6.1.23
See Notes
If the competent authority in an EEA State other than the United Kingdom has agreed to be the competent authority responsible for exercising supplementary supervision of an insurance group of which a firm is a member under Article 4(2) of the Insurance Groups Directive, the firm may prepare the calculations required under INSPRU 6.1.8 R in relation to the ultimate EEA insurance parent undertaking in accordance with the requirements of supplementary supervision in that EEA State.
- 31/12/2006
INSPRU 6.1.24
See Notes
The
FSA
will notify the firm if it has reached agreement with the competent authority in an EEA State other than the United Kingdom in accordance with Article 4(2) of the Insurance Groups Directive.
- 31/12/2006
Non-EEA ultimate insurance parent undertakings
INSPRU 6.1.25
See Notes
Where the ultimate insurance parent undertaking of a firm has its head office in a non-EEA State, the firm may:
(1) calculate the group capital resources and the group capital resources requirement of its ultimate insurance parent undertaking in accordance with accounting practice applicable for the purposes of the regulation of insurance undertakings in the state or territory of the head office of the ultimate insurance parent undertaking adapted as necessary to apply the general principles set out in Annex I (1) paragraphs B, C and D of the Insurance Groups Directive; and
(2) elect (see INSPRU 6.1.26 R) to carry out the calculation referred to in (1) in accordance with the accounting consolidation method set out in Annex I (3) of the Insurance Groups Directive.
- 31/12/2006
INSPRU 6.1.26
See Notes
A firm may elect to use the calculation method referred to in INSPRU 6.1.25R (2) if it has made the election by written notice to the
FSA
in a way that complies with the requirements for written notice in
SUP 15.7.
- 31/12/2006
INSPRU 6.1.27
See Notes
INSPRU 6.1.15 R does not apply in respect of the group capital resources of a firm's ultimate insurance parent undertaking if that ultimate insurance parent undertaking has its head office in a non-EEA State.
- 31/12/2006
Proportional holdings
INSPRU 6.1.28
See Notes
Subject to INSPRU 6.1.30 R and INSPRU 6.1.31 R, when calculating group capital resources and the group capital resources requirement of an undertaking in INSPRU 6.1.17 R, a firm must take only the relevant proportion of the following items ("calculation items") into account:
(2) the assets of a regulated related undertaking which are required to be deducted as part of the calculation of group capital resources; and
- 31/12/2006
INSPRU 6.1.29
See Notes
In INSPRU 6.1.28 R, the relevant proportion is either:
(1) the proportion of the total number of issued shares in the regulated related undertaking held, directly or indirectly, by the undertaking in
PRU 8.3.17 R; or
(2) where a consolidation Article 12(1) relationship exists between related undertakings within the insurance group, such proportion as the
FSA
determines in accordance with Article 28(5) of the Financial Groups Directive and Regulation 15 of the Financial Groups Directive Regulations.
- 31/12/2006
INSPRU 6.1.30
See Notes
Where the undertaking in INSPRU 6.1.17 R is a firm, if the individual capital resources requirement of a regulated related undertaking that is a subsidiary undertaking and not an insurer exceeds the solo capital resources of that undertaking less the amount calculated in INSPRU 6.1.74 R(if any), the full amount of the calculation items of that regulated related undertaking less the amount in INSPRU 6.1.74R (3) must be taken into account in the calculation of group capital resources and the group capital resources requirement.
- 31/12/2006
INSPRU 6.1.31
See Notes
Except where INSPRU 6.1.30 R applies, if the individual capital resources requirement of a regulated related undertaking that is a subsidiary undertaking of the undertaking in INSPRU 6.1.17 R exceeds its solo capital resources, the full amount of the calculation items of that regulated related undertaking must be taken into account in the calculation of group capital resources and the group capital resources requirement.
- 31/12/2006
INSPRU 6.1.32
See Notes
For the purposes of INSPRU 6.1.10 R, where a composite firm that is an undertaking in INSPRU 6.1.17R (1)(c) or (2):
(2) the shares in (1) are held partly by its long-term insurance business and partly by its general insurance business;
(3) the relevant proportion of the calculation items calculated in accordance with INSPRU 6.1.29 R, subject to INSPRU 6.1.30 R and INSPRU 6.1.31 R, must be allocated between the long-term insurance business and general insurance business in proportion to their respective holdings, directly or indirectly, in the shares in that regulated related undertaking.
- 31/12/2006
Calculation of the GCRR
INSPRU 6.1.33
See Notes
Subject to INSPRU 6.1.23 R and INSPRU 6.1.25 R, a firm must calculate the group capital resources requirement of an undertaking in INSPRU 6.1.17 R as the sum of the individual capital resources requirement of that undertaking and the individual capital resources requirement of each of its regulated related undertakings.
- 31/12/2006
INSPRU 6.1.34
See Notes
For the purposes of INSPRU 6.1, an individual capital resources requirement is:
(1) in respect of any insurer:
(b) where the capital resources requirements of both the insurer and its insurance parent undertaking that is an insurer include with-profits insurance capital components, any element of double-counting that may arise from the aggregation of the individual capital resources requirements for the purposes of INSPRU 6.1.33 R;
(2) in respect of an EEA insureror an EEApure reinsurer, the equivalent of the capital resources requirement as calculated in accordance with the applicable requirements in its Home State;
(3) in respect of an EEA ISPV, the solo capital resources requirement that applies to the ISPV under the sectoral rules for the insurance sector of the member State of the competent authority that authorised the ISPV;
(4) in respect of an insurance undertaking that is not within (1), (2) or (3) and whose head office is in a designated State or territory, either:
(a) its proxy capital resources requirement; or
(b) the solo capital resources requirement that applies to it under the sectoral rules for the insurance sector of the designated State or territory;
(5) in respect of an insurance undertaking within (4) which is not subject to a solo capital resources requirement under the sectoral rules for the insurance sector of that designated State or territory, its proxy capital resources requirement;
(6) in respect of an insurance undertaking that is not within (1) to (5), its proxy capital resources requirement;
(7) in respect of an insurance holding company, zero;
(8) [intentionally blank]
(9) in respect of a regulated entity (excluding an insurance undertaking), its solo capital resources requirement;
(10) in respect of an asset management company, the solo capital resources requirement that would apply to it if, in connection with its activities, it were treated as being in the investment services sector; ;and
(11) in respect of a financial institution that is not a regulated entity (including a financial holding company), the solo capital resources requirement that would apply to it if, in connection with its activities, it were treated as being within the banking sector.
(12) [deleted]
- 31/12/2008
INSPRU 6.1.34A
See Notes
For the purposes of INSPRU 6.1.34R (4)(b), where the solo capital resources requirement under the sectoral rules for the insurance sector in a designated State or territory is ascertained by reference to the trigger for regulatory intervention, the
FSA
considers that the solo capital resources requirement of the insurance undertaking in such a designated State or territory will generally correspond to the highest point at which any regulatory or corrective action is triggered or which is at least comparable to the capital resources requirement which would apply if the insurance undertaking were an insurer.
- 31/12/2006
INSPRU 6.1.35
See Notes
INSPRU 6.1.34R sets out the rules for calculating an insurer'sindividual capital resources requirement. Among other things, this allows the use of local rules for related entities in designated states and territories. Paragraphs 6.5 and 6.6 of GENPRU 3 Annex 1R include the equivalent provisions for related undertakings in the banking sector and investment services sector. The provisions of paragraphs 6.4 to 6.6 extend to the calculation of solo capital resources, with the references to sectoral rules in paragraphs 1.2, 2.3 and 3.2 of GENPRU 3 Annex 1R (that is, the capital resources requirement of a related undertaking must be met by capital resources that are eligible under the relevant sectoral rules).
- 31/12/2007
Calculation of GCR
INSPRU 6.1.36
See Notes
For the purposes of INSPRU 6.1.8 R and subject to INSPRU 6.1.23 R and INSPRU 6.1.25 R, a firm must calculate the group capital resources of an undertaking in INSPRU 6.1.17 R in accordance with the table in INSPRU 6.1.43 R, subject to the limits in INSPRU 6.1.45 R.
- 31/12/2006
INSPRU 6.1.37
See Notes
For the purposes of INSPRU 6.1, the following expressions when used in relation to either an undertaking in INSPRU 6.1.17 R or a regulated related undertaking which is not subject to the capital resources table, are to be construed as if that undertaking were required to calculate its capital resources in accordance with the capital resources table, but with such adjustments being made to secure that the undertaking's calculation of its solo capital resources complies with the relevant sectoral rules applicable to it:
- 31/12/2006
INSPRU 6.1.38
See Notes
For the purposes of INSPRU 6.1.37 R, the sectoral rules applicable to:
(1) an insurance holding company whose main business is to acquire and hold participations in subsidiary undertakings which are either exclusively or mainly reinsurance undertakings are the sectoral rules that would apply to it if, in connection with its activities, it were treated as a pure reinsurer;
(2) an insurance holding company not within (1) are the sectoral rules that would apply to it if, in connection with its activities, it were treated as an insurer;
(3) an asset management company are the sectoral rules that would apply to it if, in connection with its activities, it were treated as an investment firm; and
(4) subject to INSPRU 6.1.39 R, a financial institution, that is not a regulated entity, are the sectoral rules that would apply to it if, in connection with its activities, it were treated as being within the banking sector.
- 31/12/2006
INSPRU 6.1.39
See Notes
Where a financial institution, that is not a regulated entity, has invested in tier one capital or tier two capital issued by a parent undertaking that is:
(1) an insurance holding company; or
(2) an insurer;
the sectoral rules that apply to that financial institution are the sectoral rules for the insurance sector.- 31/12/2006
INSPRU 6.1.40
See Notes
For the purposes of INSPRU 6.1.36 R, the capital resources of a financial institution within INSPRU 6.1.39 R that can be included in the calculations in INSPRU 6.1.48R (2), INSPRU 6.1.50R (2), INSPRU 6.1.53R (2), INSPRU 6.1.55R (2) and INSPRU 6.1.57R (2) are:
(1) the issued tier one capital or tier two capital of that financial institution held, directly or indirectly, by its parent undertaking referred to in INSPRU 6.1.39 R; and
(2) the lower of:
(a) the tier one capital or tier two capital issued by the parent undertaking referred to in INSPRU 6.1.39 R pursuant to the investment by the financial institution; and
(b) the tier one capital or tier two capital issued by the financial institution to raise funds for its investment in the capital resources of the parent undertaking referred to in (a).
- 31/12/2006
INSPRU 6.1.41
See Notes
(1) In calculating group capital resources, a firm must exclude the restricted assets of a regulated related undertaking except insofar as those assets are available to meet the individual capital resources requirement of that regulated related undertaking.
(2) In (1), "restricted assets" means assets of a regulated related undertaking which are subject to a legal restriction or other requirement having the effect that those assets cannot be transferred or otherwise made available to another regulated related undertaking for the purposes of meeting its individual capital resources requirement without causing a breach of that legal restriction or requirement.
- 31/12/2006
INSPRU 6.1.42
See Notes
For the purposes of INSPRU 6.1.41 R, in respect of an insurance undertaking that is a member of an insurance group, the assets of a long-term insurance fund are restricted assets within the meaning of INSPRU 6.1.41 R. Any excess of assets over liabilities in the
long-term insurance fund
may only be included in the calculation of the group capital resources up to the amount of the
undertaking's
individual capital resources requirement
which relates to the
long-term insurance business
in respect of which that long-term insurance fund is held.
- 31/12/2007
INSPRU 6.1.42A
See Notes
For the purposes of calculating group capital resources, a firm must exclude:
(1) the book value of any investment by a related undertaking of the undertaking in INSPRU 6.1.17 R in shares of, or loans to, an undertaking that is not a related undertaking, where that undertaking has invested in the capital resources of a regulated related undertaking of the undertaking in INSPRU 6.1.17 R; and
(2) any item of capital not in (1) to the extent that it is the result of or otherwise attributable to reciprocal financing arrangements entered into by the undertaking in INSPRU 6.1.17 R or by a related undertaking of an undertaking in INSPRU 6.1.17 R.
- 06/03/2011
INSPRU 6.1.42B
See Notes
The Insurance Groups Directive gives an example of reciprocal financing as when an insurance undertaking, or any of its related undertakings, holds shares in, or makes loans to, another undertaking which, directly or indirectly, holds an element eligible for the solvency margin of the first undertaking. However, there are other instances of reciprocal financing, for example where a groupundertaking provides a guarantee to an undertaking outside the group, in whole or partial reliance on which the non-groupundertaking invests in or provides any kind of financial accommodation to support the capital resources of a groupundertaking whose capital resources are relevant to the group capital resources calculation. INSPRU 6.1.42AR (2) requires that firms exclude from group capital resources those items of capital resulting from or attributable to such reciprocal financing arrangements.
- 06/03/2011
INSPRU 6.1.43
See Notes
Table: Group capital resources
| Stage | Related text | |
| Total group tier one capital | A | INSPRU 6.1.48 R |
| Total group tier two capital | B | INSPRU 6.1.50 R |
| Group capital resources before deductions | C=(A+B) | |
| Total deductions of inadmissible assets | D | INSPRU 6.1.59 R |
| Total deductions under the requirement deduction method from group capital resources | E | INSPRU 6.1.62 R |
| Total deductions of ineligible surplus capital* | F | INSPRU 6.1.65 R |
| Deduction of assets in excess of market risk and counterparty exposure limits* | G | INSPRU 6.1.70 R |
| Group capital resources | H=(C-(D+E+F*+G*)) | |
| * = section (F) of the table (the deductions for ineligible surplus capital) and section (G) of the table (assets in excess of market risk and counterparty exposure limits) only apply and are required to be calculated for the purposes of the adjusted solo calculation of an undertaking in INSPRU 6.1.17 R that is a participating insurance undertaking. | ||
- 31/12/2006
Calculation of GCR - Limits on the use of different forms of capital
INSPRU 6.1.44
See Notes
As the various components of capital differ in the degree of protection that they offer the insurance group, restrictions are placed on the extent to which certain types of capital are eligible for inclusion in the group capital resources of the undertaking in INSPRU 6.1.17 R. These restrictions are set out in INSPRU 6.1.45 R.
- 31/12/2006
INSPRU 6.1.45
See Notes
(1) For the purposes of INSPRU 6.1.9 R, INSPRU 6.1.10 R and INSPRU 6.1.15 R, a firm must ensure that at all times its tier one capital resources and tier two capital resources are of such an amount that the group capital resources of the undertaking in INSPRU 6.1.17 R comply with the following limits:
(a) (P - Q) >= ½ (R - S);
(b) (P - Q + T - W) >= ¾ (R - S);
(c) V >= ½ P;
(d) Q <= 15% of P;
(e) T <= P; and
(f) W <= ½ P
(2) For the purposes of INSPRU 6.1.9 R and INSPRU 6.1.10 R, a firm must ensure that at all times its tier one capital resources and tier two capital resources are of such an amount that its group capital resources comply with the following limit, subject to (4)
(P - Q + T) = 1/3 X + (R - S - U - X).
(P - Q + T) = 1/3 X + (R - S - U - X).
(3) For the purposes of (1) and (2):
(b) Q is the sum of the innovative tier one capital resources calculated in accordance with INSPRU 6.1.53 R;
(d) S is the sum of all the with-profits insurance capital components of an undertaking in INSPRU 6.1.17 R that is an insurer and each of its regulated related undertakings that is an insurer;
(f) U is the sum of all the resilience capital requirements of an undertaking in INSPRU 6.1.17 R that is an insurer and each of its regulated related undertakings that is an insurer;
(h) W is the sum of the lower tier two capital resources calculated in accordance with INSPRU 6.1.57 R; and
(4) For the purposes of (2):
(a)
INSPRU 6.1.45R (1)(a) does not apply;
(b) the innovative tier one capital of the firm or its regulated related undertakings that meets the conditions for it to be upper tier two capital may be included as upper tier two capital for the purpose of the calculation in INSPRU 6.1.50 R; and
(c) the firm must exclude from the calculation of (P - Q + T) in (2) the higher of:
(i) any amount by which the total group tier two capital exceeds the group capital resources of the firm less any innovative tier one capital excluded by (b); and
(ii) any amount by which the sum of lower tier two capital resources calculated in accordance with INSPRU 6.1.57 R exceeds one third of the group capital resources of the firm less any innovative tier one capital excluded by (b).
- 31/12/2006
INSPRU 6.1.46
See Notes
The amount of any capital item excluded from group capital resources under INSPRU 6.1.45R (1)(d) may form part of total group tier two capital calculated in accordance with INSPRU 6.1.50 R subject to the limits in INSPRU 6.1.45R (1)(e) and INSPRU 6.1.45R (1)(f).
- 31/12/2006
INSPRU 6.1.47
See Notes
For the purposes of INSPRU 6.1.10 R, a firm must ensure that the tier one capital resources and tier two capital resources of each of its long-term insurance business and its general insurance business are of such an amount that the group capital resources of each its long-term insurance business and its general insurance business comply with the limits in INSPRU 6.1.45 R separately for each type of business.
- 31/12/2006
Calculation of GCR - Total group tier one capital
INSPRU 6.1.48
See Notes
For the purposes of INSPRU 6.1.43 R, the total group tier one capital of an undertaking in INSPRU 6.1.17 R is the sum of:
(2) subject to INSPRU 6.1.40 R, the tier one capital resources of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in INSPRU 6.1.49 R.
- 31/12/2006
INSPRU 6.1.49
See Notes
The deduction referred to in INSPRU 6.1.48 R is the sum of:
(1) the book value of the investment by the undertaking in INSPRU 6.1.17 R in the tier one capital resources of each of its related undertakings that is a regulated related undertaking; and
(2) the book value of the investments by related undertakings of the undertaking in INSPRU 6.1.17 R in the tier one capital resources of the undertaking in INSPRU 6.1.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2006
Calculation of GCR - Total group tier two capital
INSPRU 6.1.50
See Notes
For the purposes of INSPRU 6.1.43 R, the total group tier two capital of an undertaking in INSPRU 6.1.17 R is the sum of:
(1) the upper tier two capital resources and the lower tier two capital resources of that undertaking; and
(2) subject to INSPRU 6.1.40 R, the upper tier two capital resources and the lower tier two capital resources of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in INSPRU 6.1.51 R.
- 31/12/2006
INSPRU 6.1.51
See Notes
The deduction referred to in INSPRU 6.1.50 R is the sum of:
(1) the book value of the investments by the undertaking in INSPRU 6.1.17 R in the upper tier two capital resources and the lower tier two capital resources of each of its related undertakings that is a regulated related undertaking; and
(2) the book value of the investments by related undertakings of the undertaking in INSPRU 6.1.17 R in the upper tier two capital resources and the lower tier two capital resources of the undertaking in INSPRU 6.1.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2006
INSPRU 6.1.52
See Notes
For the purposes of INSPRU 6.1.50R (2), the limits in GENPRU 2.2.37 R apply to the upper tier two capital resources and the lower tier two capital resources of any regulated related undertaking that is an insurer. Similar limits may apply to other regulated related undertakings under the relevant sectoral rules.
- 31/12/2006
Calculation of GCR - Innovative tier one capital resources, lower tier two capital resources and core tier one capital
INSPRU 6.1.53
See Notes
For the purposes of INSPRU 6.1.45R (4)(b), the innovative tier one capital resources is the sum of:
(2) subject to INSPRU 6.1.40 R, the innovative tier one capital resources of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in INSPRU 6.1.54 R.
- 31/12/2006
INSPRU 6.1.54
See Notes
The deduction referred to in INSPRU 6.1.53 R is the sum of:
(1) the book value of the investments by the undertaking in INSPRU 6.1.17 R in the innovative tier one capital resources of each of its related undertakings that is a regulated related undertaking; and
(2) the book value of the investments by related undertakings of the undertaking in INSPRU 6.1.17 R in the innovative tier one capital resources of the undertaking in INSPRU 6.1.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2006
INSPRU 6.1.55
See Notes
For the purposes of INSPRU 6.1.45R (3)(g), the core tier one capital is the sum of:
(2) subject to INSPRU 6.1.40 R, the core tier one capital of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in INSPRU 6.1.56 R.
- 31/12/2006
INSPRU 6.1.56
See Notes
The deduction referred to in INSPRU 6.1.55 R is the sum of:
(1) the book value of the investments by the undertaking in INSPRU 6.1.17 R in the core tier one capital of each of its related undertakings that is a regulated related undertaking; and
(2) the book value of the investments by related undertakings of the undertaking in INSPRU 6.1.17 R in the core tier one capital of the undertaking in INSPRU 6.1.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2006
INSPRU 6.1.57
See Notes
For the purposes of INSPRU 6.1.45R (3)(h), the lower tier two capital resources is the sum of:
(2) subject to INSPRU 6.1.40 R, the lower tier two capital resources of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in INSPRU 6.1.58 R.
- 31/12/2006
INSPRU 6.1.58
See Notes
The deduction referred to in INSPRU 6.1.57 R is the sum of:
(1) the book value of the investments by the undertaking in INSPRU 6.1.17 R in the lower tier two capital resources of each of its related undertakings that is a regulated related undertaking; and
(2) the book value of the investments by related undertakings of the undertaking in INSPRU 6.1.17 R in the lower tier two capital resources of the undertaking in INSPRU 6.1.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2006
Calculation of GCR - Inadmissible assets
INSPRU 6.1.59
See Notes
For the purpose of INSPRU 6.1.43 R, a firm must deduct from the group capital resources before deduction (calculated at stage C in the table in INSPRU 6.1.43 R) of the undertaking in INSPRU 6.1.17 R, the value of all assets of the undertaking in INSPRU 6.1.17 R and each of its regulated related undertakings that are not admissible assets as set out in INSPRU 6.1.60 R.
- 31/12/2006
INSPRU 6.1.60
See Notes
For the purposes of INSPRU 6.1.59 R, an asset is not an admissible asset if:
(1) in respect of a regulated related undertaking or undertaking in INSPRU 6.1.17 R that is an insurer (other than a pure reinsurer), it is not an admissible asset as listed in GENPRU 2 Annex 7;
(2) in respect of a regulated related undertaking or undertaking in INSPRU 6.1.17 R that is a pure reinsurer, the holding of the asset is inconsistent with compliance by that undertaking with INSPRU 3.1.61A R; or
(3) in respect of a regulated related undertaking or undertaking in INSPRU 6.1.17 R that is not an insurer, it is an asset of the undertaking that is not admissible for the purpose of calculating that undertaking'ssolo capital resources in accordance with the sectoral rules applicable to it.
- 31/12/2006
INSPRU 6.1.61
See Notes
For the purposes of INSPRU 6.1.60R (3), the sectoral rules applicable to:
(1) an asset management company are the sectoral rules that would apply to it if, in connection with its activities, it were treated as an investment firm; and
(2) a financial institution that is not a regulated entity are the sectoral rules that would apply to it if, in connection with its activities, it were treated as being within the banking sector.
- 31/12/2006
Calculation of GCR - Deductions under requirement deduction method from group capital resources
INSPRU 6.1.62
See Notes
For the purposes of INSPRU 6.1.43 R, a firm must deduct from the group capital resources before deduction (calculated at stage C in the table in INSPRU 6.1.43 R) of an undertaking in INSPRU 6.1.17 R, the sum of the value of the direct or indirect investments by the undertaking in INSPRU 6.1.17 R in each of its related undertakings which is an ancillary services undertaking, calculated in accordance with INSPRU 6.1.63 R.
- 31/12/2006
INSPRU 6.1.63
See Notes
The value of an investment in an undertaking referred to in INSPRU 6.1.62 R is the higher of the book value of the direct or indirect investment by the undertaking in INSPRU 6.1.17 R and the notional capital resources requirement of that undertaking.
- 31/12/2006
INSPRU 6.1.64
See Notes
For the purposes of INSPRU 6.1.63 R, the notional capital resources requirement is:
(1) for an ancillary insurance services undertaking, zero;
(2) for any other ancillary services undertaking, the capital resources requirement that would apply to that undertaking, if it were a regulated related undertaking, in accordance with the sectoral rules applicable to a regulated related undertaking whose activities are closest in nature and scope to the activities of that undertaking.
- 31/12/2006
Calculation of GCR - Deductions of ineligible surplus capital
INSPRU 6.1.65
See Notes
Where the undertaking in INSPRU 6.1.17 R is a participating insurance undertaking, the firm must, for the purposes of INSPRU 6.1.43 R, deduct from its group capital resources before deduction (calculated at stage C in the table in INSPRU 6.1.43 R) the sum of the ineligible surplus capital of each of its regulated related undertakings that is an insurance undertaking, calculated in accordance with INSPRU 6.1.67 R.
- 31/12/2006
INSPRU 6.1.66
See Notes
The purpose of INSPRU 6.1.65 R is to ensure that, where the undertaking in INSPRU 6.1.17 R is a firm, group capital resources are not overstated by the inclusion of capital that, although surplus to the requirements of the relevant regulated related undertaking that is an insurance undertaking, cannot practically be transferred to support requirements arising elsewhere in the group. Therefore, ineligible surplus capital in a regulated related undertaking that is an insurance undertaking is deducted in arriving at group capital resources. Surplus capital in such a regulated related undertaking is regarded as transferable only to the extent that:
(1) it can be transferred without the regulated related undertaking breaching its own limits on the use of different forms of capital;
(2) it does not contain assets that are restricted within the meaning of INSPRU 6.1.41 R; and
(3) in the case of a regulated related undertaking that has a long-term insurance business, it does not contain any assets allocated to the capital resources of that undertaking for the purposes of the capital resources of its long-term insurance business meeting the capital resources requirement of its long-term insurance business.
- 31/12/2006
INSPRU 6.1.67
See Notes
(1) For the purposes of INSPRU 6.1.65 R, the ineligible surplus capital of a regulated related undertaking that is an insurance undertaking is calculated by deducting B from A where:
(a) A is the regulatory surplus value of that insurance undertaking less any restricted assets of the insurance undertaking that have been excluded under INSPRU 6.1.41 R; and
(b) B is the transferable capital of that undertaking.
(2) If A minus B is negative, the ineligible surplus capital is zero.
- 31/12/2006
INSPRU 6.1.68
See Notes
For the purposes of INSPRU 6.1.67R (1)(b), the transferable capital is calculated by deducting the sum of the following from the tier one capital resources of the regulated related undertaking that is an insurance undertaking:
(1) any restricted assets of that insurance undertaking that have been excluded under INSPRU 6.1.41 R;
(2) any tier one capital resources of that insurance undertaking that have been allocated towards meeting the individual capital resources requirement of its long-term insurance business; and
(3) the higher of:
(a) 50% of the individual capital resources requirement of the general insurance business of that insurance undertaking; and
(b) the individual capital resources requirement of the general insurance business of that insurance undertaking less the difference between E and F where:
Examples of transferable and ineligible surplus capital:(i) E is its tier two capital resources; and
(ii) F is the amount of its tier two capital resources that have been allocated towards meeting the individual capital resources requirement of its long-term insurance business.
- 31/12/2006
INSPRU 6.1.69
See Notes
Example 1
Example 2
Example 3
The requirement relating to the long-term insurance business is met by the FFA of 20 and tier two capital resources of 5. Of the remaining tier two capital resources of 35, 5 is excluded at the solo level because the tier one capital resources allocated to the general insurance business are 30.
| Share capital | Audited reserves | FFA | Tier two | Requirement |
| 30 | 20 | 0 | 40 | 50 |
(i) Under INSPRU 6.1.68 R, transferable capital = tier one capital resources of 50, less the sum of:
(1) restricted assets excluded under INSPRU 6.1.41 R = (none);
(3) higher of (50% of 50 = 25 and 50 - 40 = 10) = (25) = (50 - 25) = 25
(ii) Under INSPRU 6.1.67 R, ineligible surplus capital = regulatory surplus value (40) less restricted assets excluded under INSPRU 6.1.41 R (0) less transferable capital (25) = 15.
Example 2
| Share capital | Audited reserves | FFA (of which 5 is restricted) | Tier two | Requirement (of which 4 relates to the long-term insurance business) |
| 30 | 20 | 10 | 40 | 50 |
(i) Under INSPRU 6.1.68 R, transferable capital = tier one capital resources of 60, less the sum of:
(1) restricted assets excluded under INSPRU 6.1.41 R = (5);
(3) the higher of (50% of 45 = 22.5; and 45 - 40 = 5) = (22.5)= 60 - 32.5 = 27.5
(ii) Under IINSPRU 6.1.67 R, ineligible surplus capital = regulatory surplus value (50) - restricted assets excluded under INSPRU 6.1.41 R of (5) - transferable capital (27.5) = 17.5.
Example 3
| Share capital | Audited reserves | FFA (of which 0 is restricted) | Tier two (40, of which 5 is excluded at the solo level - see below) | Requirement (of which 25 relates to the long-term insurance business) |
| 20 | 10 | 20 | 35 | 50 |
The requirement relating to the long-term insurance business is met by the FFA of 20 and tier two capital resources of 5. Of the remaining tier two capital resources of 35, 5 is excluded at the solo level because the tier one capital resources allocated to the general insurance business are 30.
(i) Under INSPRU 6.1.68 R, transferable capital = tier one capital resources of 50, less the sum of:
(1) restricted assets excluded under INSPRU 6.1.41 R = (none);
(3) the higher of (50% of 25 = 12.5; and 25 - (35 - 5) = -5) = (12.5)= 50 - 32.5 = 17.5.
(ii) Under INSPRU 6.1.67 R, ineligible surplus capital = regulatory surplus value (35) - restricted assets excluded under INSPRU 6.1.41 R of (0) - transferable capital (17.5) = 17.5.
- 31/12/2006
Calculation of GCR - Assets in excess of market risk and counterparty exposure limits
INSPRU 6.1.70
See Notes
Subject to INSPRU 6.1.70A R, where the undertaking in INSPRU 6.1.17 R is a participating insurance undertaking, the firm must deduct from its group capital resources before deduction (calculated at stage C in the table in INSPRU 6.1.43 R) the assets in excess of market risk and counterparty exposure limits calculated in accordance with INSPRU 6.1.74 R.
- 31/12/2006
INSPRU 6.1.70A
See Notes
Where the undertaking in INSPRU 6.1.17 R is a pure reinsurer that is a participating insurance undertaking, the firm must calculate assets in accordance with INSPRU 6.1.74A R and deduct from its group capital resources before deduction (calculated at stage C in the table in INSPRU 6.1.43 R) those assets the holding of which is inconsistent with compliance by that undertaking with INSPRU 3.1.61A R.
- 31/12/2006
INSPRU 6.1.71
See Notes
For the purposes of INSPRU 6.1.43 R, where the undertaking in INSPRU 6.1.17 R is a participating insurance undertaking, the investments referred to in INSPRU 6.1.48 R and INSPRU 6.1.50 R are not subject to the market risk and counterparty exposure limits.
- 31/12/2006
INSPRU 6.1.72
See Notes
The firm (A) must, subject to INSPRU 6.1.73 R, include in the calculation in INSPRU 6.1.74 R or, where A is a pure reinsurer, INSPRU 6.1.74A R each related undertaking (B) that is:
(2) a related undertaking where the firm has elected to value the shares held in that undertaking by the firm in accordance with GENPRU 1.3.47 R for the purposes of calculating the tier one capital resources of the firm.
- 31/12/2006
INSPRU 6.1.73
See Notes
The related undertakings in INSPRU 6.1.72 R need only be included in the calculation in INSPRU 6.1.74 R or INSPRU 6.1.74A R if:
(1) where B is a regulated related undertaking, the solo capital resources of that undertaking exceed its individual capital resources requirement; or
(2) where B is an undertaking in INSPRU 6.1.72R (2), its assets that fall within one or more of the categories in GENPRU 2 Annex 7 exceed its accounting liabilities.
- 31/12/2006
INSPRU 6.1.74
See Notes
A's assets in excess of the market risk and counterparty exposure limits are calculated as follows:
(1) Subject to (2), a firm must apply the market risk and counterparty exposure limits in INSPRU 2.1.22R (3) to:
(b) where B is a pure reinsurer, the assets of that undertaking less those assets identified in INSPRU 6.1.60R (2) as not being admissible; and
(c) where B is a regulated related undertaking that is not an insurer, the assets of that undertaking less those assets identified in INSPRU 6.1.60R (3) as not being admissible assets.
(2) The market risk and counterparty exposure limits do not need to be applied to an undertaking in INSPRU 6.1.72R (2).
(3) Where the assets of B in INSPRU 6.1.74R (1) exceed the limits in INSPRU 2.1.22R (3), the assets of B in excess of the limits must be deducted by the firm from B's solo capital resources for the purposes of INSPRU 6.1.30 R.
(4) After the application of (1) and (2), the surplus assets of B are aggregated with the admissible assets of A, where the surplus assets of B are:
(a) where B is a firm (other than a pure reinsurer), the admissible assets of B that represent the amount by which the capital resources of B exceed its capital resources requirement, subject to INSPRU 6.1.77 R, and limited to the amount of transferable capital calculated in accordance with INSPRU 6.1.68 R;
(b) where B is a regulated related undertaking that is not in (a), the assets of the undertaking in INSPRU 6.1.74R (1)(b) or INSPRU 6.1.74R (1)(c) that represent the amount by which the solo capital resources of B exceed its individual capital resources requirement and, where B is an insurance undertaking that is not in (a), limited to the amount of transferable capital calculated in accordance with INSPRU 6.1.68 R; and
(c) where B is an undertaking in INSPRU 6.1.72R (2), the assets of the undertaking which represent those assets that fall within one or more of the categories in GENPRU 2 Annex 7 which exceed its accounting liabilities.
(5) The market risk and counterparty exposure limits are then applied to the aggregate of A's admissible assets and the surplus assets in INSPRU 6.1.74R (4).
- 31/12/2008
INSPRU 6.1.74A
See Notes
A must apply INSPRU 3.1.61A R to the aggregate of:
(1) the assets of A, less any assets already identified in INSPRU 6.1.60R (2) as not being admissible; and
(2) the surplus assets of B calculated in accordance with INSPRU 6.1.74R (1) to INSPRU 6.1.74R (4) as if that rule applied to B.
- 31/12/2006
INSPRU 6.1.75
See Notes
(1) Subject to (2), A must then deduct the amount by which the admissible assets aggregated in accordance with INSPRU 6.1.74R (5) exceed the market risk and counterparty exposure limits from A's group capital resources before deduction (calculated at stage C in the table in INSPRU 6.1.43 R) in accordance with INSPRU 6.1.70 R.
(2) Where A is a pure reinsurer, A must then deduct the amount of any assets identified by INSPRU 6.1.74A R as not complying with INSPRU 3.1.61A R in accordance with INSPRU 6.1.70A R.
- 31/12/2006
INSPRU 6.1.76
See Notes
In relation to any of its regulated related undertakings that is not an insurer, A may modify the calculation in INSPRU 6.1.74 R by:
(2) aggregating all of the assets of B identified in
INSPRU 6.1.74R (1)(c)
as admissible assets with the admissible assets of A in INSPRU 6.1.74R (4).
- 31/12/2008
INSPRU 6.1.77
See Notes
The admissible assets of either A or B that are part of a long-term insurance fund of A or B are excluded for the purposes of the calculation in INSPRU 6.1.74 R and INSPRU 6.1.74A R except insofar as those assets are available to meet the liabilities and capital resources requirement of that long-term insurance fund.
- 31/12/2006
INSPRU 6.1.78
See Notes
If B is itself either a participating insurance undertaking or an insurance parent undertaking, the admissible assets of B for the purposes of INSPRU 6.1.74R (1) must be calculated as in INSPRU 6.1.75 R but as if B were A.
- 31/12/2006
INSPRU 7
Individual Capital Assessment
INSPRU 7.1
Application
- 31/12/2006
INSPRU 7.1.1
See Notes
INSPRU 7.1 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.
- 31/12/2006
INSPRU 7.1.2
See Notes
Subject to INSPRU 7.1.3 R, INSPRU 7.1 applies to managing agents and to the Society in accordance with:
- 31/12/2006
INSPRU 7.1.3
See Notes
Managing agents must carry out assessments of capital adequacy for each syndicate they manage by reference to all open syndicate years taken together.
- 31/12/2006
Purpose
INSPRU 7.1.4
See Notes
Principle 4 requires a firm to maintain adequate financial resources. GENPRU 2 deals specifically with the adequacy of the capital resources element of a firm's financial resources.
- 31/12/2006
INSPRU 7.1.5
See Notes
The adequacy of a firm'scapital resources needs to be assessed both by the firm and the
FSA. In GENPRU 2.1, the
FSA
sets minimum capital resources requirements for firms.
- 31/12/2006
INSPRU 7.1.6
See Notes
The
FSA
also assesses whether the minimum capital resources requirements are appropriate by reviewing:
(1) a firm's own assessment of its capital needs; and
(2) the processes and systems by which that assessment is made.
- 31/12/2006
INSPRU 7.1.7
See Notes
In assessing whether the minimum capital resources requirements are appropriate, the
FSA
is principally concerned with capital resources as calculated in accordance with GENPRU 2.2.17 R. However, in carrying out its own assessment of its capital needs, a firm may take into account other capital available to it (see GENPRU 1.2.30 R and GENPRU 1.2.36 R), although it should be able to explain and justify its reliance on these other forms of capital.
- 31/12/2006
INSPRU 7.1.8
See Notes
There are two main aims in this section:
(1) to enable firms to understand the issues which the
FSA
would expect to see assessed and the systems and processes which the
FSA
would expect to see in operation for ICAs by firms to be regarded as thorough, objective and prudent; and
(2) to enable firms to understand the
FSA's
approach to assessing whether the minimum capital resources requirements of GENPRU 2.1 are appropriate and what action may be taken if the
FSA
concludes that those requirements are not appropriate to a firm's circumstances.
- 31/12/2006
General approach
INSPRU 7.1.9
See Notes
The rules in GENPRU 1.2 require a firm to identify and assess risks to its being able to meet its liabilities as they fall due, to assess how it intends to deal with those risks and to quantify the financial resources it considers necessary to mitigate those risks. To meet these requirements, a firm should consider:
(1) the extent to which capital is an appropriate mitigant for the risks identified; and
(2) assess the amount and quality of capital required.
- 31/12/2006
INSPRU 7.1.9A
See Notes
This section sets out in greater detail the approach to be taken by a firm when carrying out the assessment of capital described in the preceding paragraph. This is the assessment referred to as an individual capital assessment.
GENPRU 1.2.42 R is a general requirement for a firm to carry out stress tests and scenario analyses taking into account an appropriate range of adverse circumstances and events relevant to the firm's business and risk profile and to estimate the financial resources it would need to continue to meet the overall financial adequacy rule in the stress scenarios considered. As part of its obligations under GENPRU 1.2.42 R, the firm must carry out stress tests and scenario analyses to estimate the financial resources it would need to support its business plans and continue adequately to cover its CRR and meet the overall financial adequacy rule over a time horizon of 3 to 5 years. This is a separate requirement from that to carry out an ICA, and guidance on this requirement is provided in
GENPRU 1.2.73A G
In particular, firms should note that there is no requirement that the level of capital required as identified by the ICA should be equal to, or exceed, the CRR.
- 14/12/2009
INSPRU 7.1.9B
See Notes
The requirements and guidance in this section are drafted so as to apply to a firm on a solo basis. As noted in GENPRU 1.2.17 G, however, in some cases the requirements in GENPRU 1.2 apply on a consolidated basis. In these cases, a firm should read and apply this section making appropriate adjustments to reflect the application of the GENPRU 1.2 requirements on a consolidated basis.
- 06/04/2008
INSPRU 7.1.10
See Notes
- 14/12/2009
INSPRU 7.1.11
See Notes
In accordance with GENPRU 1.2.60 R, these assessments must be documented so that they can be easily reviewed by the
FSA
as part of the
FSA's
assessment of the adequacy of the firm'scapital resources.
- 31/12/2006
INSPRU 7.1.12
See Notes
The
FSA
may ask for the results of these assessments to be provided to it together with a description of the processes by which the assessments have been made, the range of results from each stress test or scenario analysis performed and the main assumptions made. The
FSA
may also carry out a more detailed examination of the details of the firm's processes and calculations.
- 31/12/2006
INSPRU 7.1.13
See Notes
Based upon this information and other information available to it, the
FSA
will consider whether the capital resources requirement applicable to the firm is appropriate. Where relevant, the firm'sECR will be a key input to the
FSA's
assessment of the adequacy of the firm'scapital resources. For firms carrying on general insurance business, the ECR is calculated in accordance with INSPRU 1.1.72C R. For realistic basis life firms, the ECR forms part of the CRR and is calculated in accordance with GENPRU 2.1.38 R.
- 31/12/2006
INSPRU 7.1.14
See Notes
Firms that are required to calculate an ECR may wish to note that the ECR as calculated is based upon the assumptions that a firm's business is well diversified, well managed with assets matching its liabilities and good controls, and stable with no large, unusual, or high risk transactions. Firms may find it helpful to assess the extent to which their actual business differs from these assumptions and therefore what adjustments it might be reasonable to make to the CRR or ECR to arrive at an adequate level of capital resources.
- 31/12/2006
Methodology of capital resources assessment
INSPRU 7.1.15
See Notes
Where a firm is carrying out an assessment in accordance with GENPRU 1.2 of the adequacy of its overall financial resourcesto cover the risk in the overall financial adequacy rule, that is, the risk of its being unable to meet its liabilities as they fall due, the assessment of the adequacy of the firm's capital resources must:
(1) reflect the firm's assets, liabilities, intra-group arrangements and future plans;
(2) be consistent with the firm's management practice, systems and controls;
(3) consider all material risks that may have an impact on the firm's ability to meet its liabilities to policyholders; and
(4) use a valuation basis that is consistent throughout the assessment.
- 06/04/2008
Representative of the firm's characteristics
INSPRU 7.1.16
See Notes
The ICA should reflect both the firm's desire to fulfil its business objectives and its responsibility to meet liabilities to policyholders. This means that the ICA should demonstrate that the firm holds sufficient capital to be able to make planned investments and take on new business (within an appropriate planning horizon). It should also ensure that if the firm had to close to new business (if it has not already done so), it would be able to meet its existing commitments. The costs of writing new business, the expenses incurred in servicing all liabilities, including liabilities to non-policyholders, and the nature of intra-group arrangements and reinsurance arrangements should be considered as part of the assessment as well as the costs that would be incurred in the event of closure to new business.
- 31/12/2006
INSPRU 7.1.17
See Notes
- 31/12/2006
INSPRU 7.1.18
See Notes
Where including new business would increase the capital resources by more than any increase in the capital required, or reduce the capital required by more than any reduction in available capital, new business should be excluded. To the extent that including new business increases the required capital, a firm should consider whether it is appropriate to include the additional amount within the ICA.
- 31/12/2006
INSPRU 7.1.19
See Notes
Any contract that the firm is legally obliged to renew should be considered part of the firm's existing liabilities and not treated as new business. Such contractual obligations include multi-year general insurance contracts and the exercise of options by long-term policyholders.
- 31/12/2006
INSPRU 7.1.20
See Notes
For a firm to discharge its financial obligations to policyholders, it will incur certain expenses, including payments to the firm's own staff, contributions to any pension scheme and fees to outsourcing suppliers or service companies. All of these expenses, and risks associated with these payments, should be considered when carrying out the ICA. When considering the appropriate level of expenses in a projection, the firm should consider the acceptability of the service provided to policyholders and the resources required by the senior management to manage the firm.
- 31/12/2006
INSPRU 7.1.21
See Notes
Where a firm's liabilities include payments which are subordinated to liabilities to policyholders, these payments do not need to be included within the ICA. However, the ICA should include all payments that must be made to avoid putting policyholders' interests at risk, including any payment on which a default might trigger the winding up of the firm. For example, if the principal of a loan could be recalled on default of a coupon payment, coupon payments over the lifetime of policyholder liabilities should be included in the ICA. As a further example, declared dividends should be treated as a liability. However, planned dividends that have not been declared need not be included in the ICA.
- 31/12/2006
Intra-group capital considerations
INSPRU 7.1.22
See Notes
It is common for firms whose corporate group consists of a number of separate legal entities to have intra-group transactions in place. Capital and risk may originate within the firm and be passed to another company or may originate in another company and be passed to the firm. The ICA should consider the underlying effect of intra-group arrangements.
- 31/12/2006
INSPRU 7.1.23
See Notes
Risks may exist within the individual legal entity from these intra-group transactions. Intra-group transactions should not be treated differently from external transactions just because they are intra-group. However, some intra-group transactions may carry less credit risk than the equivalent external transactions if the firm has access to more information regarding the financial position of an internal reinsurer. In assessing intra-group risks, consideration should be given, but should not be limited, to:
(1) future defaults on intra-group reinsurance arrangements: Firms should consider, for example, a test akin to the credit risk assessment undertaken on external reinsurance assets held or future anticipated recoveries; in other cases it may be more appropriate to perform a more explicit assessment of the group counterparty's own capital position, to inform the firm's exposure to default;
(2) non-recoverability on intra-group loans: Even though these transactions occur within the same group, there is a risk that an entity may default on such intra-group payments; and
(3) non-payment of future internal dividends or transfers: Many entities or funds within a group rely on these payments as a means to maintaining their solvency position. There is a risk that the entity paying the dividend or making the transfer may not be able to do so, and ICAs performed for separate regulated legal entities or funds within a group should consider these risks as appropriate.
- 31/12/2006
INSPRU 7.1.24
See Notes
A firm's capital should normally be restricted to resources within the firm. Where the firm is relying on resources outside the direct control of the firm, these should only be included to the extent that the firm has a right to call on those resources and the provider has the ability to provide those resources without recourse to the assets of the firm itself, in the circumstances considered as part of the ICA.
- 31/12/2006
Consistency with a firm's practice, systems and controls
INSPRU 7.1.25
See Notes
The ICA should reflect the firm's ability to react to events as they occur. When relying on prospective management actions, firms should understand the implications of taking such actions, including the financial effect, and taking into consideration any preconditions that might affect the value of management actions as risk mitigants.
- 31/12/2006
INSPRU 7.1.26
See Notes
The ICA should assume that a firm will continue to manage its business having regard to the
FSA's
Principles for Businesses. In particular, a firm should take into account how the
FSA's
Principles for Businesses may constrain its prospective management actions, for example,
Principle 6 (Treating Customers Fairly).
- 31/12/2006
INSPRU 7.1.27
See Notes
Firms should also consider whether their systems and controls provide sufficient information to permit senior management to identify the crystallisation of risks in a timely manner so as to provide them with the opportunity to respond and allow the firm to obtain the full value of the modelled management action. Firms should also analyse the wider implications of the management actions, particularly where they represent significant divergence from the business plan and use this information to consider the appropriateness of taking this action.
- 31/12/2006
INSPRU 7.1.28
See Notes
Where the ICA assumes that the firm may move capital from one part of its business to another across legal or geographical boundaries, the firm should explain the mechanisms that it would apply and satisfy itself that it could achieve the necessary capital movements in times of distress (see GENPRU 1.2.51 R). The firm should also consider any associated costs or restrictions in the amount of capital that would be able to be relocated.
- 31/12/2006
Considering all material risks
INSPRU 7.1.29
See Notes
The ICA should give the required level of confidence that the firm's liabilities to policyholders will be paid. The ICA should consider all material risks which may arise before the policyholder liabilities are paid (including those risks set out in GENPRU 1.2.30 R).
- 31/12/2006
INSPRU 7.1.30
See Notes
Firms should not ignore risks simply because they relate to events that occur with an expected likelihood beyond the confidence level. However, the capital required in the face of these tail events may be reduced for the purpose of carrying out the ICA. For example, while an A-rated bond may be assumed not to default within the required confidence level, allowance should be made for the devaluation of that bond through a more likely downgrade or change in credit spreads or other method which reflects that this investment includes a default risk to the firm.
- 31/12/2006
INSPRU 7.1.31
See Notes
Notwithstanding INSPRU 7.1.30 G, risks which have an immaterial effect on the firm's financial position or only occur with an extreme probability may be excluded from the ICA.
- 31/12/2006
INSPRU 7.1.32
See Notes
- 31/12/2006
INSPRU 7.1.33
See Notes
The assets that a firm holds will include assets to back both the liabilities and any capital requirement. These assets carry risk, both in their own right and to the extent that they do not match the liabilities that they are backing. The risk associated with these assets should be considered over the full term for which the firm expects to carry the liabilities.
- 31/12/2006
INSPRU 7.1.34
See Notes
- 31/12/2006
INSPRU 7.1.35
See Notes
If a firm summarises cash flows over part of the lifetime of the portfolio using a balance sheet but is exposed to risks which emerge after the balance sheet date, then these longer-dated risks may be captured by adjusting the assumptions used in the closing balance sheet.
- 31/12/2006
Valuation basis
INSPRU 7.1.36
See Notes
The valuation of the assets and of the liabilities should reflect their economic substance. A realistic valuation basis should be used for assets and liabilities taking into account the actual amounts and timings of cash flows under any projections used in the assessment.
- 31/12/2006
INSPRU 7.1.37
See Notes
- 31/12/2006
INSPRU 7.1.38
See Notes
The methods and assumptions used in valuing the liabilities should contain no explicit margins for risk, nor should the approach be optimistic. The valuation of liabilities should be consistent with the valuation of assets. To the extent the market price includes an implicit allowance for risk, this should be included within the valuation.
- 31/12/2006
INSPRU 7.1.39
See Notes
The methodology used to place a value on an asset or a liability following a risk event should be consistent with the methodology used prior to the risk event.
- 31/12/2006
INSPRU 7.1.40
See Notes
- 31/12/2006
INSPRU 7.1.41
See Notes
- 31/12/2006
ICA submitted to FSA: confidence level
INSPRU 7.1.42
See Notes
Where the
FSA
requests a firm to submit to it a written record of the firm's assessments of the adequacy of its capital resources carried out in accordance with INSPRU 7.1.15 R, those assessments must include an assessment comparable to a 99.5% confidence level over a one year timeframe that the value of assets exceeds the value of liabilities, whether or not this is the confidence level otherwise used in the firm's own assessments.
- 31/12/2006
INSPRU 7.1.43
See Notes
In considering the value of liabilities for the purpose of INSPRU 7.1.42 R, firms should have regard to the guidance in INSPRU 7.1.21 G, INSPRU 7.1.26 G and GENPRU 1.2.27 G to GENPRU 1.2.29 G.
- 31/12/2006
INSPRU 7.1.44
See Notes
The
FSA
requires firms to submit a capital assessment calibrated to a common confidence level, as set out in INSPRU 7.1.42 R, to enable the
FSA
to assess whether the minimum capital resources requirements in GENPRU 2.1 are appropriate. This then allows the
FSA
to give a consistent level of individual capital guidance across the industry.
- 31/12/2006
INSPRU 7.1.45
See Notes
If a firm selects a longer time horizon than one year it may choose to use a lower confidence level than 99.5%. In such a case, the firm should be prepared to justify its choice and explain why this confidence interval is appropriate and how it is comparable to a 99.5% confidence level over a one year timeframe. An assessment based on a longer timeframe should also demonstrate that there are sufficient assets to cover liabilities at all future dates. This may be illustrated by future annual balance sheets.
- 31/12/2006
Measurement
INSPRU 7.1.46
See Notes
In determining the strength of the ICA, a firm should consider all risks in aggregate making appropriate allowance for diversification such that the assessment meets the required confidence level overall. The firm should be able to describe and explain each of the main diversification benefits allowed for.
- 31/12/2006
INSPRU 7.1.47
See Notes
For risks that can be observed to crystallise over a short period of the order of a year, the confidence level may be measured with reference to the probability distribution for the impact of the risks over one year. For example, catastrophic events such as hurricanes can be measured in this way by estimating the ultimate capital cost.
- 31/12/2006
INSPRU 7.1.48
See Notes
For risks that are not observable over a short period (such as long-tailed liability business or annuitant mortality), the confidence level may be measured with reference to the probability distribution for the emergence of that risk over the lifetime of the liabilities.
- 31/12/2006
Documenting ICAs submitted to the FSA
INSPRU 7.1.49
See Notes
The written record of a firm'sindividual capital assessments carried out in accordance with INSPRU 7.1.15 R submitted by the firm to the
FSA
must:
(1) in relation to the assessment comparable to a 99.5% confidence level over a one year timeframe that the value of assets exceeds the value of liabilities, document the reasoning and judgements underlying that assessment and, in particular, justify:
(a) the assumptions used;
(b) the appropriateness of the methodology used; and
(c) the results of the assessment; and
(2) identify the major differences between that assessment and any other assessments carried out by the firm using a different confidence level.
- 31/12/2006
INSPRU 7.1.50
See Notes
A firm's management should determine their own risk appetite or confidence level and a risk measure that they believe is suitable for the management of the business. The
FSA
expects that the firm's capital resources assessment under GENPRU 1.2 which it uses in the management of its business may well be at a different confidence level than the 99.5% one required by INSPRU 7.1.42 R for a number of reasons, for example, because its view of capital adequacy is different, or to satisfy the demands of rating agencies, or to meet the proposition to policyholders as to the strength of the firm. A firm will maintain its own written assessment of the adequacy of its financial resources, as required by GENPRU 1.2, through the written record requirement of GENPRU 1.2.60 R.
- 31/12/2006
INSPRU 7.1.51
See Notes
INSPRU 7.1.49R (2) recognises that a firm may carry out a number of different assessments of the adequacy of its capital resources, using different confidence levels, in reaching its overall assessment of the adequacy of its financial resources under GENPRU 1.2. The purpose of asking the firm to identify the major differences between those assessments and the assessment documented under INSPRU 7.1.49R (1) is to enable the
FSA
better to understand the firm's approach to capital adequacy and risk management in running its business. Understanding the written record made under GENPRU 1.2.60 R is therefore key to the
FSA's
understanding of the firm's risk and capital management processes.
- 31/12/2006
INSPRU 7.1.52
See Notes
The written record of any other assessment by the firm required by GENPRU 1.2.60 R is not itself part of the submission to the
FSA, but the
FSA
is interested in the connection between that other assessment, as documented in the written record required by GENPRU 1.2.60 R, and the assessment documented under INSPRU 7.1.49R (1) in terms of the firm's compliance with GENPRU 1.2, and the use of capital measures within the firm.
- 31/12/2006
INSPRU 7.1.53
See Notes
For the purpose of the written record submitted to the
FSA, the submitted comparison should include:
(1) A description of any direct difference in the strength of the firm's own assessment compared to the assessment submitted to the
FSA. This is likely to be expressed as a different confidence level to the assessment undertaken to a 99.5% confidence level or the targeting of a defined margin about the 99.5% assessment.
(2) A description of any major differences in the definition of the assets or liabilities, the management actions used, the risks considered or the valuation methodology and assumptions included within the assessment.
- 31/12/2006
INSPRU 7.1.54
See Notes
Some firms may not undertake an assessment at a separate confidence level because they consider that a 99.5% confidence level is appropriate to manage their business and meets the requirements of GENPRU 1.2. In the case of these firms, no analysis of the major differences is required to be submitted.
- 31/12/2006
Justifying assumptions used
INSPRU 7.1.55
See Notes
- 31/12/2006
INSPRU 7.1.56
See Notes
- 31/12/2006
INSPRU 7.1.57
See Notes
- 31/12/2006
Approach taken for significant assumptions
INSPRU 7.1.58
See Notes
- 31/12/2006
INSPRU 7.1.59
See Notes
Firms may seek to justify their assumptions by considering the process used to determine those assumptions from relevant data. Alternatively, where historical data is either limited or not considered to be indicative of likely future experience, firms may justify their assumptions by reference to the suitability of the calibration for the purpose of the ICA. However, relatively more attention should be given to the justification where the choice of assumption has a more significant effect on the ICA.
- 31/12/2006
INSPRU 7.1.60
See Notes
Where there is a concentration of business from a single source (for example, a single sales channel or cedant), consideration should be given to the greater impact of a risk crystallising, compared to that for a well-diversified portfolio.
- 31/12/2006
Justification of prospective management actions
INSPRU 7.1.61
See Notes
- 31/12/2006
INSPRU 7.1.62
See Notes
Where the prospective management action is identical to those used in another regulatory assessment of solvency (e.g. calculation of the WPICC for realistic basis life firms), no further justification is required.
- 31/12/2006
INSPRU 7.1.63
See Notes
Where the prospective management action is not similar to those used in another regulatory assessment of solvency, or uses different assumptions, the firm should show the financial impact of the management action.
- 31/12/2006
Regular review of assumptions
INSPRU 7.1.64
See Notes
- 31/12/2006
Methodology
INSPRU 7.1.65
See Notes
- 31/12/2006
INSPRU 7.1.66
See Notes
Firms should be able to explain their rationale for choosing their approach to risk and assessment of capital required. There are no simple classifications of approach to risk and capital assessment, so the rationale should be considered in the context of a number of defining characteristics in the structure of the capital model.
- 31/12/2006
INSPRU 7.1.67
See Notes
Generally, larger firms would be expected to take a more sophisticated approach to capital modelling than smaller ones.
- 31/12/2006
Stress tests and scenario analyses
INSPRU 7.1.68
See Notes
- 14/12/2009
INSPRU 7.1.69
See Notes
The overall assessment of capital required may require the aggregation of results from the stress and scenario testing. The firm should explain its choice of aggregation approach and its understanding of the implications of combining the individual risks. The firm should be satisfied that the resultant capital provides the required degree of confidence, given the variability of the underlying risks and the uncertainty associated with modelling those risks. A useful component of this process is the characterisation and explanation of a range of possible circumstances that could give rise to a loss of this magnitude.
- 31/12/2006
Documenting the results
INSPRU 7.1.70
See Notes
The conclusion of the ICA should consider whether the firm has adequate capital to meet its assessment of the required capital. Furthermore, the firm should consider any implications for its approach to risk management arising from the work carried out. The ICA should be supported by an explanation of the material sources of risk and financial impact of the management actions that the firm may take to manage those risks. Where possible, the reasonableness of the results should be supported by considering other evidence of the capital needed.
- 31/12/2006
INSPRU 7.1.71
See Notes
The objective of capital modelling is to consider all possible outcomes, however unlikely any one outcome might be, and set capital as protection against all but the most extreme losses. It is therefore important to focus not only on the assumptions and methodology used to quantify individual risks, but also on the approach to aggregating the capital required for each risk.
- 31/12/2006
INSPRU 7.1.72
See Notes
However the risks have been aggregated to give the firm's capital requirement, checks should be made as to the reasonableness of the outcome. It should be possible to characterise scenarios, or combinations of loss events, that would result in a loss of similar magnitude to that indicated by the ICA. Firms should consider a range of scenarios that could give rise to such a loss.
- 31/12/2006
INSPRU 7.1.73
See Notes
- 31/12/2006
Additional guidance for Lloyd's
INSPRU 7.1.74
See Notes
Responsibility for:
(1) managing the risks associated with the insurance business; and
(2) holding the capital resources that support those risks;
is divided between managing agents and the Society. To clarify the respective responsibilities of managing agents and the Society for ensuring the adequacy of financial resources, the
FSA
distinguishes between the managing agents' responsibility to carry out capital adequacy assessments of the capital resources held at syndicate level for each syndicate that they manage, and the Society's responsibility to carry out an assessment for each member.- 31/12/2006
INSPRU 7.1.75
See Notes
In carrying out ICAs in respect of the insurance business carried on through each syndicate (the syndicate ICA), managing agent must consider the risks, controls and the financial resources relevant to each syndicate.
- 31/12/2006
INSPRU 7.1.76
See Notes
When carrying out the syndicate ICA, managing agents must not take into account risks to which a member may be exposed or controls from which a member may benefit:
(1) because that member carries on insurance business through another syndicate or more than one syndicate year (whether or not managed by the same managing agent); or
- 31/12/2006
INSPRU 7.1.77
See Notes
The Society must have regard to syndicate ICAs in arriving at its own capital assessment for each member.
- 31/12/2006
INSPRU 7.1.78
See Notes
In assessing the adequacy of the capital resources supporting the insurance business of each member, the Society should consider the risks, controls and financial resources relevant to the totality of the member'sinsurance business, including:
(1) the adequacy of syndicate ICAs;
(3) adjustments in respect of risks and controls relating to funds at Lloyd's, central assets and the interaction of risks underwritten by the member through different syndicates and in respect of different syndicate years; and
(4) the ongoing validity of any relevant assumptions it makes.
- 31/12/2006
INSPRU 7.1.79
See Notes
In taking account of a syndicate ICA under INSPRU 7.1.77 R:
(1) if the Society considers a syndicate ICA to be adequate, it should use the managing agent's risk and capital assessments in carrying out its ICA in relation to any member of that syndicate, or it should be able to justify why it will not; and
(2) if the Society considers a syndicate ICA to be less than adequate, the Society should increase the syndicate ICA so that it is adequate for the purpose of carrying out its ICA in relation to the members of that syndicate.
- 31/12/2006
INSPRU 7.1.80
See Notes
The assessment of capital adequacy for a member will rarely equal the proportionate share of a syndicate ICA (or sum of those shares, where the member participates on more than one syndicate) as attributed to that member, because, in determining the capital assessments for each member, the Society may make adjustments to take account of:
(1) risks and controls associated with funds at Lloyd's and central assets, which can increase the assessment for that member;
(2) diversification effects, including as a result of members' participations on more than one syndicate year, which can reduce the assessment for that member; and
(3) its own assessment of syndicate risks, which can be higher than the managing agent's and so increase the assessment for that member.
- 31/12/2006
INSPRU 7.1.81
See Notes
Capital resources to meet each syndicate ICA could be:
(2) held and managed by the Society; or
(3) not needed in full, because of effects such as diversification that the Society takes into account.
- 31/12/2006
INSPRU 7.1.82
See Notes
The balancing amount is a function of the relationship between the syndicate ICA and the amount of assets held within the syndicate. As illustrations:
(1) if the syndicate holds no capital resources (but its liabilities are fully covered by relevant assets), the balancing amount equals the syndicate ICA (as there are no capital resources at syndicate level, all the capital resources must be held as funds at Lloyd's or central assets);
(2) if capital resources held at syndicate level are negative (i.e. if relevant assets do not fully cover liabilities for the syndicate), the balancing amount should be higher than the syndicate ICA by an amount corresponding to the negative capital resources held by managing agents on behalf of the syndicate; and
(3) conversely, if a syndicate holds positive capital resources for the syndicate, the balancing amount should be lower than the syndicate ICA by a corresponding amount.
- 31/12/2006
INSPRU 7.1.83
See Notes
Managing agents must periodically notify the Society of the syndicate ICA and the balancing amount in respect of each syndicate.
- 31/12/2006
INSPRU 7.1.84
See Notes
For the purpose of assessing the adequacy of capital resources held as funds at Lloyd's and central assets, the Society must have regard to balancing amounts notified to it by managing agents.
- 31/12/2006
INSPRU 7.1.85
See Notes
After notification of a balancing amount by a managing agent, the Society must:
(1) confirm to the managing agent that capital resources held as funds at Lloyd's and central assets are adequate to support the balancing amount; or
(2) notify the managing agent that it cannot give that confirmation.
- 31/12/2006
INSPRU 7.1.86
See Notes
Managing agents should submit syndicate ICAs and notify balancing amounts to the Society as part of the annual capital-setting process at Lloyd's. The submission of the syndicate ICA and the notification of the balancing amount should be made in good time for the Society to review them and place appropriate reliance on them when it determines the capital assessments for each member.
- 31/12/2006
INSPRU 7.1.87
See Notes
When communicating the syndicate ICA and balancing amount for each syndicate to the Society, managing agents should agree with the Society an allocation of the syndicate ICA between syndicate years. The purpose of the allocation is to ensure that there is an appropriate matching of assets to risk and liabilities and an equitable treatment between the members reflecting the provision of capital in each syndicate year.
- 31/12/2006
INSPRU 7.1.88
See Notes
For the purposes of complying with their obligations under INSPRU, managing agents may assume that any balancing amount confirmed by the Society under INSPRU 7.1.85 R is supported by capital resources held as funds at Lloyd's and central assets.
- 31/12/2006
INSPRU 7.1.89
See Notes
If a managing agent has, at any time, a significant doubt about the adequacy of a syndicate ICA or balancing amount with respect to syndicate risks and controls, it must notify the Society immediately.
- 31/12/2006
INSPRU 7.1.90
See Notes
If the Society has, at any time, a significant doubt about the adequacy of any member'scapital resources held by it in support of any balancing amount, it must notify the relevant managing agent immediately.
- 31/12/2006
FSA assessment process - all firms
INSPRU 7.1.91
See Notes
In assessing the adequacy of a firm'scapital resources, the
FSA
draws on more than just a review of the submitted ICA. Use is made of wider supervisory knowledge of a firm and of wider market developments and practices. When forming a view of any individual capital guidance to be given to a firm, the review of the firm'sICA along with the ARROW risk assessment and any other issues arising from day-to-day supervision will be considered.
- 31/12/2006
INSPRU 7.1.92
See Notes
The
FSA
will take a risk-based and proportionate approach to the review of a firm'sICA, focusing on the firm's approach to dealing with the key risks it faces. Any individual capital guidance given will reflect the judgements reached through the ARROW review process as well as the review of the firm'sICA.
- 31/12/2006
INSPRU 7.1.93
See Notes
A firm should not expect the
FSA
to accept as adequate any particular model that the firm develops or that the results from the model are automatically reflected in any individual capital guidance given to the firm for the purpose of determining adequate capital resources. However, the
FSA
will take into account the results of any sound and prudent model when giving individual capital guidance or considering applications for a waiver under section 148 of the Act of the capital resources requirement in GENPRU 2.1.
- 31/12/2006
INSPRU 7.1.94
See Notes
Where the
FSA
considers that a firm will not comply with GENPRU 1.2.26 R (adequate financial resources, including capital resources) by holding the capital resources required by GENPRU 2.1, the
FSA
may give the firmindividual capital guidance advising it of the amount and quality of capital resources which the
FSA
considers it needs to hold in order to meet that rule.
- 31/12/2006
INSPRU 7.1.95
See Notes
In giving individual capital guidance, the
FSA
seeks a balance between delivering consistent outcomes across the individual capital guidance it gives to all firms and recognising that such guidance should reflect the individual features of the firm. Comparison with the assumptions used by other firms will be used to trigger further enquiry. Debate will be sought where good arguments are made for a particular result that differs markedly from those of a firm's peers. The
FSA
also takes account of the quality of the wider risk management around the development of the numbers used in the ICA. The aim is to deliver individual capital guidance that comes closest to ensuring that there is no significant risk that a firm is unable to pay its liabilities as they fall due.
- 31/12/2006
INSPRU 7.1.96
See Notes
Following an internal validation process, the
FSA
will write to the Board of the firm being assessed providing both quantitative and qualitative feedback on the results of the
FSA's
assessment. This letter will notify the firm of the individual capital guidance considered appropriate. The letter will include reasons for any capital add-ons identified, where applicable.
- 31/12/2006
INSPRU 7.1.97
See Notes
If a firm considers that the individual capital guidance is inappropriate to its circumstances, then the firm should inform the
FSA
that it does not intend to follow that guidance. Informing the
FSA
of such an intention would be expected if a firm is to comply with Principle 11 (Relations with regulators).
- 31/12/2006
INSPRU 7.1.98
See Notes
The
FSA
expects most disagreements about the adequacy of capital will be resolved through further analysis and discussion. The
FSA
may consider the use of its powers under section 166 of the Act (Reports by skilled persons) to assist in such circumstances. If the
FSA
and the firm still do not agree on an adequate level of capital, then the
FSA
may consider using its powers under section 45 of the Act to, on its own initiative, vary a firm's
Part IV permission
so as to require it to hold capital in accordance with the
FSA's
view of the capital necessary to comply with GENPRU 1.2.26 R. SUP 7 provides further information about the
FSA's
powers under section 45.
- 31/12/2006
INSPRU 7.1.99
See Notes
Where a firm considers that the capital resources requirements of GENPRU 2.1 require the holding of more capital than is needed for the firm to comply with GENPRU 1.2.26 R then the firm may apply to the
FSA
for a waiver of the requirements in GENPRU 2.1 under section 148 of the Act. In addition to the statutory tests under section 148, in deciding whether to grant a waiver and, if granted, its terms, the
FSA
will consider the thoroughness, objectivity and prudence of a firm'sICA and the extent to which the guidance in this section has been followed. The
FSA
will not grant a waiver that would cause a breach of the minimum capital requirements under the Insurance Directives or Reinsurance Directive.
- 31/12/2006
INSPRU 8
General provisions applying INSPRU and GENPRU to Lloyd's
INSPRU 8.1
Application
- 31/12/2006
INSPRU 8.1.1
See Notes
- 31/12/2006
INSPRU 8.1.2
See Notes
If a provision in INSPRU or GENPRU applies to the Society "in accordance with" this rule, the Society must:
(2) manage its central assets; and
so as to achieve in relation to those assets and that insurance business the same effect as the relevant INSPRU or GENPRU provision would have (that is, conforming with the requirements of any rule and taking appropriate account of any applicable guidance,) when applied to a firm or to the insurance business of a firm.- 31/12/2006
INSPRU 8.1.3
See Notes
- 31/12/2006
INSPRU 8.1.4
See Notes
If a provision in INSPRU or GENPRU applies to a managing agents "in accordance with" this rule, the managing agent must, in relation to each syndicate managed by it and for each syndicate year, manage:
(1) the syndicate assets; and
so as to achieve in relation to those assets and that insurance business the same effect as the relevant INSPRU or GENPRU provision would have (that is, conforming with the requirements of any rule and taking appropriate account of any applicable guidance) when applied to a firm or to the insurance business of a firm.- 31/12/2006
INSPRU 8.1.5
See Notes
Syndicate membership may change from year to year or it may remain constant. Managing agents are required to apply INSPRU and GENPRU to the insurance business carried on through each syndicate for each syndicate year. This should ensure that INSPRU and GENPRU are applied to Lloyd's in a way that is consistent with the provision of capital to support the insurance business underwritten.
- 31/12/2006
INSPRU 8.1.6
See Notes
Where common systems and controls or processes are appropriate for all the insurance business carried on through more than one syndicate year, a single response may be adequate for all syndicate years. However, in some cases it will be important to consider the business of each open syndicate year separately, particularly for quantitative rules. For example, it is important that managing agents separately assess the financial resources (including capital) that are required and are available to support the insurance business carried on through each syndicate year, where the syndicatemembership changes from year to year. This is because each member's assets are only available to support its own business, so the assets supporting one year of account may not be available to support another. For example, if a managing agent were to assess the financial requirements of two or more syndicate years together where the capital structure had changed, there would be a risk that the managing agent might take account of diversification effects that were not reflected in the capital supporting the insurance business.
- 31/12/2006
INSPRU 8.1.7
See Notes
There is no requirement on managing agents to carry out separate individual capital assessments for syndicates for each syndicate year. Managing agents are required to carry out individual capital assessments for each syndicate as if that syndicate were a firm; this would normally be on the basis of a going concern but, just as in a firm, account needs to be taken of any restrictions on the availability of assets (e.g. deposits with cedants), and some account needs to be taken of changes in the capital participation in the syndicate. The Society is responsible for the individual capital assessment for each member, which must take into account the assessments made by managing agents of any syndicates on which the member participates. INSPRU 7.1 contains rules and guidance on the assessment of capital adequacy for firms and INSPRU 7.1.74 G to INSPRU 7.1.90 R provide for the application of INSPRU 7.1 to the Society and managing agents.
- 31/12/2006
INSPRU 8.1.8
See Notes
The assessment which a firm makes should be based upon its future business plans and projections. This is the main area where the firm's assessment may diverge from its prescribed capital resources requirement which, necessarily, is based upon historic data.
- 31/12/2006
INSPRU 8.1.9
See Notes
Key INSPRU and GENPRU requirements for Lloyd's
| Key INSPRU and GENPRU requirements | INSPRU | GENPRU |
| Risk management, systems and controls | ||
| The Society to establish and maintain systems and controls to address risks affecting the Lloyd's market | INSPRU 8.2 | |
| The Society to manage prudential, credit, market, liquidity and operational risks affecting funds at Lloyd's and central assets | INSPRU 4.1, INSPRU 5.1, INSPRU 8.2 & INSPRU 8.5 | |
| Managing agents to establish and maintain systems and controls for the management of prudential, credit, market, liquidity, operational, and insurance risks affecting each syndicate | INSPRU 4.1, INSPRU 5.1, INSPRU 8.2 & INSPRU 8.5 | |
| Adequacy of financial resources | ||
| The Society to ensure that members' financial resources are adequate | GENPRU 1.2 & GENPRU 1.5 | |
| Members taken together to maintain adequate financial resources in respect of the insurance business conducted at Lloyd's | GENPRU 1.5 | |
| Managing agents to ensure that financial resources are adequate for each syndicate | GENPRU 1.2 & GENPRU 1.5 | |
| Valuation | ||
| The Society and managing agents to apply generally accepted accounting principles to valuing assets, liabilities, equity and income statement items for the purposes of the rules and guidance in GENPRU, INSPRU and IPRU (INS) unless the contrary is expressly stated | INSPRU 3.1 & INSPRU 3.2 | GENPRU 1.3 & GENPRU 1.5 |
| Capital resources requirements | ||
| The Society to calculate the MCR in respect of the general insurance business of each member | GENPRU 2.1 & GENPRU 2.3 | |
| The Society to calculate the CRR (higher of MCR and ECR) in respect of the long-term insurance business of each member | GENPRU 2.1 & GENPRU 2.3 | |
| Capital resources | ||
| The Society and managing agents to calculate capital resources in accordance with the rules and guidance in GENPRU | GENPRU 2.2 & GENPRU 2.3 | |
| Adequacy of capital resources | ||
| Managing agents to assess the adequacy of capital resources held at syndicate level in respect of insurance business carried on through each syndicate (annual ICA for each syndicate) | INSPRU 7.1 | |
| The Society to assess the adequacy of capital resources available to support each member'sinsurance business (ICA for each member), both at syndicate level (taking account of syndicate ICAs), and as funds at Lloyd's | INSPRU 7.1 |
- 31/12/2006
INSPRU 8.2
Special provisions for Lloyd's
- 31/12/2006
Management of insurance business
INSPRU 8.2.1
See Notes
Neither the Society nor managing agents may permit a member to carry on any insurance business except as a participant on one or more syndicates.
- 31/12/2006
Obligations under INSPRU and GENPRU
INSPRU 8.2.2
See Notes
- 31/12/2006
Management of risk
INSPRU 8.2.3
See Notes
The Society must establish and maintain systems and controls to enable it appropriately to address the risks to which the Lloyd's market is exposed.
- 31/12/2006
INSPRU 8.2.4
See Notes
The systems and controls in INSPRU 8.2.3 R must include systems and controls to enable the Society to ensure that any assumptions made in calculating a member'scapital resources or in determining the individual capital assessment for each member are regularly reviewed and that appropriate action is taken if any assumption is no longer valid.
- 31/12/2006
INSPRU 8.2.5
See Notes
The Society must take all reasonable steps, including establishing and maintaining adequate systems and controls to enable it:
(2) to ensure that funds at Lloyd's and central assets are adequate to support all balancing amounts.
- 31/12/2006
INSPRU 8.2.6
See Notes
A managing agent must establish and maintain adequate systems and controls to manage the risks to which the insurance business carried on through each syndicate it manages is exposed.
- 31/12/2006
INSPRU 8.2.7
See Notes
In complying with INSPRU 8.2.6 R, managing agents should have particular regard to:
(1) transactions which may give rise to a conflict of interest, such as those to which the counterparties are:
(c) any entity that is part of a group to which one or more members of any syndicates managed by the managing agent belong; and
(2) transactions involving:
(a) the provision of capital;
(b) the provision of reinsurance; or
(c) the provision of other services.
- 31/12/2006
INSPRU 8.2.8
See Notes
In complying with INSPRU 8.2.6 R a managing agent need not take account of risks associated with assets that are not syndicate assets.
- 31/12/2006
INSPRU 8.2.9
See Notes
The Society must take reasonable steps to ensure that systems and controls established and maintained by managing agents are adequate to ensure that risks to which the insurance business carried on through each syndicate is exposed do not have a detrimental effect on funds at Lloyd's or central assets.
- 31/12/2006
INSPRU 8.2.10
See Notes
Managing agents and the Society each hold and manage some of the financial resources held to support the insurance business carried on through syndicates. In particular:
(1) the Society holds and manages funds at Lloyd's and central assets which must be held to support balancing amounts. The Society is required to manage the risks that affect funds at Lloyd's and central assets directly, once the effects of any aggregation and diversification have been taken into account;
(2)
managing agents hold and manage some of the financial resources in respect of the insurance business carried on through each syndicate that they manage. Managing agents are required to manage all risks affecting a syndicate except for the risk that funds at Lloyd's and central assets are not available to support the balancing amount.
- 31/12/2006
INSPRU 8.2.11
See Notes
- 31/12/2006
INSPRU 8.2.12
See Notes
The arrangements in INSPRU 8.2.11 R must enable the Society to identify any significant overstatement of financial resources resulting from any transaction falling within INSPRU 8.2.11R (2) to INSPRU 8.2.11R (4), including as a result of:
(1) any differences in the amounts recorded as due or payable by each party to any such transaction; or
(2) any actual or likely disputes between the parties to any such transaction.
- 31/12/2006
INSPRU 8.2.13
See Notes
If the Society identifies a significant overstatement of the kind referred to in INSPRU 8.2.12 R, it must ensure that an appropriate adjustment is made, including if appropriate by a deduction from or reduction in the value attributed to:
- 31/12/2006
Approved reinsurance to close
INSPRU 8.2.14
See Notes
As defined in the Glossary, "approved reinsurance to close" excludes:
(2) balance transfers between syndicate years of syndicates having only one member, which have no effect on the overall liabilities of that member.
- 31/12/2006
INSPRU 8.2.15
See Notes
The "approved" status of an approved reinsurance to close does not alter the legal status or effect of the original contract of insurance, or the liability of a reinsured member to the policyholder under or in respect of the original contract of insurance.
- 31/12/2006
INSPRU 8.2.16
See Notes
Notwithstanding that the liability of a reinsured member to a policyholder is unaffected by an approved reinsurance to close as described in INSPRU 8.2.15 G, for the purposes of INSPRU and GENPRU only:
(1) for an approved reinsurance to close which is not to a subsidiary of the Society:
(a) a contract of insurance reinsured under an approved reinsurance to close must be treated as if the reinsuring member and not the reinsured member had effected the original contract of insurance; and
(b) any payment received by a member as consideration for or in connection with an approved reinsurance to close must be treated as a Lloyd's member's contribution and not as premium or as a reinsurance recovery;
(2) for an approved reinsurance to close to a subsidiary of the Society, a contract of insurance reinsured under that approved reinsurance to close must be treated as if the reinsured member had not effected the original contract of insurance but:
(a) for the purposes of the calculation of the Society GICR, general insurance business carried on by members and former underwriting members which has been reinsured to a subsidiary of the Society under an approved reinsurance to close must be treated as reinsured to a third party; and
(b) for the purposes of the calculation of the capital resources requirement of a subsidiary of the Society, the approved reinsurance to close must be treated as a reinsurance.
- 31/12/2009
Provision of information by managing agents
INSPRU 8.2.17
See Notes
A managing agent must, as soon as possible, give the Society any information the managing agent has concerning material risks to funds at Lloyd's or central assets.
- 31/12/2006
INSPRU 8.2.18
See Notes
A managing agent need not comply with INSPRU 8.2.17 R if the managing agent knows that the Society already has the relevant information.
- 31/12/2006
Insurance receivables to be carried to trust funds
INSPRU 8.2.19
See Notes
The Society must take all reasonable steps to ensure that each member:
(1) executes the appropriate Lloyd's trust deeds; and
(2) carries to the appropriate Lloyd's trust fund all amounts received or receivable by the member, or on its behalf, in respect of any insurance business carried on by it.
- 31/12/2006
INSPRU 8.2.20
See Notes
The Society must carry all amounts it receives on behalf of any member in respect of that member'sinsurance business to the appropriate Lloyd's trust fund.
- 31/12/2006
INSPRU 8.2.21
See Notes
A managing agent must carry all amounts it receives on behalf of any member in respect of that member'sinsurance business to the appropriate Lloyd's trust fund.
- 31/12/2006
INSPRU 8.2.22
See Notes
In complying with INSPRU 8.2.19 R to INSPRU 8.2.21 R, the Society and managing agents must take all reasonable steps to ensure that amounts received or receivable by a member in respect of general insurance business and long-term insurance business are carried to separate Lloyd's trust funds.
- 31/12/2006
Amendments to byelaws, trust deeds and standard form letters of credit and guarantees
INSPRU 8.2.23
See Notes
The Society must, as soon as it is practical to do so, notify the
FSA
of its intention to approve the form of any new Lloyd's trust deed.
- 31/12/2006
INSPRU 8.2.24
See Notes
The Society must, as soon as it is practical to do so, notify the
FSA
of its intention to make any amendment which may alter the meaning or effect of any byelaw, including:
(1) any Lloyd's trust deed;
(2) any standard form letter of credit prescribed by the Society from time to time; or
(3) any standard form guarantee agreement prescribed by the Society from time to time.
- 31/12/2006
INSPRU 8.2.25
See Notes
The Society must provide the
FSA
with full details of:
(1) the form of any new Lloyd's trust deed it intends to approve, as described in INSPRU 8.2.23 R and
(2) any amendments falling within INSPRU 8.2.24 R.
- 31/12/2006
INSPRU 8.2.26
See Notes
The Society must consult interested parties in relation to any new Lloyd's trust deed and in relation to any amendment falling within INSPRU 8.2.24 R.
- 31/12/2006
INSPRU 8.2.27
See Notes
Except in urgent cases, the Society should consult in relation to any new Lloyd's trust deed or amendments before the new deed or amendments take effect.
- 31/12/2006
INSPRU 8.2.28
See Notes
The information provided to the
FSA
by the Society under INSPRU 8.2.25 R must include:
(1) a statement of the purpose of any proposed amendment or new Lloyd's trust deed and the expected impact, if any, on policyholders, managing agents, members, and potential members; and
(2) a description of the consultation undertaken under INSPRU 8.2.26 R including a summary of any significant responses to that consultation.
- 31/12/2006
INSPRU 8.2.29
See Notes
The
FSA
would normally expect to receive the information required under INSPRU 8.2.25 R and INSPRU 8.2.28 R not less than three months in advance of the proposed change.
- 31/12/2006
INSPRU 8.3
The Central Fund
- 31/12/2006
Application
INSPRU 8.3.1
See Notes
This section applies to the Society.
- 06/01/2010
Purpose
INSPRU 8.3.2
See Notes
The rules and guidance in this section are intended to promote confidence in the market at Lloyd's, and to protect certain consumers of services provided by the Society in carrying on, or in connection with or for the purposes of, its regulated activities. They do this by:
(1) giving guidance to the Society about the protection that the Central Fund should provide for policyholders; and
(2) enabling the
FSA
to keep under review the protection the Central Fund provides for policyholders.
- 06/01/2010
Enabling Provision
INSPRU 8.3.3
See Notes
- 06/01/2010
INSPRU 8.3.4
See Notes
The directions given in this section are given in relation to the exercise of the powers by the Society in respect of the Central Fund and are given with a view to achieving the objective of ensuring that the Society in making payments or in providing any other financial assistance from the Central Fund does so on a basis which takes no account of amounts of compensation which policyholders may receive under the provisions of the compensation scheme in respect of protected claims against members.
- 06/01/2010
INSPRU 8.3.5
See Notes
The Society should seek to ensure that the Central Fund provides protection for policyholders so as to minimise the need for Lloyd's policyholders to have recourse to the compensation scheme.
- 31/12/2006
INSPRU 8.3.6
See Notes
The Society should seek, and take appropriate account of, the
FSA's
views on all proposed changes in its arrangements relating to the Central Fund.
- 31/12/2006
INSPRU 8.3.7
See Notes
The Society must, in the exercise of its powers to make payments from the Central Fund or to provide other forms of financial assistance from the Central Fund, ensure that in calculating and determining the amount of any such payment or the amount of any other financial assistance, it takes no account of the amounts of compensation which policyholders may receive under the provisions of the compensation scheme in respect of protected claims against members.
- 31/12/2006
INSPRU 8.4
Capacity Transfer Market
- 31/12/2006
Application
INSPRU 8.4.1
See Notes
This section applies to the Society.
- 06/01/2010
Purpose
INSPRU 8.4.2
See Notes
The rules and guidance in this section are intended to promote confidence in the market at Lloyd's, and to protect certain consumers of services provided by the Society in carrying on, or in connection with or for the purposes of, its regulated activities. They do this by ensuring that the Society appropriately and effectively regulates the capacity transfer market so that it operates in a fair and transparent manner.
- 06/01/2010
Requirement to make byelaws governing conduct in the capacity transfer market
INSPRU 8.4.3
See Notes
- 31/12/2006
INSPRU 8.4.4
See Notes
The byelaws referred to in INSPRU 8.4.3 R should:
(1) ensure that adequate and effective arrangements are in place to enable members and persons applying to be admitted as members to enter into transactions to transfer syndicate capacity and settle these transactions in a timely manner;
(2) give clear and comprehensive guidance about the dissemination of information that is, or may be, relevant to the price of syndicate capacity and the transparency of the capacity transfer market; and
(3) prohibit unfair and abusive practices (including market manipulation), the misuse of information not generally available, and the dissemination of false or misleading information.
- 31/12/2006
INSPRU 8.4.5
See Notes
The Society should have adequate and effective arrangements to:
(1) record and monitor transactions in the capacity transfer market, and maintain adequate audit trails; and
(2) suspend or annul transactions where appropriate.
- 31/12/2006
INSPRU 8.4.6
See Notes
The Society should regularly review the byelaws referred to in INSPRU 8.4.3 R, taking account of the standards of conduct required in other UK financial markets.
- 31/12/2006
INSPRU 8.4.7
See Notes
The Society should consult members and underwriting agents before it finalises material changes in the byelaws referred to in INSPRU 8.4.3 R, and should have timely and effective arrangements for notifying them of changes in these byelaws.
- 31/12/2006
INSPRU 8.5
Former underwriting members
- 31/12/2006
Application
INSPRU 8.5.1
See Notes
This section applies to the Society.
- 06/01/2010
Purpose
INSPRU 8.5.2
See Notes
The rules and guidance in this section are intended to promote confidence in the market at Lloyd's and to protect certain consumers of services provided by the Society in carrying on or in connection with or for the purposes of its regulated activities by:
(1) protecting policyholders against the risk that former underwriting members may not be able to meet any liabilities to carry out contracts of insurance that they underwrote at Lloyd's; and
- 06/01/2010
Requirements relating to former underwriting members
INSPRU 8.5.3
See Notes
The Society must draw sections 320 to 322 of the Act (Former underwriting members, Requirements imposed under section 320, Rules applicable to former underwriting members) to the attention of any person ceasing to be an underwriting member on or after commencement.
- 31/12/2006
INSPRU 8.5.4
See Notes
The Society must require any person, other than a body corporate, ceasing to be an underwriting member on or after commencement to:
(1) notify the Society of any change in his address within one month of the change;
(2) in the case of a natural person, to make arrangements for the Society to be notified in the event of his death.
- 31/12/2006
INSPRU 8.6
Prudential risk management and associated systems and controls
- 31/12/2006
Application of SYSC 14
INSPRU 8.6.1
See Notes
Subject to INSPRU 8.6.2 R, SYSC 14 (Prudential risk management and associated systems and controls) applies to managing agents and to the Society in accordance with:
- 31/12/2006
INSPRU 8.6.2
See Notes
The requirement in SYSC 14.1.18 R to take reasonable steps to ensure the establishment and maintenance of a business plan does not apply to the Society.
- 31/12/2006
Application of SYSC 11, 15 and 16
INSPRU 8.6.3
See Notes
Subject to INSPRU 8.6.5 R, SYSC 11 (Liquidity risk management systems and controls), SYSC 15 (Credit risk management systems and controls) and SYSC 16 (Market risk management systems and controls) apply to managing agents and to the Society in accordance with:
- 31/12/2006
Application of SYSC 17
INSPRU 8.6.4
See Notes
Subject to INSPRU 8.6.5 R, SYSC 17 (Insurance risk systems and controls) applies to managing agents in accordance with INSPRU 8.1.4 R.
- 31/12/2006
INSPRU 9
Actions for damages
INSPRU 9.1
Actions for damages
- 31/12/2006
Transitional Provisions and Schedules
INSPRU TP
Transitional provisions
| Application | |||
| 1.1 | R | INSPRU TP 1 applies to an insurer unless it is: | |
| (1) | a non-directive friendly society; or | ||
| (2) | an incoming EEA firm; or | ||
| (3) | an incoming Treaty firm. | ||
| Version of IPRU to be used | |||
| 1.2 | R | Any reference in INSPRU TP to IPRU(INS) is to the version in force on 30 December 2004. | |
| Duration of transitional | |||
| 1.3 | R | INSPRU TP 1 applies until the relevant rule is revoked. | |
| Continuing effect of waivers | |||
| 1.4 | R | A rule in INSPRU listed in the Table at INSPRU TP Table 2 is disapplied, or is modified in its application, to a firm: | |
| (1) | in order to produce the same effect, including any conditions, as a waiver had on the corresponding rule in IPRU(INS); | ||
| (2) | for the same period as the waiver would have lasted, if shorter than the period in INSPRU TP 1.3; | ||
| provided the conditions set out in INSPRU TP 1.5 are satisfied. | |||
| 1.5 | R | The conditions referred to in INSPRU TP 1.4 are: | |
| (1) | the rule is shown in the Table at INSPRU TP Table 2 as corresponding with the rule in IPRU(INS) in relation to which the waiver was granted to the firm; | ||
| (2) | the waiver was current as respects the firm immediately before 31 December 2004; and | ||
| (3) | there is no specific transitional rule relating to the waiver. | ||
| 1.6 | R | INSPRU TP 1.4 does not have effect if, and to the extent that, it would be inconsistent with any EU law obligation of the United Kingdom. | |
| 1.7 | R | A firm which has the benefit of a waiver to which INSPRU TP 1.4 applies must: | |
| (1) | notify the FSA immediately if it becomes aware of any matter which is material to the relevance or appropriateness of the waiver; | ||
| (2) | maintain a written record of the rule in INSPRU to which it considers the waiver applies; and | ||
| (3) | make the record available to the FSA on request. | ||
| Rules in INSPRU | Corresponding rules in IPRU (INS) |
| 2.1.22 | 4.14(1) |
| 3.1.34 | 5.11 |
| 3.1.39 | 5.11 5.11(4) 5.11(5) 5.11(9) 5.11(11) |
| 3.1.58 | 2.3(2) |
| 1.1.51 | 2.4(6) |
| 1.1.56 | 2.4(1) |
| 1.1.66 | Appendix 2.1 2.4(1)(b) Appendix 2.2 2.4(1)(b) 5.9(1) |
| 1.2.40 | 5.9(2) |
| 1.2.41 | 5.9(2) |
| 1.2.43 | 5.10 |
| 1.2.74 | 5.16[deleted] |
| 6.1.17 | 10.1 10.2 10.2(1) 10.2(2) 10.2(3) |
| 6.1.23 | 10.2 10.2(1) 10.2(2) 10.2(3) |
| 3 | PRU waivers | ||
| Application | |||
| 3.1 | R | INSPRU TP 3 applies to an insurer unless it is: | |
| (1) | a non-directive friendly society; or | ||
| (2) | an incoming EEA firm; or | ||
| (3) | an incoming Treaty firm. | ||
| Version of PRU to be used | |||
| 3.2 | R | A reference in INSPRU TP 3 to PRU is to the version in force on 30 December 2006. | |
| Duration of transitional | |||
| 3.3 | R | INSPRU TP 3 applies until the relevant INSPRUrule is revoked. | |
| Continuing effect of waivers | |||
| 3.4 | R | A rule in INSPRU is disapplied, or is modified in its application, to a firm: | |
| (1) | in order to produce the same effect, including any conditions, as a waiver had on the rule in PRU; | ||
| (2) | for the same period as the waiver would have lasted, if shorter than the period in INSPRU TP 3.3; | ||
| provided the conditions set out in INSPRU TP 3.5 are satisfied. | |||
| 3.5 | R | The conditions referred to in INSPRU TP 3.4 are: | |
| (1) | the rule in PRU in relation to which the waiver was granted to the firm was redesignated as the relevant rule in INSPRU by the Prudential Sourcebook for Insurers Instrument 2006; | ||
| (2) | the waiver was current as respects the firm immediately before 31 December 2006; and | ||
| (3) | there is no specific transitional rule relating to the waiver. | ||
| 3.6 | R | INSPRU TP 3.4 does not have effect if, and to the extent that, it would be inconsistent with any EU law obligation of the United Kingdom. | |
| 3.7 | R | A firm which has the benefit of a waiver to which INSPRU TP 3.4 applies must: | |
| (1) | notify the FSA immediately if it becomes aware of any matter which is material to the relevance or appropriateness of the waiver; | ||
| (2) | maintain a written record of the rule in INSPRU to which it considers the waiver applies; and | ||
| (3) | make the record available to the FSA on request. | ||
| 4 | EEA pure reinsurers | ||
| Application | |||
| 4.1 | R | INSPRU TP 4 applies to a pure reinsurer: | |
| (1) | whose head office is in an EEA State other than the United Kingdom; and | ||
| (2) | which is not an incoming Treaty firm. | ||
| Duration of transitional | |||
| 4.2 | R | INSPRU TP 4 has effect in relation to a firm until 10 December 2008 or, if earlier, the date on which it becomes: | |
| (1) | an incoming EEA firm by reason of having exercised its right to carry on the regulated activity of effecting or carrying out contracts of insurance in the United Kingdom in accordance with Schedule 3 to the Act (EEA Passport Rights); or | ||
| (2) | an incoming Treaty firm by reason of having exercised its right to carry on the regulated activity of effecting or carrying out contracts of insurance in the United Kingdom in accordance with Schedule 4 to the Act (Treaty Rights). | ||
| 50% premiums and claims uplift for classes 11, 12 and 13; credit equalisation provision | |||
| 4.3 | R | The following rules or paragraphs of a rule do not apply to a firm: | |
| (1) | INSPRU 1.1.56 R (1); | ||
| (2) | INSPRU 1.1.60 R (1); and | ||
| (3) | INSPRU 1.4.39 R to INSPRU 1.4.46 R. | ||
| 5 | Pure reinsurance groups | |
| Application | ||
| 5.1 | R | INSPRU TP 5 applies to a pure reinsurer whose ultimate EEA insurance parent undertaking is the parent undertaking of a group comprised solely of reinsurance undertakings. |
| Duration of transitional | ||
| 5.2 | R | INSPRU TP 5 applies until 10 December 2007. |
| Group capital resources requirement | ||
| 5.3 | R | A firm need not comply with INSPRU 6.1.15 R. |
| 6 | Admissible assets | ||
| Application | |||
| 6.1 | R | INSPRU TP 6 applies to an insurer which is not a pure reinsurer. | |
| Duration of transitional | |||
| 6.2 | R | INSPRU TP 6 applies until 30 December 2007. | |
| GENPRU 2 Annex 7R | |||
| 6.3 | R | (1) | In determining whether its assets are admissible assets, instead of applying GENPRU 2 Annex 7, a firm may elect to treat as an admissible asset an asset that would have been an admissible asset for the purposes of the Integrated Prudential Sourcebook (PRU) as it was in force on 30 December 2006. |
| (2) | (1) does not apply when determining whether a derivative or quasi-derivative is an approved derivative or approved quasi-derivative. | ||
| (3) | If a firm applies (1) to any of its assets, it must do so for all of its assets except derivatives and quasi-derivatives. | ||
| 7 | Mathematical reserves | |
| Application | ||
| 7.1 | R | INSPRU TP 7 applies to an insurer to which INSPRU 1.2 applies. |
| Duration of transitional | ||
| 7.2 | R | INSPRU TP 7 applies until the relevant rule is revoked. |
| 7.3 | R | INSPRU 1.2.79A R does not apply in respect of reinsurance and analogous non-reinsurance financing agreements entered into and the terms of which came into effect before 10 December 2009, provided that immediately before 6 October 2010 the firm had the benefit of INSPRU 1.2.79 R (2) in relation to those reinsurance or analogous non-reinsurance financing agreements. |
- 06/10/2010
INSPRU Sch 1
Record keeping requirements
- 31/12/2006
INSPRU Schedule 1.1
See Notes
The aim of the guidance in the following table is to give the reader a quick overall view of the relevant record keeping requirements.
- 31/12/2006
INSPRU Schedule 1.2
See Notes
It is not a complete statement of those requirements and should not be relied on as if it were.
- 31/12/2006
INSPRU Schedule 1.3
See Notes
Table
| Handbook reference | Subject of Record | Contents of Record | When record must be made | Retention Period |
| INSPRU 1.2.20 R | Mathematical reserves |
(1)The methods and assumptions used in establishing the firm'smathematical reserves, including the margins for adverse deviation, and the reasons for their use(2)The nature of, reasons for, and effect of, any change in approach, including the amount by which the change in approach increases or decreases its mathematical reserves
| Not specified | An appropriate period |
| INSPRU 1.3.17 R, INSPRU 1.3.19 R | Calculation of with-profits insurance capital component |
(1)The methods and assumptions used in making any calculation required for the purposes of INSPRU 1.3 (and any subsequent changes) and the reasons for their use(2)Any change in practice (in particular changes in those items which will or may be significant in relation to the eventual claim values) and the nature of, reasons for, and effect of, any change in approach with respect to those methods and assumptions
| Not specified | An appropriate period |
| INSPRU 1.5.23 R | Long-term insurance funds | A separate accounting record in respect of each of a firm'slong-term insurance funds | Not specified | Not specified |
| INSPRU 1.5.56 R, INSPRU 1.5.57 R | Branch accounting records in the United Kingdom | A record of the activities carried on from a non-EEA direct insurer's United Kingdombranch and, if it is an EEA-deposit insurer, from its branches in other EEA states including a record of: (1)the income, expenditure and liabilities arising from activities of the branch or branches(2)the assets identified under INSPRU 1.1.20 R as available to meet those liabilities | Not specified | Not specified |
- 31/12/2006
INSPRU Sch 2
Notification and reporting requirements
- 31/12/2006
INSPRU Schedule 2.1
See Notes
The aim of the guidance in
the following table is to give the reader a quick overall view of the relevant
notification requirements.
- 31/12/2006
INSPRU Schedule 2.2
See Notes
It
is not a complete statement of those requirements and should not be relied
on as if it were.
- 31/12/2006
INSPRU Schedule 2.3
See Notes
Table
| Handbook reference | Matter to be notified | Contents of notification | Trigger event | Time allowed |
| INSPRU 2.1.23 R | That a reinsurance exposure to a reinsurer or group of closely related reinsurers is reasonably likely to exceed, or has exceeded, 100% of the firm'scapital resources excluding capital resources held to cover property-linked liabilities | Fact that the limit is reasonably likely
to be, or has been, exceeded Note: upon notification under INSPRU 2.1.23 R the firm must: (1)demonstrate that prudent provision
has been made for the reinsurance exposure
in excess of the 100% limit, or explain why in the opinion if the firm no provision is required, and(2)explain how the reinsurance exposure
is being safely managed (see INSPRU 2.1.24R) |
(1)A reasonable likelihood that the
limit will be exceeded, or(2)if (1) does not apply , the limit
being exceeded
| As soon as the firm first becomes aware of the matter required to be notified |
| INSPRU 2.1.29 R | That the firm has exceeded, or anticipates exceeding, the limit expressed in INSPRU 2.1.28 E (in each financial year a firm should restrict the gross earned premiums which it pays to a reinsurer or group of closely related reinsurers to the higher of (a) 20% of the firm's projected gross earned premiums for that financial year and (b) £4 million) | Fact that the limit has been exceeded,
or that the firm anticipates
exceeding the limit Note: upon notification under INSPRU 2.1.29 R the firm must explain to the FSA how, despite the excess reinsurance concentration, the credit risk is being safely managed (see INSPRU 2.1.30 R) | The limit being exceeded, or an anticipation that the limit will be exceeded | Immediately |
| INSPRU 3.1.65 R | Syndicate liabilities not covered by matching syndicate assets as required by INSPRU 3.1.53 R | Nature and extent of syndicate liabilities not covered by matching syndicate assets as required by INSPRU 3.1.53 R | Syndicate liabilities are no longer covered by matching syndicate assets as required by INSPRU 3.1.53 R | Immediately |
| INSPRU 7.1.83 R | Syndicate ICA and balancing amount in respect of each syndicate | Syndicate ICA and balancing amount in respect of each syndicate | Notification should be made periodically | As part of the annual capital-setting process, in good time for the Society to review and place appropriate reliance on them when determining capital assessments for each member |
| INSPRU 7.1.89 R | Significant doubt about the adequacy of a syndicate ICA or balancing amount with respect to syndicate risks and controls | Revised syndicate ICA and balancing amount | The managing agent considers that syndicate ICA and balancing amount communicated in the capital setting process are no longer adequate in the light of the risks to which the syndicate business is exposed | Immediately |
| INSPRU 8.2.17 R | Information the managing agent has concerning material risks to funds at Lloyd's or central assets | All information concerning relevant risk | Receipt of information | As soon as possible |
| INSPRU 8.2.23 R | Intention to approve the form of any new Lloyd's trust deed | Fact of intention | Intention to approve | As soon as practical |
| INSPRU 8.2.24 R | Intention to make any amendment which may alter the meaning or effect of any byelaw (including Lloyd's trust deeds, standard form letters of credit and guarantees) | Fact of intention | Intention to amend | As soon as practical |
| INSPRU 8.2.25 R | Full details of form of new Lloyd's trust deed or amendments to byelaw (including Lloyd's trust deeds, standard form letters of credit and guarantees) |
(1)Statement of purpose of amendment
or new form and expected impact, if any, on policyholders, managing agents, members and
potential members, and(2)Description of the consultation
undertaken and summary of significant responses to consultation
| Not specified | Normally not less than three months in advance of proposed change |
- 31/12/2008
INSPRU Sch 3
Fees and other requirement payments
- 31/12/2006
See Notes
There are no requirements for
fees or other payments in INSPRU.
- 31/12/2006
INSPRU Sch 4
Powers exercised
- 31/12/2006
INSPRU Schedule 4.1
See Notes
| The following powers and related provisions in the Act have been exercised by the FSA to make the rules in INSPRU: |
| Section 138 (General rule-making power) |
| Section 141 (Insurance business rules) |
| Section 149 (Evidential provisions) |
| Section 150(2) (Actions for damages) |
| Section 156 (General supplementary powers) |
| Section 316(1) (Direction by Authority) |
| Section 318(1) (Exercise of powers through Council) |
- 06/10/2009
INSPRU Schedule 4.2
See Notes
- 31/12/2006
INSPRU Sch 5
Rights of action for damages
- 31/12/2006
INSPRU Schedule 5.1
See Notes
The table below sets out the rules in INSPRU contravention of which by an authorised person may be actionable under section 150of the Act (Actions for damages) by a person who suffers loss as a result of the contravention.
- 31/12/2006
INSPRU Schedule 5.2
See Notes
If a "Yes" appears in the column headed "For private person", the rule may be actionable by a private person under section 150(or, in certain circumstances, his fiduciary or representative; see article 6(2) and (3)(c) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001/2256)). A "Yes" in the column headed "Removed" indicates that the
FSA
has removed the right of action under section 150(2)of the Act. If so, a reference to the rule in which it is removed is also given.
- 31/12/2006
INSPRU Schedule 5.3
See Notes
The column headed "For other person" indicates whether the rule may be actionable by a person other than a private person (or his fiduciary or representative) under article 6(2) and (3) of those Regulations. If so, an indication of the type of person by whom the rule may be actionable is given.
| Chapter/Appendix | Section/Annex | Right of action under section 150 | ||
| For private person | Removed | For other person | ||
| All rules in INSPRU | No | Yes (INSPRU 9.1.1R) | No | |
- 31/12/2006
INSPRU Sch 6
Rules that can be waived
- 31/12/2006
See Notes
The rules in INSPRU can be waived by the
FSA
under section 148 of the Act (Modification or waiver of rules), except for INSPRU 9.1.1 R (Actions for damages). However, if the rules incorporate requirements laid down in European directives, it will not be possible for the
FSA
to grant a waiver that would be incompatible with the United Kingdom's responsibilities under those directives. It therefore follows that if a rule in INSPRU contains provisions which derive partly from a directive, and partly not, the
FSA
will be able to consider a waiver of the latter requirements only, unless the directive provisions are optional rather than mandatory.
- 31/12/2006