Insurance Company – Risk Management

1.1

Unless otherwise stated, this Part applies to;

1. (1) a non-directive insurer, other than a non-directive friendly society; and
2. (2) subject to 1.2, a Swiss general insurer.

1.2

This Part only applies to a Swiss general insurer in respect of the activities of the firm carried on from a branch in the UK.

1.3

This Part applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.

1.4

Where a firm carries on both long-term insurance business and general insurance business, this Part applies separately to each type of business.

1.5

In this Part, the following definitions shall apply:

investment risk

means the risk that the assets held by a firm:

1. (1) (where they are admissible assets held by the firm to cover its technical provisions) might not be:
1. (a) of a value at least equal to the amount of those technical provisions as required by Insurance Company – Technical Provisions 4.1; or
2. (b) of appropriate safety, yield and marketability as required by Insurance Company – Technical Provisions 6.2(1); or
3. (c) of an appropriate currency match as required by 3.2;
2. (2) (where they are held to cover index-linked liabilities) might not be appropriate cover for those liabilities as required by 4.2; and
3. (3) (where they are held to cover property-linked liabilities) might not be appropriately selected in accordance with the requirements of INSPRU 1.5.36 R of the FCA Handbook and appropriate cover for those liabilities as required by 4.2.

linked assets

means assets held to cover linked long-term liabilities 4.2.

2.1

A firm must cover a contract providing for the purchase or sale of foreign currency by:

1. (1) holding the currency that must be paid by the firm under the contract; or
2. (2) being subject to an offsetting transaction.

3.1

This Chapter does not apply:

1. (1) to a pure reinsurer; or
2. (2) in respect of linked assets.

3.2

1. (1) 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, except where the amount of those assets does not exceed 7% of the assets in other currencies.
2. (2) For the purposes of (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.

3.3

For the purposes of 3.2, 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. (1) the currency of the country or territory in which the risk is situated;
2. (2) if the firm on reasonable grounds so decides, the currency in which the premium payable under the contract is expressed;
3. (3) if, taking into account the nature of the risks insured, the firm considers it more appropriate:
1. (a) the currency (based on past experience) in which it expects the claims to be paid; or
2. (b) if there is no past experience, the currency of the country or territory in which the firm or relevant branch is established:
1. (i) for contracts covering risks falling within general insurance business classes 4, 5, 6, 7, 11, 12 and 13 (producer's liability only); and
2. (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);
4. (4) (where a claim has been notified to the firm and the firm's liability in respect of that claim is payable in a currency other than that which would result from the application of (1), (2) or (3)) the currency in which the claim is to be paid; or
5. (5) (where a claim is assessed in a currency known to the firm in advance and is a currency other than that which would result from the application of (1), (2), (3) or (4)) the currency in which the claim is to be assessed.

4.1

This Chapter does not apply to a pure reinsurer.

4.2

A firm must cover its technical provisions in respect of its linked long-term liabilities as closely as possible with:

1. (1) where the linked benefits are linked to the value of units, those units;
2. (2) where the linked benefits are linked to the value of assets contained in an internal fund of the firm:
1. (a) in a case where the internal fund is divided into notional units, the assets represented by those notional units; or
2. (b) in a case where notional units are not established, those assets; and
3. (3) where the linked benefits are linked to a share index or other reference value not mentioned in (1) or (2), assets of appropriate security and marketability which correspond as closely as possible to the assets on which the reference value is based.

5.1

A pure reinsurer must invest its assets in accordance with the following requirements:

1. (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. (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. (3) investment in assets which are not admitted to trading on a regulated market must be kept to prudent levels;
4. (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;
5. (5) the firm must avoid excessive risk exposure to a single counterparty and to other derivative or quasi-derivative operations;
6. (6) the assets must be properly diversified in such a way as to avoid:
1. (a) excessive reliance on any one particular asset, issuer or group of undertakings; and
2. (b) accumulations of risk in the portfolio as a whole;
7. (7) 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
8. (8) (6) and (7) do not apply to investment in government bonds.

6.1

This Chapter does not apply to a pure reinsurer.

6.2

For the purposes of Insurance Company – Capital Resources 13, a derivative or quasi-derivative is approved if:

1. (1) it is held for the purpose of efficient portfolio management or reduction of investment risk;
2. (2) it is covered; and
3. (3) it is effected or issued:
1. (a) on or under the rules of a regulated market; or
2. (b) off-market with an approved counterparty and, except for a forward transaction, on approved terms and is capable of valuation.

6.3

1. (1) For the purposes of 6.2, 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.
2. (2) For the purposes (1), an increase in risk from a derivative or quasi-derivative is significant unless:
1. (a) relative to any reduction in investment risk it is both small and reasonable; or
2. (b) the risk is remote.

6.4

For the purposes of 6.2(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 Insurance Company – Overall Resources and Valuation 7.

6.5

For the purposes of 6.2(3)(b), a derivative or quasi-derivative is capable of valuation only if the firm:

1. (1) is able to value it with reasonable accuracy on a reliable basis in compliance with Insurance Company - Overall Resources and Valuation 3.1; and
2. (2) reasonably believes that it will be able to do so throughout the life of the transaction.

6.6

For the purposes of 6.2(1), 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:

1. (1) generating additional capital or income in one of the ways described in 6.7; or
2. (2) reducing tax or investment cost in relation to admissible assets or linked assets; or
3. (3) acquiring or disposing of rights in relation to admissible assets or linked assets, or their equivalent, more efficiently or effectively.

6.7

The generation of additional capital or income falls within 6.6(1) where it arises from:

1. (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 linked assets; or
2. (2) receiving a premium for selling a covered call option or its equivalent, the underlying of which is an admissible asset or linked assets, even if that additional capital or income is obtained at the expense of surrendering the chance of greater capital or income.

7.1

This Chapter does not apply to a pure reinsurer.

7.2

1. (1) A firm must cover an obligation to transfer assets or pay monetary amounts that arise from:
1. (a) a derivative or quasi-derivative; or
2. (b) a contract (other than a contract of insurance) for the purchase, sale or exchange of assets.
2. (2) 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.

7.3

For the purposes of 7.2, an obligation to transfer assets or pay monetary amounts must be covered:

1. (1) by assets, a liability or a provision; or
2. (2) by an offsetting transaction.

7.4

For the purposes of 7.2, an obligation to transfer assets (other than money) or to pay monetary amounts based on the value of, or income from, assets is covered if the firm holds:

1. (1) those assets; or
2. (2) in the case of an index or basket of assets, a reasonable approximation to those assets.

7.5

For the purposes of 7.2, an obligation to pay a monetary amount (whether or not falling in 7.4) is covered if:

1. (1) the firm holds admissible assets or linked assets, 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. (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. (3) a provision at least equal to the value of the assets in (1) is, in accordance with 7.6, implicitly or explicitly set up.

7.6

For the purposes of 7.5(3), a provision is:

1. (1) implicitly set up to the extent that the obligation to pay the monetary amount is recognised under Insurance Company – Overall Resources and Valuation 3 to 7 either by offset against an asset or as a separate liability; and
2. (2) explicitly set up if it is in addition to an implicit provision.

7.7

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.

7.8

For the purposes of 7.3(2), an offsetting transaction offsets an obligation to transfer assets away from the firm only if it provides for the transfer to the firm of those assets, or their value, at the time, or before, the obligation falls due.

7.9

For the purposes of 7.3(2), an offsetting 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.

7.10

For the purposes of this Chapter, assets that have been lent by the firm are not available for cover, unless:

1. (1) they are non-monetary assets that have been lent under a transaction that fulfils the conditions in 8.2; and
2. (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.

7.11

For the purposes of this Chapter, assets that have been borrowed by the firm are not available for cover except as allowed by 7.12.

7.12

For the purposes of this Chapter, borrowed money may be used as cover only where:

1. (1) the money has been advanced or an approved credit institution has committed itself to advance the money; and
2. (2) the borrowing is or would be covered.

8.1

This Chapter does not apply to a pure reinsurer.

8.2

1. (1) For the purposes of Insurance Company – Capital Resources 13, a stock lending transaction (including a repo transaction) is approved if:
1. (a) the firm is the lender;
2. (b) the assets lent by the firm are admissible assets;
3. (c) 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:
1. (i) the Office of the Comptroller of the Currency;
2. (ii) the Federal Deposit Insurance Corporation; and
3. (iii) the Board of Governors of the Federal Reserve System; and
4. (d) adequate and sufficiently immediate collateral is obtained to secure the obligation of the counterparty.
2. (2) 8.2(1)(d) does not apply to a stock lending transaction made through Euroclear Bank SA/NV's Securities Lending and Borrowing Programme.

8.3

For the purposes of 8.2(1)(d), collateral is adequate only if it:

1. (1) is transferred to the firm or its agent or, in the case of a letter of credit, meets the conditions described in 8.4;
2. (2) is:
1. (a) at the time of the transfer and on a continuing basis; or
2. (b) (in the case of a letter of credit) at the time of issue and on a continuing basis;
3. at least equal in value to the value of the securities transferred, or consideration provided, by the firm; and
3. (3) is of adequate quality.

8.4

The conditions referred to in 8.3(1) are that the letter of credit is:

1. (1) direct, explicit, unconditional and irrevocable; and
2. (2) issued by an undertaking which is:
1. (a) not an affiliated company of the counterparty; and
2. (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:
1. (i) the Office of the Comptroller of the Currency;
2. (ii) the Federal Deposit Insurance Corporation; and
3. (iii) the Board of Governors of the Federal Reserve System.

8.5

For the purposes of 8.3(2), where the validity of the collateral or the firm's interest in the collateral is about to expire or has expired, collateral will only be adequate on a continuing basis if sufficient collateral will again be transferred or issued at the latest by the close of business on the day of expiry.

8.6

For the purposes of 8.2(1)(c), collateral is sufficiently immediate only if:

1. (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. (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.