PRU 1
Application and general requirements
PRU 1.1
to follow
- 31/12/2004
PRU 1.2
Adequacy of financial resources
- 31/12/2004
Application
PRU 1.2.1
See Notes
- 31/12/2004
PRU 1.2.2
See Notes
- (1) In relation to liquidity risk only, this section applies to a firm in PRU 1.2.3 R unless PRU 1.2.7 R applies.
- (2) Liquidity risk includes the systems, processes and resources required by this section in respect of liquidity risk.
- 31/12/2004
PRU 1.2.3
See Notes
The firms referred to in PRU 1.2.2 R (1) are:
- (1) a building society;
- (2) a bank or an own account dealer (other than a venture capital firm) that is a UK firm;
- (3) an incoming EEA firm which:
- (a) is a full BCD credit institution; and
- (b) has a branch in the United Kingdom;
- (4) an overseas firm which is a bank or an own account dealer (other than a venture capital firm) but which is not:
- (a) an incoming EEA firm; or
- (b) a lead-regulated firm;
- (5) an overseas firm which:
- (a) is a bank;
- (b) is a lead-regulated firm;
- (c) is not an incoming EEA firm; and
- (d) has a branch in the United Kingdom.
- 31/12/2004
PRU 1.2.4
See Notes
- 31/12/2004
PRU 1.2.5
See Notes
- 31/12/2004
PRU 1.2.6
See Notes
If a firm carries on:
- (1) long-term insurance business; and
- (2) general insurance business;
this section applies separately to each type of business.
- 31/12/2004
PRU 1.2.7
See Notes
This section does not apply to:
- (1) a non-directive friendly society; or
- (2) a Swiss general insurer; or
- (3) an EEA-deposit insurer; or
- (4) a UCITS qualifier; or
- (5) an ICVC; or
- (6) an incoming EEA firm (unless PRU 1.2.3 R applies); or
- (7) an incoming Treaty firm.
- 31/12/2004
PRU 1.2.8
See Notes
- 31/12/2004
PRU 1.2.9
See Notes
- 31/12/2004
PRU 1.2.10
See Notes
- 31/12/2004
PRU 1.2.11
See Notes
- 31/12/2004
PRU 1.2.12
See Notes
- 31/12/2004
Purpose
PRU 1.2.14
See Notes
- 31/12/2004
PRU 1.2.15
See Notes
- 31/12/2004
PRU 1.2.16
See Notes
- 31/12/2004
PRU 1.2.17
See Notes
- 31/12/2004
Outline of other related provisions
PRU 1.2.18
See Notes
- 31/12/2004
PRU 1.2.19
See Notes
- 31/12/2004
PRU 1.2.20
See Notes
- 31/12/2004
PRU 1.2.21
See Notes
- 31/12/2004
Main Requirements
PRU 1.2.22
See Notes
- 31/12/2004
PRU 1.2.23
See Notes
- 31/12/2004
PRU 1.2.24
See Notes
- 31/12/2004
PRU 1.2.25
See Notes
- 31/12/2004
PRU 1.2.26
See Notes
- 31/12/2004
PRU 1.2.27
See Notes
- 31/12/2004
PRU 1.2.28
See Notes
- 31/12/2004
PRU 1.2.29
See Notes
- 31/12/2004
PRU 1.2.30
See Notes
- 31/12/2004
PRU 1.2.31
See Notes
The processes and systems required by PRU 1.2.26 R must enable the firm to identify the major sources of risk to its ability to meet its liabilities as they fall due, including the major sources of risk in each of the following categories:
- (1) credit risk;
- (2) market risk;
- (3) liquidity risk;
- (4) operational risk; and
- (5) insurance risk.
- 31/12/2004
PRU 1.2.32
See Notes
In PRU 1.2.31 R:
- (1) operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events; and
- (2) insurance risk refers to the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities.
- 31/12/2004
PRU 1.2.33
See Notes
- 31/12/2004
PRU 1.2.34
See Notes
- 31/12/2004
PRU 1.2.35
See Notes
For each of the major sources of risk identified in accordance with PRU 1.2.31 R, the firm must carry out stress tests and scenario analyses that are appropriate to the nature of those major sources of risk, as part of which the firm must:
- (1) take reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which the risk identified crystallises; and
- (2) estimate the financial resources the firm would need in each of the circumstances and events considered in order to be able to meet its liabilities as they fall due.
- 31/12/2004
PRU 1.2.36
See Notes
- 31/12/2004
PRU 1.2.37
See Notes
A firm must make a written record of its assessment of the adequacy of its financial resources, including:
- (1) the major sources of risk identified in accordance with PRU 1.2.31 R;
- (2) how it intends to deal with those risks; and
- (3) details of the stress tests and scenario analyses carried out and the resulting financial resources estimated to be required in accordance with PRU 1.2.35 R.
- 31/12/2004
PRU 1.2.38
See Notes
- 31/12/2004
PRU 1.2.39
See Notes
- 31/12/2004
Stress tests and scenario analyses
PRU 1.2.40
See Notes
- 31/12/2004
PRU 1.2.41
See Notes
- 31/12/2004
PRU 1.2.42
See Notes
- 31/12/2004
PRU 1.2.43
See Notes
- 31/12/2004
PRU 1.2.44
See Notes
- 31/12/2004
PRU 1.2.45
See Notes
PRU 1.2.35 R requires a firm, as part of carrying out stress tests and scenario analyses, to take reasonable steps to identify an appropriate range of realistic circumstances and events in which a risk would crystallise. In particular:
- (1) a firm need only carry out stress tests and scenario analyses in so far as the circumstances or events are reasonably foreseeable, that is to say, their occurrence is not too remote a possibility; and
- (2) a firm should also take into account the relative costs and benefits of carrying out the stress tests and scenario analyses in respect of the circumstances and events identified.
- 31/12/2004
PRU 1.2.46
See Notes
- 31/12/2004
PRU 1.2.47
See Notes
Both stress testing and scenario analyses are prospective analysis techniques, which seek to anticipate possible losses that might occur if an identified risk crystallises. In applying them, a firm needs to decide how far forward to look. This should depend upon:
- (1) how quickly it would be able to identify events or changes in circumstances that might lead to a risk crystallising resulting in a loss; and
- (2) after it has identified the event or circumstance, how quickly and effectively it could act to prevent or mitigate any loss resulting from the risk crystallising and to reduce exposure to any further adverse event or change in circumstance.
- 31/12/2004
PRU 1.2.48
See Notes
The time horizon over which stress tests and scenario analysis would need to be carried out for the market risk arising from the holding of investments, for example, should depend upon:
- (1) the extent to which there is a regular, open and transparent market in those assets, which would allow fluctuations in the value of the investment to be more readily and quickly identified; and
- (2) the extent to which the market in those assets is liquid (and would remain liquid in the changed circumstances contemplated in the stress test or scenario analysis) which would allow the firm, if needed, to sell its holding so as to prevent or reduce exposure to future price fluctuations.
- 31/12/2004
PRU 1.2.49
See Notes
In identifying scenarios, and assessing their impact, a firm should take into account, where material, how changes in circumstances might impact upon:
- (1) the nature, scale and mix of its future activities; and
- (2) the behaviour of counterparties, and of the firm itself, including the exercise of choices (for example, options embedded in financial instruments or contracts of insurance).
- 31/12/2004
PRU 1.2.50
See Notes
In determining whether it would have adequate financial resources in the event of each identified realistic adverse scenario, a firm should:
- (1) only include financial resources that could reasonably be relied upon as being available in the circumstances of the identified scenario; and
- (2) take account of any legal or other restriction on the purposes for which financial resources may be used.
- 31/12/2004
PRU 1.2.51
See Notes
- 31/12/2004
PRU 1.2.52
See Notes
- 31/12/2004
PRU 1.2.53
See Notes
- 31/12/2004
PRU 1.2.54
See Notes
- 31/12/2004
PRU 1.2.55
See Notes
- 31/12/2004
PRU 1.3
Valuation
- 31/12/2004
Application
PRU 1.3.1
See Notes
PRU 1.3 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.
- 31/12/2004
PRU 1.3.2
See Notes
- 31/12/2004
PRU 1.3.3
See Notes
- (1) PRU 1.3 applies to a firm in relation to the whole of its business.
- (2) Where a firm carries on both long-term insurance business and general insurance business, PRU 1.3 applies separately to each type of business.
- 31/12/2004
Purpose
PRU 1.3.4
See Notes
- 31/12/2004
General requirements: accounting principles to be applied
PRU 1.3.5
See Notes
Except where a rule in PRU provides for a different method of recognition or valuation, whenever a rule in PRU refers to an asset, liability, equity or income statement item, a firm must, for the purpose of that rule, recognise the asset, liability, equity or income statement item and measure its value in accordance with:
- (1) the insurance accounts rules, or the Friendly Societies (Accounts and Related Provisions) Regulations 1994;
- (2) Financial Reporting Standards and Statements of Standard Accounting Practice issued or adopted by the Accounting Standards Board; and
- (3) Statements of Recommended Practice, issued by industry or sectoral bodies recognised for this purpose by the Accounting Standards Board;
- 31/12/2004
PRU 1.3.6
See Notes
PRU 1.3.5 R provides that unless a rule in PRU provides for a different method of recognition or valuation, the applicable provisions of the Companies Act 1985, the Companies Act (Northern Ireland) Order 1986 or the Friendly Societies (Accounts and Related Provisions) Regulations 1994, as supplemented by Financial Reporting Standards, Statements of Standard Accounting Practice, and Statements of Recommended Accounting Practice, should be used to determine the recognition and valuation of assets, liabilities, equity and income statement items for the purposes of PRU, including:
- (1) whether, and when, to recognise or de-recognise an asset or liability;
- (2) the amount at which to value an asset, liability, equity or income statement item;
- (3) which description to place on an asset, liability, equity or income statement item.
- 31/12/2004
PRU 1.3.7
See Notes
In particular, unless an exception applies, PRU 1.3.5 R should be applied for the purposes of PRU to determine how to account for:
- (1) netting of amounts due to or from the firm;
- (2) the securitisation of assets and liabilities (see also PRU 1.3.8 G);
- (3) leased tangible assets;
- (4) assets transferred or received under a sale and repurchase or stock lending transaction; and
- (5) assets transferred or received by way of initial or variation margin under a derivative or similar transaction.
- 31/12/2004
PRU 1.3.8
See Notes
- 31/12/2004
PRU 1.3.9
See Notes
- 31/12/2004
PRU 1.3.10
See Notes
- 31/12/2004
Investments, derivatives and quasi-derivatives
PRU 1.3.11
See Notes
Subject to PRU 1.3.31 R, for the purposes of PRU, a firm must apply PRU 1.3.12 R to PRU 1.3.30 R in order to determine how to account for:
- (1) investments that are, or amounts owed arising from the disposal of:
- (a) debt securities, bonds and other money- and capital-market instruments; or
- (b) loans; or
- (c) shares and other variable yield participations; or
- (d) units in UCITS schemes, non-UCITS retail schemes, recognised schemes and any other collective investment scheme that invests only in admissible assets (including any derivatives or quasi-derivatives held by the scheme); and
- (2) derivatives and quasi-derivatives.
- 31/12/2004
Marking to market
PRU 1.3.12
See Notes
- 31/12/2004
PRU 1.3.13
See Notes
- 31/12/2004
PRU 1.3.14
See Notes
- 31/12/2004
Marking to model
PRU 1.3.15
See Notes
- 31/12/2004
PRU 1.3.16
See Notes
When the model used is developed by the firm, that model must be:
- (1) based on appropriate assumptions which have been assessed and challenged by suitably qualified parties independent of the development process; and
- (2) independently tested, including validation of the mathematics, assumptions, and software implementation.
- 31/12/2004
PRU 1.3.17
See Notes
- 31/12/2004
PRU 1.3.18
See Notes
- 31/12/2004
PRU 1.3.19
See Notes
- 31/12/2004
PRU 1.3.20
See Notes
- 31/12/2004
PRU 1.3.21
See Notes
- 31/12/2004
PRU 1.3.22
See Notes
- 31/12/2004
PRU 1.3.23
See Notes
- 31/12/2004
Independent price verification
PRU 1.3.24
See Notes
- 31/12/2004
PRU 1.3.25
See Notes
- 31/12/2004
Valuation adjustments or reserves
PRU 1.3.26
See Notes
- 31/12/2004
PRU 1.3.27
See Notes
- 31/12/2004
PRU 1.3.28
See Notes
- 31/12/2004
PRU 1.3.29
See Notes
The requirements referred to in PRU 1.3.26 R and PRU 1.3.28 R are:
- (1) a firm must consider the following adjustments or reserves: unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, future administrative costs and, where appropriate, model risk; and
- (2) a firm must consider several factors when determining whether a valuation reserve is necessary for less liquid items. These factors include the amount of time it would take to hedge out the position/risks within the position; the average and volatility of bid/offer spreads; the availability of market quotes (number and identity of market makers); and the average and volatility of trading volumes.
- 31/12/2004
PRU 1.3.30
See Notes
- 31/12/2004
Shares in, and debts due from, related undertakings
PRU 1.3.31
See Notes
PRU 1.3.11 R does not apply to shares in, and debts due from, a related undertaking that is:
- (1) a regulated related undertaking; or
- (2) an ancillary services undertaking; or
- (3) any other subsidiary undertaking, the shares of which a firm elects to value in accordance with PRU 1.3.35 R.
- 31/12/2004
PRU 1.3.32
See Notes
- 31/12/2004
PRU 1.3.33
See Notes
- 31/12/2004
PRU 1.3.34
See Notes
- 31/12/2004
PRU 1.3.35
See Notes
For the purposes of PRU 1.3.33 R, the value of the shares held in an undertaking referred to in PRU 1.3.31 R (1) or PRU 1.3.31R (3) is the sum of:
- (1) the regulatory surplus value of that undertaking; less
- (2) for the purposes of PRU 2.2.90 R, the book value of the total investments in the tier one capital resources and tier two capital resources of that undertaking by the firm and its related undertakings; or
- (3) for other purposes in PRU, the sum of:
- (a) the book value of the investments by the firm and its related undertakings in the tier two capital resources of the undertaking; and
- (b) if the undertaking is an insurance undertaking, its ineligible surplus capital and any restricted assets of the undertaking which have been excluded under PRU 8.3.41 R (1).
- 31/12/2004
PRU 1.3.36
See Notes
For the purposes of PRU 1.3.35 R (1), the regulatory surplus value of an undertaking referred to in PRU 1.3.31 R (1) or PRU 1.3.31R (3) is, subject to PRU 1.3.37 R, the sum of:
- (1) the tier one capital resources of the undertaking; plus
- (2) the tier two capital resources of the undertaking; less
- (3) the individual capital resources requirement of the undertaking.
- 31/12/2004
PRU 1.3.37
See Notes
- (1) Subject to PRU 1.3.38 R, for the purposes of PRU 1.3.36 R, only the relevant proportion of the:
- (a) tier one capital resources of the undertaking;
- (b) tier two capital resources of the undertaking;
- (c) individual capital resources requirement of the undertaking;
- is to be taken into account.
- (2) In (1), the relevant proportion is the proportion of the total number of shares issued by the undertaking held, directly or indirectly, by the firm.
- 31/12/2004
PRU 1.3.38
See Notes
- 31/12/2004
PRU 1.3.39
See Notes
For the purposes of PRU 1.3.35 R to PRU 1.3.38 R:
- (1) in relation to an undertaking referred to in PRU 1.3.31 R (1):
- (a) individual capital resources requirement has the meaning given by PRU 8.3.34 R;
- (b) the following expressions are to be construed in accordance with PRU 8.3.37 R:
- (i) tier one capital resources; and
- (ii) tier two capital resources;
- (c) ineligible surplus capital has the meaning given by PRU 8.3.67 R;
- (2) in relation to an undertaking referred to in PRU 1.3.31 R (3), the following expressions are to be construed as if that undertaking were an insurance holding company:
- (a) individual capital resources requirement;
- (b) tier one capital resources; and
- (c) tier two capital resources.
- 31/12/2004
PRU 1.3.40
See Notes
- 31/12/2004
PRU 1.3.41
See Notes
- 31/12/2004
PRU 1.3.42
See Notes
- 31/12/2004
Community co-insurance operations: general insurance business
PRU 1.3.43
See Notes
Where a relevant insurer determines the amount of a liability in order to make provision for outstanding claims under a Community co-insurance operation, then, if the leading insurer has informed the relevant insurer of the amount of the provision made by the leading insurer for such claims, the amount determined by the relevant insurer:
- (1) must be at least as great as the amount of the provision made by the leading insurer; or
- (2) in a case where it is not the practice in the United Kingdom to make such provision separately, must be sufficient, when all liabilities are taken into account, to include provision at least as great as that made by the leading insurer for such claims;
- 31/12/2004
PRU 1.4
Prudential risk management and associated systems and controls
- 31/12/2004
Application
PRU 1.4.1
See Notes
PRU 1.4 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.
- 31/12/2004
PRU 1.4.2
See Notes
PRU 1.4 applies to:
- (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.
- 31/12/2004
Purpose
PRU 1.4.3
See Notes
- 31/12/2004
PRU 1.4.4
See Notes
- 31/12/2004
PRU 1.4.5
See Notes
- 31/12/2004
How to interpret PRU 1.4
PRU 1.4.6
See Notes
- 31/12/2004
PRU 1.4.7
See Notes
- 31/12/2004
PRU 1.4.8
See Notes
Appropriate systems and controls for the management of prudential risk will vary from firm to firm. Therefore most of the material in PRU 1.4 is guidance. In interpreting this guidance, a firm should have regard to its own particular circumstances. Following from SYSC 3.1.2 G, this should include considering the nature, scale and complexity of its business, which may be influenced by factors such as:
- (1) the diversity of its operations, including geographical diversity;
- (2) the volume and size of its transactions; and
- (3) the degree of risk associated with each area of its operation.
- 31/12/2004
PRU 1.4.9
See Notes
- 31/12/2004
The role of systems and controls in a prudential context
PRU 1.4.10
See Notes
- 31/12/2004
The prudential responsibilities of senior management and the apportionment of those responsibilities
PRU 1.4.11
See Notes
Ultimate responsibility for the management of prudential risks rests with a firm's governing body and relevant senior managers, and in particular with those individuals that undertake the firm's governing functions and the apportionment and oversight function. In particular, these responsibilities should include:
- (1) overseeing the establishment of an appropriate business plan and risk management strategy;
- (2) overseeing the development of appropriate systems for the management of prudential risks;
- (3) establishing adequate internal controls; and
- (4) ensuring that the firm maintains adequate financial resources.
- 31/12/2004
The delegation of responsibilities within the firm
PRU 1.4.12
See Notes
- 31/12/2004
PRU 1.4.13
See Notes
- 31/12/2004
Firms subject to risk management on a group basis
PRU 1.4.14
See Notes
Some firms organise the management of their prudential risks on a stand-alone basis. In some cases, however, the management of a firm's prudential risks may be entirely or largely subsumed within a whole group or sub-group basis.
- (1) The latter arrangement may still comply with the FSA's prudential policy on systems and controls if the firm's governing body formally delegates the functions that are to be carried out in this way to the persons or bodies that are to carry them out. Before doing so, however, the firm's governing body should have explicitly considered the arrangement and decided that it is appropriate and that it enables the firm to meet the FSA's prudential policy on systems and controls. The firm should notify the FSA if the management of its prudential risks is to be carried out in this way.
- (2) Where the management of a firm's prudential risks is largely, but not entirely, subsumed within a whole group or sub-group basis, the firm should ensure that any prudential issues that are specific to the firm are:
- (a) identified and adequately covered by those to whom it has delegated certain prudential risk management tasks; or
- (b) dealt with by the firm itself.
- 31/12/2004
PRU 1.4.15
See Notes
- 31/12/2004
PRU 1.4.16
See Notes
- 31/12/2004
Business planning and risk management
PRU 1.4.17
See Notes
- 31/12/2004
PRU 1.4.18
See Notes
- 31/12/2004
PRU 1.4.19
See Notes
When establishing and maintaining its business plan and prudential risk management systems, a firm must document:
- (1) an explanation of its overall business strategy, including its business objectives;
- (2) a description of, as applicable, its policies towards market, credit (including provisioning), liquidity, operational, insurance and group risk (that is, its risk policies), including its appetite or tolerance for these risks and how it identifies, measures or assesses, monitors and controls these risks;
- (3) the systems and controls that it intends to use in order to ensure that its business plan and risk policies are implemented correctly;
- (4) a description of how the firm accounts for assets and liabilities, including the circumstances under which items are netted, included or excluded from the firm's balance sheet and the methods and assumptions for valuation;
- (5) appropriate financial projections and the results of its stress testing and scenario analysis (see PRU 1.2 Adequacy of financial resources); and
- (6) details of, and the justification for, the methods and assumptions used in financial projections and stress testing and scenario analysis.
- 31/12/2004
PRU 1.4.20
See Notes
The prudential risk management systems referred to in PRU 1.4.18 R and PRU 1.4.19 R are the means by which a firm is able to:
- (1) identify the prudential risks that are inherent in its business plan, operating environment and objectives, and determine its appetite or tolerance for these risks;
- (2) measure or assess its prudential risks;
- (3) monitor its prudential risks; and
- (4) control or mitigate its prudential risks.
PRU 5.1.78 E is an evidential provision relating to PRU 1.4.18 R concerning risk management systems in respect of liquidity risk arising from substantial exposures in foreign currencies.
- 31/12/2004
PRU 1.4.21
See Notes
- 31/12/2004
PRU 1.4.22
See Notes
A firm's business plan and risk management systems should be:
- (1) effectively communicated so that all employees and contractors understand and adhere to the procedures related to their own responsibilities;
- (2) regularly updated and revised, in particular when there is significant new information or when actual practice or performance differs materially from the documented strategy, policy or systems.
- 31/12/2004
PRU 1.4.23
See Notes
- 31/12/2004
PRU 1.4.24
See Notes
- 31/12/2004
PRU 1.4.25
See Notes
- 31/12/2004
Internal controls: introduction
PRU 1.4.26
See Notes
- 31/12/2004
PRU 1.4.27
See Notes
- 31/12/2004
PRU 1.4.28
See Notes
The precise role and organisation of internal controls can vary from firm to firm. However, a firm's internal controls should normally be concerned with assisting its governing body and relevant senior managers to participate in ensuring that it meets the following objectives:
- (1) safeguarding both the assets of the firm and its customers, as well as identifying and managing liabilities;
- (2) maintaining the efficiency and effectiveness of its operations;
- (3) ensuring the reliability and completeness of all accounting, financial and management information; and
- (4) ensuring compliance with its internal policies and procedures as well as all applicable laws and regulations.
- 31/12/2004
PRU 1.4.29
See Notes
When determining the adequacy of its internal controls, a firm should consider both the potential risks that might hinder the achievement of the objectives listed in PRU 1.4.28 G, and the extent to which it needs to control these risks. More specifically, this should normally include consideration of:
- (1) the appropriateness of its reporting and communication lines (see SYSC 3.2.2 G);
- (2) how the delegation or contracting of functions or activities to employees, appointed representatives or other third parties (for example outsourcing) is to be monitored and controlled (see SYSC 3.2.3 G to SYSC 3.2.4 G, PRU 1.4.12 G to PRU 1.4.16 G and PRU 1.4.33 G; additional guidance on the management of outsourcing arrangements is also provided in SYSC 3A.9);
- (3) the risk that a firm's employees or contractors might accidentally or deliberately breach a firm's policies and procedures (see SYSC 3A.6.3 G);
- (4) the need for adequate segregation of duties (see SYSC 3.2.5 G and PRU 1.4.30 G to PRU 1.4.33 G);
- (5) the establishment and control of risk management committees (see PRU 1.4.34 G to PRU 1.4.37 G);
- (6) the need for risk assessment and the establishment of a risk assessment function (see SYSC 3.2.10 G and PRU 1.4.38 G to PRU 1.4.41 G); and
- (7) the need for internal audit and the establishment of an internal audit function and audit committee (see SYSC 3.2.15 G to SYSC 3.2.16 G and PRU 1.4.42 G to PRU 1.4.45 G).
- 31/12/2004
Internal controls: segregation of duties
PRU 1.4.30
See Notes
The effective segregation of duties is an important internal control in the prudential context. In particular, it helps to ensure that no one individual is completely free to commit a firm's assets or incur liabilities on its behalf. Segregation can also help to ensure that a firm's governing body receives objective and accurate information on financial performance, the risks faced by the firm and the adequacy of its systems. In this regard, a firm should ensure that there is adequate segregation of duties between employees involved in:
- (1) taking on or controlling risk (which could include risk mitigation);
- (2) risk assessment (which includes the identification and analysis of risk); and
- (3) internal audit.
- 31/12/2004
PRU 1.4.31
See Notes
- 31/12/2004
PRU 1.4.32
See Notes
- 31/12/2004
PRU 1.4.33
See Notes
Where a firm outsources a controlled function, such as internal audit, it should take reasonable steps to ensure that every individual involved in the performance of this service is independent from the individuals who perform its external audit. This should not prevent services from being undertaken by a firm's external auditors provided that:
- (1) the work is carried out under the supervision and management of the firm's own internal staff; and
- (2) potential conflicts of interest between the provision of external audit services and the provision of controlled functions are properly managed.
- 31/12/2004
Internal controls: risk management committees
PRU 1.4.34
See Notes
- 31/12/2004
PRU 1.4.35
See Notes
Where a firm decides to create one or more risk management committee(s), adequate internal controls should be put in place to ensure that these committees are effective and that their actions are consistent with the objectives outlined in PRU 1.4.28 G. This should normally include consideration of the following:
- (1) setting clear terms of reference, including membership, reporting lines and responsibilities of each committee;
- (2) setting limits on their authority;
- (3) agreeing routine reporting and non-routine escalation procedures;
- (4) agreeing the minimum frequency of committee meetings; and
- (5) reviewing the performance of these risk management committees.
- 31/12/2004
PRU 1.4.36
See Notes
- 31/12/2004
PRU 1.4.37
See Notes
The effective use of risk management committees can help to enhance a firm's internal controls. In establishing and maintaining its risk management committees, a firm should consider:
- (1) their membership, which should normally include relevant senior managers (such as the head of group risk, head of legal, and the heads of market, credit, liquidity and operational risk, etc.), business line managers, risk management personnel and other appropriately skilled people, for example, actuaries, lawyers, accountants, IT specialists, etc.;
- (2) using these committees to:
- (i) inform the decisions made by a firm's governing body regarding its appetite or tolerance for risk taking;
- (ii) highlight risk management issues that may require attention by the governing body;
- (iii) consider risk at the firm-wide level and, within delegated limits, to determine the allocation of risk limits and financial resources across business lines;
- (iv) consider how exposures may be unwound, hedged, or otherwise mitigated, as appropriate.
- 31/12/2004
Internal controls: risk assessment
PRU 1.4.38
See Notes
Risk assessment is the process through which a firm identifies and analyses (using both qualitative and quantitative methodologies) the risks that it faces. A firm's risk assessment activities should normally include consideration of:
- (1) its total exposure to risk at the firm-wide level (that is, its exposure across business lines and risk categories);
- (2) capital allocation and the need to calculate risk weighted returns for different business lines;
- (3) the potential correlations that can exist between the risks in different business lines; this should also include looking for risks to which a firm's business plan is particularly sensitive, such as interest rate risk, or multiple dealings with the same counterparty;
- (4) the use of stress tests and scenario analysis;
- (5) whether there are risks inherent in the firm's business that are not being addressed adequately;
- (6) the risk adjusted return that the firm is achieving; and
- (7) the adequacy and timeliness of management information on market, credit, insurance, liquidity, operational and group risks from the business lines, including risk limit utilisation.
- 31/12/2004
PRU 1.4.39
See Notes
- 31/12/2004
PRU 1.4.40
See Notes
- 31/12/2004
PRU 1.4.41
See Notes
- 31/12/2004
Internal audit
PRU 1.4.42
See Notes
A firm should ensure that it has appropriate mechanisms in place to assess and monitor the appropriateness and effectiveness of its systems and controls. This should normally include consideration of:
- (1) adherence to and effectiveness of, as appropriate, its market, credit, liquidity, operational, insurance, and group risk policies;
- (2) whether departures and variances from its documented systems and controls and risk policies have been adequately documented and appropriately reported, including whether appropriate pre-clearance authorisation has been sought for material departures and variances;
- (3) adherence to and effectiveness of its accounting policies, and whether accounting records are complete and accurate;
- (4) adherence to and effectiveness of its management reporting arrangements, including the timeliness of reporting, and whether information is comprehensive and accurate; and
- (5) adherence to FSA rules and regulatory prudential standards.
- 31/12/2004
PRU 1.4.43
See Notes
- 31/12/2004
PRU 1.4.44
See Notes
- 31/12/2004
PRU 1.4.45
See Notes
- 31/12/2004
Management information
PRU 1.4.46
See Notes
- 31/12/2004
PRU 1.4.47
See Notes
The role of management information should be to help a firm's governing body and senior managers to understand risk at a firm-wide level. In so doing, it should help them to:
- 31/12/2004
PRU 1.4.48
See Notes
A firm should consider what information needs to be made available to its governing body and senior managers. Some possible examples include:
- (1) firm-wide information such as the overall profitability and value of a firm and its total exposure to risk;
- (2) reports from committees to which the governing body has delegated risk management tasks, if applicable;
- (3) reports from a firm's internal audit and risk assessment functions, if applicable, including exception reports, where risk limits and policies have been breached or systems circumvented;
- (4) financial projections under expected and abnormal (that is, stressed) conditions;
- (5) reconciliation of actual profit and loss to previous financial projections and an analysis of any significant variances;
- (6) matters which require a decision from the governing body or senior managers, for example a significant variation to a business plan, amendments to risk limits, the creation of a new business line, etc;
- (7) compliance with FSA rules and regulatory prudential standards;
- (8) risk weighted returns; and
- (9) liquidity and funding requirements.
- 31/12/2004
PRU 1.4.49
See Notes
The management information that is provided to a firm's governing body and senior managers should have the following characteristics:
- (1) it should be timely, its frequency being determined by factors such as:
- (a) the volatility of the business in which the firm is engaged (that is, the speed at which its risks can change);
- (b) any time constraints on when action needs to be taken; and
- (c) the level of risk that the firm is exposed to, compared to its available financial resources and tolerance for risk;
- (2) it should be reliable, having regard to the fact that it may be necessary to sacrifice a degree of accuracy for timeliness; and
- (3) it should be presented in a manner that highlights any relevant issues on which those undertaking governing functions should focus particular attention.
- 31/12/2004
PRU 1.4.50
See Notes
- 31/12/2004
Record keeping
PRU 1.4.51
See Notes
SYSC 3.2.20 R requires a firm to take reasonable care to make and retain adequate records. The following policy on record keeping supplements SYSC 3.2.20 R by providing some additional rules and guidance on record keeping in a prudential context. The purpose of this policy is to:
- (1) facilitate the prudential supervision of a firm by ensuring that adequate information is available regarding its past/current financial situation and business activities (which includes the design and implementation of systems and controls); and
- (2) help the FSA to satisfy itself that a firm is operating in a prudent manner and is not prejudicing the interests of its customers or market confidence.
- 31/12/2004
PRU 1.4.52
See Notes
- 31/12/2004
PRU 1.4.53
See Notes
- (1) A firm must make and regularly update accounting and other records that are sufficient to enable the firm to demonstrate to the FSA:
- (a) that the firm is financially sound and has appropriate systems and controls;
- (b) the firm's financial position and exposure to risk (to a reasonable degree of accuracy); and
- (c) the firm's compliance with the rules in PRU.
- (2) The records in (1) must be retained for a minimum of three years, or longer as appropriate.
- 31/12/2004
PRU 1.4.54
See Notes
- 31/12/2004
PRU 1.4.55
See Notes
- 31/12/2004
PRU 1.4.56
See Notes
- 31/12/2004
PRU 1.4.57
See Notes
- 31/12/2004
PRU 1.4.58
See Notes
- 31/12/2004
PRU 1.4.59
See Notes
- 31/12/2004
PRU 1.4.60
See Notes
A firm must keep the records required in PRU 1.4.53 R in the United Kingdom, except where:
- (1) they relate to business carried on from an establishment in a country or territory that is outside the United Kingdom; and
- (2) they are kept in that country or territory.
- 31/12/2004
PRU 1.4.61
See Notes
- 31/12/2004
PRU 1.4.62
See Notes
- 31/12/2004
PRU 1.4.63
See Notes
- 31/12/2004
PRU 1.4.64
See Notes
- 31/12/2004
PRU 1.5
to follow
- 31/12/2004
PRU 1.6
to follow
- 31/12/2004
PRU 1.7
to follow
- 31/12/2004
PRU 1.8
Actions for damages
- 31/12/2004
PRU 2
Capital
PRU 2.1
Calculation of capital resources requirements
- 31/12/2004
Application
PRU 2.1.1
See Notes
PRU 2.1 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.
- 31/12/2004
PRU 2.1.2
See Notes
- 31/12/2004
PRU 2.1.3
See Notes
- (1) PRU 2.1 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, PRU 2.1 applies separately to each type of business.
- 31/12/2004
PRU 2.1.4
See Notes
- 31/12/2004
Purpose
PRU 2.1.6
See Notes
- 31/12/2004
PRU 2.1.7
See Notes
This section (PRU 2.1) sets capital resources requirements for a firm. PRU 2.2 sets out how, for the purpose of this, the amounts or values of capital, assets and liabilities are to be determined. More detailed rules relating to capital, assets and liabilities are also set out in the following chapters and sections:
PRU 2.1 and PRU 2.2 include appropriate cross-references to these chapters and sections.
- 31/12/2004
PRU 2.1.8
See Notes
- 31/12/2004
Main requirements
PRU 2.1.9
See Notes
- (1) A firm must maintain at all times capital resources equal to or in excess of its capital resources requirement (CRR).
- (2) A firm which is a participating insurance undertaking and, in relation to its own group capital resources, is in compliance with PRU 8.3.9 R, is deemed to comply with (1).
- 31/12/2004
PRU 2.1.10
See Notes
- 31/12/2004
PRU 2.1.11
See Notes
- 31/12/2004
PRU 2.1.12
See Notes
- 31/12/2004
PRU 2.1.13
See Notes
- 31/12/2004
Calculation of the CRR
PRU 2.1.14
See Notes
- 31/12/2004
PRU 2.1.15
See Notes
The CRR for any firm to which this rule applies (see PRU 2.1.16 R and PRU 2.1.17 R) is the higher of:
- (1) the MCR in PRU 2.1.22 R; and
- (2) the ECR in PRU 2.1.34 R.
- 31/12/2004
PRU 2.1.16
See Notes
Subject to PRU 2.1.17 R, PRU 2.1.15 R applies to a firm carrying on long-term insurance business, other than:
- (1) a non-directive mutual;
- (2) a firm which has no with-profits insurance liabilities; and
- (3) a firm which has with-profits insurance liabilities that are, and at all times since 31 December 2004 (the coming into force of PRU 2.1.15 R) have remained, less than £500 million.
- 31/12/2004
PRU 2.1.17
See Notes
PRU 2.1.15 R also applies to a firm of a type listed in PRU 2.1.16 R (3) if:
- (1) the firm makes an election that PRU 2.1.15 R is to apply to it; and
- (2) that election is made by written notice given to the FSA in a way that complies with the requirements for written notice in SUP 15.7.
- 31/12/2004
PRU 2.1.18
See Notes
- 31/12/2004
PRU 2.1.19
See Notes
- 31/12/2004
PRU 2.1.20
See Notes
- 31/12/2004
Calculation of the MCR
PRU 2.1.21
See Notes
For a firm carrying on general insurance business, the MCR in respect of that business is the higher of:
- (1) the base capital resources requirement for general insurance business applicable to that firm; and
- (2) the general insurance capital requirement.
- 31/12/2004
PRU 2.1.22
See Notes
For a firm carrying on long-term insurance business, the MCR in respect of that business is the higher of:
- (1) the base capital resources requirement for long-term insurance business applicable to that firm; and
- (2) the sum of:
- (a) the long-term insurance capital requirement; and
- (b) the resilience capital requirement.
- 31/12/2004
PRU 2.1.23
See Notes
- 31/12/2004
PRU 2.1.24
See Notes
- 31/12/2004
Calculation of the base capital resources requirement
PRU 2.1.25
See Notes
- 31/12/2004
PRU 2.1.26
See Notes
Firm type | Amount: Currency equivalent of | |
General insurance business | ||
Liability insurer (classes 10-15) |
Directive mutual | €2.25 million |
Non-directive insurer | €300,000 | |
Overseas firm | €1.5 million | |
Other | €3 million | |
Other insurer | Directive mutual | €1.5 million |
Non-directive insurer (classes 1 to 8, 16 or 18) |
€225,000 | |
Non-directive insurer (classes 9 or 17) |
€150,000 | |
Overseas firm | €1 million | |
Other | €2 million | |
Long-term insurance business | ||
Mutual | Directive | €2.25 million |
Non-directive | €600,000 | |
Overseas firm | €1.5 million | |
Any other insurer | €3 million |
- 31/12/2004
PRU 2.1.27
See Notes
- (1) Subject to (2) and (3), the amount of the base capital resources requirement specified in the last column of the table in PRU 2.1.26 R for a firm which is not a non-directive insurer will increase each year, starting on the review date of 20 September 2005 (and annually after that), 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.
- (2) In any year, if the percentage change since the last increase is less than 5%, then there will be no increase.
- (3) The increase will take effect 30 days after the EU Commission has informed the European Parliament and Council of its review and the relevant percentage change.
- 31/12/2004
PRU 2.1.28
See Notes
- 31/12/2004
PRU 2.1.29
See Notes
- 31/12/2004
Calculation of the general insurance capital requirement
PRU 2.1.30
See Notes
A firm must calculate its general insurance capital requirement as the highest of:
- (1) the premiums amount;
- (2) the claims amount; and
- (3) the brought forward amount.
- 31/12/2004
PRU 2.1.31
See Notes
- 31/12/2004
Calculation of the long-term insurance capital requirement
PRU 2.1.32
See Notes
A firm must calculate its long-term insurance capital requirement as the sum of:
- (1) the insurance death risk capital component;
- (2) the insurance health risk capital component;
- (3) the insurance expense risk capital component; and
- (4) the insurance market risk capital component.
- 31/12/2004
PRU 2.1.33
See Notes
- 31/12/2004
Calculation of the ECR
PRU 2.1.34
See Notes
For a firm carrying on long-term insurance business, the ECR in respect of that business is the sum of:
- (1) the long-term insurance capital requirement;
- (2) the resilience capital requirement; and
- (3) the with-profits insurance capital component.
- 31/12/2004
PRU 2.1.35
See Notes
- 31/12/2004
Monitoring requirements
PRU 2.1.36
See Notes
- 31/12/2004
PRU 2.1.37
See Notes
- 31/12/2004
PRU 2.1.38
See Notes
- 31/12/2004
PRU 2.2
Capital resources
- 31/12/2004
Application
PRU 2.2.1
See Notes
PRU 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.
- 31/12/2004
Purpose
PRU 2.2.2
See Notes
- 31/10/2004
Principles underlying the definition of capital resources
PRU 2.2.3
See Notes
- 31/10/2004
PRU 2.2.4
See Notes
- 31/10/2004
Tier one capital
PRU 2.2.5
See Notes
Tier one capital typically has the following characteristics:
- (1) it is able to absorb losses;
- (2) it is permanent;
- (3) it ranks for repayment upon winding up after all other debts and liabilities; and
- (4) it has no fixed costs, that is, there is no inescapable obligation to pay dividends or interest.
- 31/10/2004
PRU 2.2.6
See Notes
- 31/10/2004
Upper and lower tier two capital
PRU 2.2.7
See Notes
Tier two capital includes forms of capital that do not meet the requirements for permanency and absence of fixed servicing costs that apply to tier one capital. Tier two capital includes, for example:
- (1) capital which is perpetual (that is, has no fixed term) but cumulative (that is, servicing costs cannot be waived at the issuer's option, although they may be deferred - for example cumulative preference shares); perpetual capital instruments may be included in upper tier two capital; and
- (2) capital which is not perpetual (that is, it has a fixed term) and which may also have fixed servicing costs that cannot generally be either waived or deferred, for example subordinated debt. Such capital should normally be of a medium to long-term maturity (that is, an original maturity of at least five years). Dated capital instruments are included in lower tier two capital.
- 31/12/2004
Deductions from capital
PRU 2.2.8
See Notes
- 31/10/2004
PRU 2.2.9
See Notes
- 31/12/2004
Calculation of capital resources
PRU 2.2.10
See Notes
- 31/10/2004
PRU 2.2.11
See Notes
Liabilities | Assets | ||
Borrowings | 100 | Admissible assets | 350 |
Ordinary shares | 200 | Intangible assets | 100 |
Profit and loss account and other reserves | 100 | Other inadmissible assets | 100 |
Perpetual subordinated debt | 150 | ||
Total | 550 | Total | 550 |
Calculation of capital resources: eligible assets less foreseeable liabilities | |||
Total assets | 550 | ||
less intangible assets | (100) | ||
less inadmissible assets | (100) | ||
less liabilities (borrowings) | (100) | ||
Capital resources | 250 | ||
Calculation of capital resources: components of capital | |||
Ordinary shares | 200 | ||
Profit and loss account and other reserves | 100 | ||
Perpetual subordinated debt | 150 | ||
less intangible assets | (100) | ||
less inadmissible assets | (100) | ||
Capital resources | 250 |
- 31/10/2004
PRU 2.2.12
See Notes
- 31/10/2004
PRU 2.2.13
See Notes
- 31/10/2004
PRU 2.2.14
See Notes
Related text | Included in the calculation of capital resources | |
A √ denotes that the item is included in the calculation of a firm's capital resources: a x denotes that the item is not included in the calculation of a firm's capital resources. | ||
(A) Core tier one capital: | ||
Permanent share capital | PRU 2.2.36 R | √ |
Profit and loss account and other reserves | PRU 2.2.76 R and PRU 2.2.77 R | √ |
Share premium account | None | √ |
Externally verified interim net profits | PRU 2.2.82 R | √ |
Positive valuation differences | PRU 2.2.78 R | √ |
Fund for future appropriations | None | √ |
(B) Perpetual non-cumulative preference shares | ||
Perpetual non-cumulative preference shares | PRU 2.2.50 R | √ |
(C) Innovative tier one capital | ||
Innovative tier one instruments | PRU 2.2.52 R to PRU 2.2.75 R | √ |
(D) Total tier one capital before deductions = A + B + C | ||
(E) Deductions from tier one capital: | ||
Investments in own shares | None | √ |
Intangible assets | PRU 2.2.84 R | √ |
Amounts deducted from technical provisions for discounting and other negative valuation differences | PRU 2.2.78 R to PRU 2.2.81 R | √ |
(F) Total tier one capital after deductions = D - E | ||
(G) Upper tier two capital: | ||
Perpetual cumulative preference shares | PRU 2.2.101 R | √ |
Perpetual subordinated debt | PRU 2.2.101 R | √ |
Perpetual subordinated securities | PRU 2.2.101 R | √ |
(H) Lower tier two capital | ||
Fixed term preference shares | PRU 2.2.108 R | √ |
Fixed term subordinated debt | PRU 2.2.108 R | √ |
Fixed term subordinated securities | PRU 2.2.108 R | √ |
(I) Total tier two capital = G + H | ||
(J) Positive adjustments for related undertakings | ||
Related undertakings that are regulated related undertakings (other than insurance undertakings) | PRU 2.2.90 R | √ |
(K) Total capital after positive adjustments for regulated related undertakings that are not insurance undertakings but before deductions = F + I + J | ||
(L) Deductions from total capital | ||
Inadmissible assets | PRU 2.2.86 R & PRU 2 Annex 1R | √ |
Assets in excess of market risk and counterparty limits | PRU 3.2.22 R | √ |
Related undertakings that are ancillary services undertakings | PRU 2.2.89 R | √ |
Negative adjustments for related undertakings that are regulated related undertakings (other than insurance undertakings) | PRU 2.2.90 R | √ |
(M) Total capital after deductions = K - L | ||
(N) Other capital resources*: | ||
Unpaid share capital or, in the case of a mutual, unpaid initial funds and calls for supplementary contributions | PRU 2.2.126 G to PRU 2.2.128 G | × |
Implicit items | PRU 2 Annex 2 G | × |
(O) Total capital resources after deductions = M + N | ||
* Items in section (N) of the table can be included in capital resources if subject to a waiver under section 148 of the Act. |
- 31/10/2004
Limits on the use of different forms of capital
PRU 2.2.15
See Notes
- 31/10/2004
PRU 2.2.16
See Notes
At least 50% of a firm's MCR must be accounted for by the sum of:
- (1) the amount calculated at stage A of the calculation in PRU 2.2.14 R; and
- (2) notwithstanding PRU 2.2.20 R (1), the amount calculated at stage B of the calculation in PRU 2.2.14 R;
- 31/10/2004
PRU 2.2.17
See Notes
A firm carrying on long-term insurance business must meet the higher of:
- (1) 1/3 of the long-term insurance capital requirement; and
- (2) the base capital resources requirement;
with the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.18
See Notes
A firm carrying on general insurance business must meet the higher of:
- (1) 1/3 of the general insurance capital requirement; and
- (2) the base capital resources requirement;
with the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.19
See Notes
- 31/10/2004
PRU 2.2.20
See Notes
In relation to a firm's tier one capital resources calculated at stage F of the calculation in PRU 2.2.14 R:
- (1) at least 50% must be accounted for by core tier one capital; and
- (2) no more than 15% may be accounted for by innovative tier one capital.
- 31/10/2004
PRU 2.2.21
See Notes
- 31/10/2004
PRU 2.2.22
See Notes
- 31/10/2004
PRU 2.2.23
See Notes
Subject to PRU 2.2.24 R, a firm must exclude from the calculation of its capital resources the following:
- (1) the amount (if any) by which tier two capital resources exceed the amount calculated at stage F of the calculation in PRU 2.2.14 R; and
- (2) the amount (if any) by which lower tier two capital resources exceed 50% of the amount calculated at stage F of the calculation in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.24
See Notes
At least 75% of a firm's MCR must be accounted for by the sum of:
- (1) the amount calculated at stage A plus stage B less stage E of the calculation in PRU 2.2.14 R; and
- (2) the amount calculated at stage G of the calculation in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.25
See Notes
- 31/10/2004
PRU 2.2.26
See Notes
- 31/10/2004
Characteristics of tier one capital
PRU 2.2.27
See Notes
A firm may not include a share in, or another investment in, or external contribution to the capital of, that firm in its tier one capital resources unless it complies with the following conditions:
- (1) it is included in one of the categories in PRU 2.2.28 R;
- (2) it is not excluded by any of the rules in PRU 2.2; and
- (3) it complies with the conditions set out in PRU 2.2.29 R.
- 31/10/2004
PRU 2.2.28
See Notes
The categories referred to in PRU 2.2.27 R (1) are:
- (1) permanent share capital;
- (2) a perpetual non-cumulative preference share; and
- (3) an innovative tier one instrument.
- 31/10/2004
PRU 2.2.29
See Notes
Subject to PRU 2.2.30 R, an item of capital in a firm complies with PRU 2.2.27 R (3) if:
- (1) it is issued by the firm;
- (2) it is fully paid and the proceeds of issue are immediately and fully available to the firm;
- (3) it:
- (a) cannot be redeemed at all or can only be redeemed on a winding up of the firm; or
- (b) complies with the conditions in PRU 2.2.38 R and PRU 2.2.39 R;
- (4) any coupon is either non-cumulative or, if it is cumulative, it complies with PRU 2.2.40 R;
- (5) it is able to absorb losses to allow the firm to continue trading and in the case of an innovative tier one instrument it complies with PRU 2.2.56 R to PRU 2.2.58 R;
- (6) it ranks for repayment upon winding up no higher than a share of a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share);
- (7) the firm has the right to choose whether or not to pay a coupon on it in cash at any time;
- (8) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy PRU 2.2.29 R (1) to PRU 2.2.29 R (7).
- 31/10/2004
PRU 2.2.30
See Notes
- (1) An item of capital does not comply with PRU 2.2.27 R (3) if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could produce the effect described in (2).
- (2) The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.29 R (1) to (8).
- 31/10/2004
PRU 2.2.31
See Notes
- 31/12/2004
PRU 2.2.32
See Notes
- 31/10/2004
PRU 2.2.33
See Notes
- 31/10/2004
PRU 2.2.34
See Notes
- 31/12/2004
PRU 2.2.35
See Notes
A firm may not include a share in its tier one capital resources unless (in addition to complying with the other relevant rules in PRU 2.2):
- (1) (in the case of a firm that is a company as defined in the Companies Act 1985 or the Companies (Northern Ireland) Order 1986) it is "called-up share capital" within the meaning given to that term in that Act or, as the case may be, that Order; or
- (2) (in the case of any other firm) it is:
- (a) in economic terms; and
- (b) in its characteristics as capital (including loss absorbency, permanency, ranking for repayment and fixed costs);
- substantially the same as called-up share capital falling into (1).
- 31/10/2004
Core tier one capital: permanent share capital
PRU 2.2.36
See Notes
Permanent share capital means an item of capital which (in addition to satisfying PRU 2.2.29 R) meets the following conditions:
- (1) it is:
- (a) an ordinary share; or
- (b) a members' contribution; or
- (c) part of the initial fund of a mutual;
- (2) any coupon on it is not cumulative, and the firm has both the right to choose whether or not to pay a coupon and the right to choose the amount of that coupon ; and
- (3) the terms upon which it is issued do not permit redemption and it is otherwise incapable of being redeemed to at least the degree of an ordinary share issued by a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share).
- 31/10/2004
PRU 2.2.37
See Notes
- 31/10/2004
Basic rules about redemption and cumulative coupons
PRU 2.2.38
See Notes
In relation to a perpetual non-cumulative preference share which is redeemable, a firm may not include it in its tier one capital resources unless its contractual terms are such that:
- (1) it is redeemable only at the option of the firm; and
- (2) the firm cannot exercise that redemption right:
- (a) on or before the fifth anniversary of its date of issue;
- (b) unless it has given notice to the FSA in accordance with PRU 2.2.72 R; and
- (c) unless at the time of exercise of that right it complies with PRU 2.1.9 R and will continue to do so after redemption.
- 31/10/2004
PRU 2.2.39
See Notes
In relation to an innovative tier one instrument which is redeemable and which, either:
- (1) is or may become subject to a step-up; or
- (2) satisfies PRU 2.2.54 R (2);
a firm may not include it in its tier one capital resources unless it complies with the conditions in PRU 2.2.38 R, except that in PRU 2.2.38 R (2)(a) "fifth anniversary" is replaced by "tenth anniversary".
- 31/10/2004
PRU 2.2.40
See Notes
- 31/10/2004
PRU 2.2.41
See Notes
- 31/12/2004
Further guidance on redemption
PRU 2.2.42
See Notes
The rules in PRU 2.2 about redemption of potential tier one instruments fall into three classes:
- (1) rules defining whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all;
- (2) rules defining whether a firm's potential tier one instruments are eligible for inclusion in its permanent share capital; and
- (3) rules defining whether a firm's potential tier one instruments must be classified as innovative tier one instruments.
- 31/10/2004
PRU 2.2.43
See Notes
The rules about redemption that are relevant to deciding whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all are as follows.
- (1) PRU 2.2.29 R (3) and PRU 2.2.39 R have the following provisions.
- (a) Any capital instrument that is redeemable at the option of the holder cannot form part of a firm's tier one capital resources. Instead, if it is redeemable at all, a capital instrument should only be redeemable at the option of the firm.
- (b) A redemption right should be exercisable no earlier than the fifth anniversary of the date of issue. However, if an instrument is an innovative tier one instrument which is subject to a step-up or any other economic incentive to redeem, any such redemption should be exercisable no earlier than the tenth anniversary.
- (c) Any redemption proceeds should be payable only in cash or in shares.
- (d) The terms of the capital instrument should provide that any redemption right should not be exercised unless and until the firm has given the notice to the FSA required under PRU 2.2.72 R.
- (e) Any redemption right should not be exercisable unless both before and after the redemption the firm complies with PRU 2.1.9 R (which requires that a firm has sufficient capital resources to meet its capital resources requirement).
- (2) Under PRU 2.2.70 R, a firm should not include a potential tier one instrument that is redeemable in whole or in part in permanent share capital in its tier one capital resources unless the firm has:
- (a) sufficient permanent share capital or sufficient authority to issue permanent share capital (and the authority to allot it) to meet any redemption obligations that have become due; and
- (b) a prudent reserve of permanent share capital or sufficient authority to issue permanent share capital (and the authority to allot it) to meet possible future redemption obligations.
- (3) PRU 2.2.65 R contains limits on the amount of permanent share capital that may be issued on a redemption of a potential tier one instrument redeemable in permanent share capital.
- 31/10/2004
PRU 2.2.44
See Notes
- 31/10/2004
PRU 2.2.45
See Notes
The rules about redemption that are relevant to deciding whether a firm's potential tier one instruments should be classified as innovative tier one instruments are as follows.
- (1) Under PRU 2.2.53 R, a redeemable potential tier one instrument is always treated as an innovative tier one instrument if the redemption proceeds are payable otherwise than in cash.
- (2) Under PRU 2.2.54 R, any feature of a tier one instrument that in conjunction with a call would make a firm more likely to redeem it or to have an incentive to do so will make it an innovative tier one instrument.
- (3) Under PRU 2.2.62 R a step-up coupled with a right of redemption results in a potential tier one instrument being treated as an innovative tier one instrument.
- 31/10/2004
Further guidance on coupons
PRU 2.2.46
See Notes
- 31/10/2004
PRU 2.2.47
See Notes
The rules about coupons that are relevant to deciding whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all are as follows.
- (1) Under PRU 2.2.29 R (4) and PRU 2.2.40 R, any deferred cumulative coupon should only be payable in permanent share capital. If a cumulative coupon is payable on a potential tier one instrument in another form, it should not be included in the firm's tier one capital resources.
- (2) Under PRU 2.2.29 R (7), the firm has the right not to pay a coupon in cash at any time.
- (3) PRU 2.2.63 R says that a potential tier one instrument that may be subject to a step-up that potentially exceeds defined limits should not be included in the firm's tier one capital resources. PRU 2.2.64 R says that any step-up should not arise before the tenth anniversary of the date of issue if it is to be included in the firm's tier one capital resources.
- (4) The provisions of PRU 2.2.70 R summarised in PRU 2.2.43 G (2) also apply to the payment of coupons.
- 31/10/2004
PRU 2.2.48
See Notes
- 31/10/2004
PRU 2.2.49
See Notes
The rules about coupons that are relevant to deciding whether a firm's potential tier one instruments should be classified as innovative tier one instruments are as follows:
- (1) Under PRU 2.2.60 R a potential tier one instrument with a cumulative coupon is an innovative tier one instrument.
- (2) Under PRU 2.2.40 R a potential tier one instrument with a coupon that if deferred must be paid in permanent share capital is an innovative tier one instrument.
- (3) Under PRU 2.2.62 R a step-up coupled with a right of redemption by the firm results in a potential tier one instrument being treated as an innovative tier one instrument.
- 31/10/2004
Perpetual non-cumulative preference shares
PRU 2.2.50
See Notes
A perpetual non-cumulative preference share may be included at stage B of the calculation in PRU 2.2.14 R if:
- (1) it complies with PRU 2.2.29 R, PRU 2.2.35 R and PRU 2.2.38 R;
- (2) any coupon on it is not cumulative, and the firm has the right to choose whether or not to pay a coupon in all circumstances;
- (3) it is not excluded from tier one capital resources by any of the rules in PRU 2.2; and
- (4) it is not an innovative tier one instrument.
- 31/10/2004
PRU 2.2.51
See Notes
- 31/10/2004
Innovative tier one instruments: general rules
PRU 2.2.52
See Notes
- 31/10/2004
PRU 2.2.53
See Notes
- 31/10/2004
PRU 2.2.54
See Notes
If a tier one instrument:
- (1) is redeemable; and
- (2) is issued on terms that are (or its terms are amended and the amended terms are) such that a reasonable person would (judging at or around the time of issue or amendment) think that:
- 31/10/2004
PRU 2.2.55
See Notes
- 31/10/2004
Innovative tier one instruments: loss absorbency
PRU 2.2.56
See Notes
A capital instrument may only be included in innovative tier one capital resources if a firm's obligations under the instrument either:
- (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
- (2) do constitute such a liability but the terms of the instrument are such that:
- (a) any such liability is not relevant for the purposes of deciding whether:
- (i) the firm is, or is likely to become, unable to pay its debts; or
- (ii) its liabilities exceed its assets;
- (b) a creditor (including, but not limited to, a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and
- (c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).
- 31/10/2004
PRU 2.2.57
See Notes
- 31/10/2004
PRU 2.2.58
See Notes
- 31/10/2004
PRU 2.2.59
See Notes
- 31/10/2004
Innovative tier one instruments: Coupons
PRU 2.2.60
See Notes
- 31/10/2004
PRU 2.2.61
See Notes
- 31/10/2004
Innovative tier one instruments and other tier one instruments: step-ups
PRU 2.2.62
See Notes
If:
- (1) a potential tier one instrument is or may become subject to a step-up; and
- (2) that potential tier one instrument is redeemable at any time (whether before, at or after the time of the step-up);
- 31/10/2004
PRU 2.2.63
See Notes
If a potential tier one instrument is or may become subject to a step-up, a firm must not include it in its tier one capital resources if the amount of the step-up exceeds or may exceed;
- (1) 100 basis points; and
- (2) 50% of the initial credit spread.
- 31/10/2004
PRU 2.2.64
See Notes
- 31/10/2004
Innovative tier one instruments: principal stock settlement
PRU 2.2.65
See Notes
A firm must not include a potential tier one instrument that is redeemable in whole or in part in permanent share capital in its tier one capital resources if:
- (1) the conversion ratio as at the date of redemption may be greater than the conversion ratio as at the time of issue by more than 200%; or
- (2) the issue or market price of the conversion instruments issued in relation to one unit of the original capital item (plus any cash element of the redemption) may be greater than the issue price (or, as the case may be, market price) of that original capital item.
- 31/10/2004
PRU 2.2.66
See Notes
In PRU 2.2.65 R to PRU 2.2.69 R:
- (1) the original capital item means the capital item that is being redeemed; and
- (2) the conversion instrument means the permanent share capital issued on its redemption.
- 31/10/2004
PRU 2.2.67
See Notes
In PRU 2.2.65 R to PRU 2.2.69 R, the conversion ratio means the ratio of:
- (1) the number of units of the conversion instrument that the firm must issue to satisfy its redemption obligation (so far as it is to be satisfied by the issue of conversion instruments) in respect of one unit of the original capital item; to
- (2) one unit of the original capital item.
- 31/10/2004
PRU 2.2.68
See Notes
- 31/10/2004
PRU 2.2.69
See Notes
- 31/12/2004
Requirement to have sufficient unissued stock
PRU 2.2.70
See Notes
- (1) This rule applies to a potential tier one instrument of a firm where either:
- (a) the redemption proceeds; or
- (b) any coupon on that capital item;
- can be satisfied by the issue of another tier one instrument.
- (2) A firm may only include an item of capital to which this rule applies in its tier one capital resources if the firm has authorised and unissued tier one instruments of the kind in question (and the authority to issue them):
- (a) that are sufficient to satisfy all such payments then due; and
- (b) are of such amount as is prudent in respect of such payments that could become due in the future.
- 31/10/2004
Notifying the FSA of the issue and redemption of tier one instruments
PRU 2.2.71
See Notes
- 31/10/2004
PRU 2.2.72
See Notes
- 31/12/2004
Non standard capital instruments
PRU 2.2.73
See Notes
- 31/10/2004
Step-ups
PRU 2.2.74
See Notes
In relation to a tier one instrument, a step-up means any change in the coupon rate on that instrument that results in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments. A step-up:
- (1) includes (in the case of a fixed rate) an increase in that coupon rate;
- (2) includes (in the case of a floating rate calculated by adding a fixed amount to a fluctuating amount) an increase in that fixed amount;
- (3) includes (in the case of a floating rate) a change in the identity of the benchmark by reference to which the fluctuating element of the coupon is calculated that results in an increase in the absolute amount of the coupon;
- (4) does not include (in the case of a floating rate) an increase in the absolute amount of the coupon caused by fluctuations in the fluctuating figure by reference to which the absolute amount of the coupon floats.
- 31/10/2004
PRU 2.2.75
See Notes
- 31/10/2004
Profit and loss account and other reserves
PRU 2.2.76
See Notes
- 31/10/2004
PRU 2.2.77
See Notes
- 31/10/2004
Valuation differences
PRU 2.2.78
See Notes
- 31/10/2004
PRU 2.2.79
See Notes
- 31/10/2004
PRU 2.2.80
See Notes
- 31/10/2004
PRU 2.2.81
See Notes
- 31/10/2004
Externally verified interim net profits
PRU 2.2.82
See Notes
- 31/10/2004
PRU 2.2.83
See Notes
- 31/10/2004
Intangible assets
PRU 2.2.84
See Notes
- 31/10/2004
PRU 2.2.85
See Notes
- 31/10/2004
Inadmissible assets
PRU 2.2.86
See Notes
- 31/10/2004
PRU 2.2.87
See Notes
- 31/10/2004
PRU 2.2.88
See Notes
The list of admissible assets has been drawn with the aim of excluding assets:
- (1) for which a sufficiently objective and verifiable basis of valuation does not exist; or
- (2) whose realisability cannot be relied upon with sufficient confidence; or
- (3) whose nature presents an unacceptable custody risk; or
- (4) the holding of which may give rise to significant liabilities or onerous duties.
- 31/10/2004
Adjustments for related undertakings
PRU 2.2.89
See Notes
- 31/10/2004
PRU 2.2.90
See Notes
- 31/10/2004
PRU 2.2.91
See Notes
- 31/10/2004
PRU 2.2.92
See Notes
- 31/10/2004
Additional requirements for a tier one or tier two instrument issued by a firm carrying on with-profits insurance business
PRU 2.2.93
See Notes
A firm carrying on with-profits insurance business must, in addition to the other requirements in respect of capital resources elsewhere in PRU 2.2, meet the following conditions before a capital instrument can be included in the firm's capital resources:
- (1) the firm must manage the with-profits fund so that discretionary benefits under a with-profits insurance contract are calculated and paid disregarding, insofar as is necessary for its customers to be treated fairly, any liability the firm may have to make payments under the capital instrument;
- (2) the intention to manage the with-profits fund on the basis set out in PRU 2.2.93 R (1) must be disclosed in the firm's Principles and Practices of Financial Management; and
- (3) no amounts, whether interest, principal, or other amounts, must be payable by the firm under the capital instrument if the firm's assets would then be insufficient to enable it to declare and pay under a with-profits insurance contract discretionary benefits that are consistent with the firm's obligations under Principle 6.
- 31/10/2004
PRU 2.2.94
See Notes
- 31/10/2004
PRU 2.2.95
See Notes
- 31/10/2004
PRU 2.2.96
See Notes
- 31/10/2004
PRU 2.2.97
See Notes
- (1) Upper tier two instruments must meet the requirements of PRU 2.2.101 R (3) which goes beyond the requirement in PRU 2.2.93 R (3) since it requires a firm to have the option to defer payments in all circumstances, not just if necessary to treat customers fairly. However, for lower tier two instruments, PRU 2.2.93 R (3) represents an additional requirement since a failure to pay amounts of interest or principal on a due date must not constitute an event of default under PRU 2.2.108 R (2) for firms carrying on with-profits insurance business.
- (2) For firms which are realistic basis life firms compliance with PRU 2.2.93 R (3) would usually be achieved if the capital instrument provides that no amounts will be payable under it unless the firm's capital resources exceed its capital resources requirement. However, such firms should ensure that the terms of the capital instrument refer to FSA capital resources requirements in force from time to time, including the current realistic reserving requirements and are not restricted to former minimum capital requirements based only on the Insurance Directives' required minimum margin of solvency. For firms which are not realistic basis life firms, compliance with PRU 2.2.93 R (3) will probably require specific reference to be made to treating customers fairly in the terms of the capital instrument.
- 31/10/2004
Tier two capital
PRU 2.2.98
See Notes
- 31/10/2004
PRU 2.2.99
See Notes
- 31/10/2004
Upper tier two capital
PRU 2.2.100
See Notes
Examples of capital instruments which may be eligible to count in upper tier two capital resources include the following:
- (1) perpetual cumulative preference shares;
- (2) perpetual subordinated debt; and
- (3) other instruments that have the same economic characteristics as (1) or (2).
- 31/10/2004
PRU 2.2.101
See Notes
A capital instrument must meet the following conditions before it can be included in a firm's upper tier two capital resources:
- (1) it must meet the general conditions described in PRU 2.2.108 R;
- (2) it must have no fixed maturity date;
- (3) the contractual terms of the instrument must provide for the firm to have the option to defer any interest payment in cash on the debt; and
- (4) the contractual terms of the instrument must provide for the loss-absorption capacity of the debt and unpaid interest, whilst enabling the firm to continue its business.
- 31/10/2004
PRU 2.2.102
See Notes
- 31/10/2004
PRU 2.2.103
See Notes
A capital instrument may only be included in upper tier two capital resources if a firm's obligations under the instrument either:
- (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
- (2) do constitute such a liability but the terms of the instrument are such that:
- (a) any such liability is not relevant for the purposes of deciding whether:
- (i) the firm is, or is likely to become, unable to pay its debts; or
- (ii) its liabilities exceed its assets;
- (b) a creditor (including but not limited to a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and
- (c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).
- 31/10/2004
PRU 2.2.104
See Notes
- 31/10/2004
PRU 2.2.105
See Notes
- 31/10/2004
PRU 2.2.106
See Notes
- 31/10/2004
Lower tier two capital
PRU 2.2.107
See Notes
- 31/10/2004
General conditions for eligibility as tier two capital
PRU 2.2.108
See Notes
A capital instrument must not form part of the tier two capital resources of a firm unless it meets the following conditions:
- (1) the claims of the creditors must rank behind those of all unsubordinated creditors;
- (2) the only events of default must be non-payment of any amount falling due under the terms of the capital instrument or the winding-up of the firm;
- (3) the remedies available to the subordinated creditor in the event of non-payment or other breach of the written agreement or instrument must be limited to petitioning for the winding-up of the firm or proving for the debt and claiming in the liquidation of the firm;
- (4) any events of default and any remedy described in (3) must not prejudice the matters in (1) and (2);
- (5) in addition to the requirement about repayment in (1), the debt must not become due and payable before its stated final maturity date (if any) except on an event of default complying with (2);
- (6) the debt agreement or terms of the capital instrument are governed by the law of England and Wales, or of Scotland or of Northern Ireland;
- (7) to the fullest extent permitted under the laws of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the firm against subordinated amounts included in the firm's capital resources owed to them by the firm;
- (8) the terms of the capital instrument must be set out in a written agreement that contains terms that provide for the conditions set out in (1) to (7);
- (9) the debt must be unsecured and fully paid up;
- (10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9); and
- (11) the firm has obtained a properly reasoned external legal opinion stating that the requirements in (1) to (10) have been met.
- 31/12/2004
PRU 2.2.109
See Notes
- 31/10/2004
PRU 2.2.110
See Notes
- 31/10/2004
PRU 2.2.111
See Notes
- 31/10/2004
PRU 2.2.112
See Notes
- 31/10/2004
PRU 2.2.113
See Notes
- (1) An item of capital does not comply with PRU 2.2.101 R or PRU 2.2.108 R if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could produce the effect described in (2).
- (2) The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.101 R or PRU 2.2.108 R.
- 31/10/2004
PRU 2.2.114
See Notes
- 31/10/2004
PRU 2.2.115
See Notes
- 31/12/2004
PRU 2.2.116
See Notes
A firm must not amend the terms of the debt and the documents referred to in PRU 2.2.108 R (8) unless:
- (1) at least one month before the amendment is due to take effect, the firm has given the FSA notice in writing of the proposed amendment and the FSA has not objected; and
- (2) that notice includes confirmation that the legal opinions referred to in PRU 2.2.108 R (11) and, if applicable, PRU 2.2.105 R and PRU 2.2.111 R, continue in full force and effect in relation to the terms of the debt and documents, notwithstanding any proposed amendment.
- 31/10/2004
PRU 2.2.117
See Notes
- 31/10/2004
Step-ups
PRU 2.2.118
See Notes
In relation to a tier two instrument, a step-up in a coupon rate means:
- (1) (in the case of a fixed rate) an increase in that rate;
- (2) (in any other case) any change in the way that the interest or other payment is calculated that may result in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments.
- 31/10/2004
PRU 2.2.119
See Notes
Where a tier two instrument is subject to one or more step-ups, the first date that a step-up can take effect must be treated, for the purposes of this section, as the instrument's final maturity date if its actual maturity date occurs after that, unless the effect of the step-up or step-ups is to increase the coupon rate at which payments are to be made by no more than:
- (1) 50 basis points in the first ten years of the life of the debt; or
- (2) 100 basis points over the whole life of the debt.
- 31/10/2004
PRU 2.2.120
See Notes
- 31/10/2004
PRU 2.2.121
See Notes
- 31/10/2004
PRU 2.2.122
See Notes
- 31/10/2004
PRU 2.2.123
See Notes
- 31/10/2004
PRU 2.2.124
See Notes
- 31/10/2004
PRU 2.2.125
See Notes
- 31/10/2004
Unpaid share capital or initial funds and calls for supplementary contributions
PRU 2.2.126
See Notes
- 31/10/2004
PRU 2.2.127
See Notes
- 31/12/2004
PRU 2.2.128
See Notes
- 31/10/2004
PRU 2.3
Individual Capital Assessment
- 31/12/2004
Application
PRU 2.3.1
See Notes
PRU 2.3 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.
- 31/12/2004
Purpose
PRU 2.3.2
See Notes
- 31/12/2004
PRU 2.3.3
See Notes
- 31/12/2004
PRU 2.3.4
See Notes
There are two main purposes of 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 capital adequacy assessments by the firm 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 PRU 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.
- 31/12/2004
Main requirements and guidance
PRU 2.3.5
See Notes
- 31/12/2004
PRU 2.3.6
See Notes
- 31/12/2004
PRU 2.3.7
See Notes
- 31/12/2004
PRU 2.3.8
See Notes
- 31/12/2004
PRU 2.3.9
See Notes
- 31/12/2004
PRU 2.3.10
See Notes
- 31/12/2004
PRU 2.3.11
See Notes
A firm to which PRU 2.3.10 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
- (3) the firm's equalisation provisions.
- 31/12/2004
PRU 2.3.12
See Notes
- 31/12/2004
PRU 2.3.13
See Notes
- 31/12/2004
PRU 2.3.14
See Notes
- 31/12/2004
PRU 2.3.15
See Notes
- 31/12/2004
PRU 2.3.16
See Notes
- 31/12/2004
PRU 2.3.17
See Notes
- 31/12/2004
Stress and scenario requirement
PRU 2.3.18
See Notes
- 31/12/2004
Factors to consider when assessing credit risk
PRU 2.3.19
See Notes
- 31/12/2004
PRU 2.3.20
See Notes
In assessing potential credit risk events that may affect the firm's solvency, a firm should allow for:
- (1) the financial effect of non-payment of reinsurance, considering the likelihood both of non-payment of outstanding claims and for the fact that reinsurance cover purchased for underwritten risks may not be effective (that is, offsetting potential liabilities); and
- (2) the financial effect of non-payment of premium debtors such as intermediaries and policyholders.
- 31/12/2004
PRU 2.3.21
See Notes
Some further areas to consider in developing the credit risk stress tests and scenario analyses might include:
- (1) the adequacy of the reinsurance programme and whether it is appropriate for the risks selected by the firm and adequately takes account of the underwriting and business plans of the firm generally;
- (2) the collapse of a reinsurer or several reinsurers on the firm's reinsurance programme and the subsequent impact this may have on the firm's outstanding reinsurance recoveries and IBNR recoveries;
- (3) a deterioration in the creditworthiness of the firm's reinsurers, intermediaries or other counterparties;
- (4) the degree of credit concentration. For example, the degree to which a firm is exposed to a single counterparty or group;
- (5) the degree of concentration of exposure to reinsurers of particular rating grades;
- (6) the prospect of reinsurance rates increasing substantially or reinsurance being unavailable;
- (7) any existing or possible future disputes relating to reinsurance contracts on a pessimistic basis and the extent that they are not already reflected in the value attributed to the reinsurances;
- (8) greater losses from bad debts than anticipated;
- (9) deterioration in the extent and quality of collateral; and
- (10) guarantees given by the insurer of the performance of others, whether under contracts of insurance or otherwise.
- 31/12/2004
Factors to consider when assessing market risk
PRU 2.3.22
See Notes
- 31/12/2004
PRU 2.3.23
See Notes
In assessing potential market risk events that may affect the firm's solvency, a firm should allow for:
- (1) reduced market values of investments;
- (2) variation in interest rates and the effect on the market value of investments;
- (3) a lower level of investment income than planned; and
- (4) the possibility of counterparty defaults.
- 31/12/2004
PRU 2.3.24
See Notes
Some further areas to consider in developing the market risk scenario might include:
- (1) the possibility of a severe economic or market downturn or upturn leading to adverse interest rate movements affecting the firm's investment position;
- (2) unanticipated losses and defaults of issuers;
- (3) price shifts in asset classes, and their impact on the entire portfolio;
- (4) inadequate valuation of assets;
- (5) the direct impact on the portfolio of currency devaluation, as well as the effect on related markets and currencies;
- (6) extent of any mismatch of assets and liabilities, including reinvestment risk;
- (7) the impact on the portfolio value of a dramatic change in the spread between a market index of interest rates and the risk-free interest rates; and
- (8) the extent to which market moves could have non-linear effects on values, such as derivatives.
- 31/12/2004
Factors to consider when assessing liquidity risk
PRU 2.3.25
See Notes
- 31/12/2004
PRU 2.3.26
See Notes
PRU 5.1 (liquidity risk systems and controls) contains evidential provisions and guidance on how firms should meet PRU 1.2.22 R for liquidity purposes.
- (1) PRU 5.1.61 E states that a scenario analysis in relation to liquidity risk required under PRU 1.2.35 R should include a cash-flow projection for each scenario tested, based on reasonable estimates of the impact of that scenario on the firm's funding needs and sources.
- (2) PRU 5.1.86 E states that a firm should have a contingency funding plan for taking action to ensure, so far as it can, that in each of the scenarios tested under PRU 1.2.35R (2), it would still have sufficient liquid financial resources to meet liabilities as they fall due.
- 31/12/2004
PRU 2.3.27
See Notes
- 31/12/2004
PRU 2.3.28
See Notes
Some further areas to consider in developing the liquidity risk scenario might include:
- (1) any mismatching between expected asset and liability cash flows;
- (2) the inability to sell assets quickly;
- (3) the extent to which the firm's assets have been pledged;
- (4) the cash-flow positions generally of the firm and its ability to withstand sharp, unexpected outflows of funds via claims, or an unexpected drop in the inflow of premiums; and
- (5) the possible need to reduce large asset positions at different levels of market liquidity, and the related potential costs and timing constraints.
- 31/12/2004
Factors to consider when assessing operational risk
PRU 2.3.29
See Notes
- 31/12/2004
PRU 2.3.30
See Notes
- 31/12/2004
PRU 2.3.31
See Notes
Examples of some issues that a firm might want to consider include:
- (1) the likelihood of fraudulent activity occurring that may impact upon the financial or operational aspects of the firm;
- (2) the obligation a firm may have to fund a pension scheme for its employees;
- (3) the technological risks that the firm may be exposed to regarding its operations. For example, risks relating to both the hardware systems and the software utilised to run those systems;
- (4) the reputational risks to which the firm is exposed. For example, the impact on the firm if the firm's brand is damaged resulting in a loss of policyholders from the underwriting portfolio;
- (5) the marketing and distribution risks that the firm may be exposed to. For example, the dependency on intermediary business or a firm's own sales force;
- (6) the impact of legal risks. For example a non-insurance related legal action being pursued against the firm;
- (7) the management of employees - for instance staff strikes, where dissatisfied staff may withdraw goodwill and may indulge in fraud or acts giving rise to reputational loss;
- (8) the resourcing of key functions such as the risk management function by staff in appropriate numbers and with an appropriate mix of skills such as underwriting, claims handling, accounting, actuarial and legal expertise.
- 31/12/2004
PRU 2.3.32
See Notes
- 31/12/2004
Factors to consider when assessing insurance risk
PRU 2.3.33
See Notes
As a result of the differences between the nature of general and long-term insurance business, some aspects of the risk assessment vary depending on the type of business written. In assessing potential insurance risk events that may affect the firm's solvency, general and long-term insurance business firms should:
- (1) analyse the potential for catastrophic losses, including both risk and event losses, the cost of reinstatement premiums and any possible reinsurance exhaustion; and
- (2) determine the likelihood of any other feature of insurance risk that may lead to a variation in projected outcomes.
- (3) Firms carrying on general insurance business should in addition:
- (a) analyse the potential for claims reserves to deteriorate beyond the current reserving level; and
- (b) determine the effect of loss ratios being higher than planned by analysing historic loss ratio experience and volatility.
- (4) Firms carrying on long-term insurance business should in addition:
- (a) analyse the potential for mathematical reserves subsequently to prove inadequate compared with the current reserving level; and
- (b) determine the effect of claims experience being more costly than planned by analysing historic claims experience, volatility and trends in experience.
- 31/12/2004
PRU 2.3.34
See Notes
Some further areas to consider in developing the insurance risk scenario might include:
- (1) For underwriting risks, general insurance business and long-term insurance business firms:
- (a) the adequacy of the firm's pricing. For example, the firm should be able to satisfy itself that it can charge adequate rates, taking into account the business and the risk profile of different products, the business environment (e.g. premium cycle-non-life) and its own internal profit targets;
- (b) the uncertainty of claims experience;
- (c) the dependence on intermediaries for a disproportionate share of the insurer's premium income; the effects of a high level of uncertainty in pricing in new or emerging underwriting markets due to a lack of information needed to enable the insurer to make a proper assessment of the price of the risk; the geographical mix of the portfolio or whether any geographical or jurisdictional concentrations exist;
- (d) the appropriateness of policy wordings;
- (e) the risk of mis-selling, for example, the number of complaints or disputed claims; and
- (f) the tolerance for expense reserve variations or variations in expenses (including indirect costs).
- (2) For firms carrying on general insurance business, in addition:
- (a) the length of tail of the claims development and latent claims; and
- (b) the effects of rapid growth or decline in the volume of the underwriting portfolio.
- (3) For firms carrying on long-term insurance business, in addition:
- (a) the uncertainty of future investment returns;
- (b) the effects of rapid growth or decline in the volume and nature of new business written; and
- (c) the ability of firms to adjust premium rates or charges for some products.
- (4) For reserving and claims risks, both general insurance business and long term insurance business firms:
- (a) the frequency and size of large claims;
- (b) possible outcomes relating to any disputed claims, particularly where the outcome is subject to legal proceedings;
- (c) the ability of the firm to withstand catastrophic events, increases in unexpected exposures, latent claims or aggregation of claims;
- (d) the possible exhaustion of reinsurance arrangements, both on a per risk and per event basis;
- (e) social changes regarding an increase in the propensity to claim and to sue; and
- (f) other social, economic and technological changes.
- (5) For firms carrying on general insurance business:
- (a) the adequacy and uncertainty of the technical claims provisions, such as outstanding claims, IBNR and claims handling expense reserves;
- (b) the adequacy of other underwriting provisions, such as the provisions for unearned premium and unexpired risk reserves;
- (c) the appropriateness of catastrophe models and underlying assumptions used, such as possible maximum loss (PML) factors used;
- (d) unanticipated legal judgements and legal change with retrospective effect specifically with regard to the claims reserves; and
- (e) the effects of inflation.
- (6) For firms carrying on long-term insurance business:
- (a) the adequacy and sensitivity of the mathematical reserves to variations in future experience, including:
- (i) the risk that investment returns differ from those assumed in the reserving assumptions;
- (ii) the risk of variations in mortality, morbidity and persistency experience and in the exercise of options under contracts;
- (iii) the rates of taxation applied, in particular where there is uncertainty over the tax treatment; and
- (b) unanticipated legal judgements and legal change with retrospective effect specifically with regard to the impact on mathematical reserves.
- 31/12/2004
Other assessments of the adequacy of capital resources
PRU 2.3.35
See Notes
- 31/12/2004
PRU 2.3.36
See Notes
- 31/12/2004
PRU 2.3.37
See Notes
Firms may find it helpful for their own assessment process if they also consider divergences from the assumptions described in PRU 2.3.36 G under the headings set out below. These are the areas which the FSA considers when forming its view of the adequacy of a firm's capital resources.
Business risk factors:
- (1) market risk;
- (2) securitisation risk;
- (3) residual risk;
- (4) concentration risk;
- (5) high impact, low probability events; and
- (6) cyclicality and capital planning.
Control risk factors:
- (1) systems and controls.
- 31/12/2004
PRU 2.3.38
See Notes
- 31/12/2004
PRU 2.3.39
See Notes
- 31/12/2004
PRU 2.3.40
See Notes
- 31/12/2004
PRU 2.3.41
See Notes
- 31/12/2004
PRU 2.3.42
See Notes
- 31/12/2004
PRU 2.3.43
See Notes
- 31/12/2004
PRU 2.3.44
See Notes
- 31/12/2004
PRU 2.3.45
See Notes
- 31/12/2004
PRU 2.3.46
See Notes
- 31/12/2004
PRU 2.3.47
See Notes
Systems and controls: a firm may decide to hold additional capital resources to mitigate weaknesses in its overall control environment. Weaknesses might be indicated by the following:
- (1) a failure by the firm to complete an assessment of its systems and controls in line with SYSC 3.1 (Systems and Controls) and PRU 1.4;
- (2) a failure by the firm's senior management to approve its financial results; and
- (3) a failure by the firm to consider an analysis of relevant internal and external information on its business and control environment.
- 31/12/2004
PRU 2.3.48
See Notes
- 31/12/2004
Capital models
PRU 2.3.49
See Notes
- 31/12/2004
PRU 2.3.50
See Notes
- 31/12/2004
PRU 2.3.51
See Notes
There is no prescribed modelling approach for how a firm develops its internal model. However, firms should be able to demonstrate:
- (1) the extent of use of the internal capital model within the firm's capital management policy;
- (2) that sound and appropriate risk-management techniques are employed and are embedded in the daily operations and financial resources requirements of the firm;
- (3) that all material risks to which the firm is exposed have been adequately addressed by quantitative and qualitative means as appropriate;
- (4) the confidence levels set and whether these are linked to the firm's corporate strategy;
- (5) the time horizons set for the different types of business that the firm undertakes;
- (6) the extent of historic data used and back testing carried out; and
- (7) whether sufficient accuracy and validation in the internal capital model has been undertaken.
- 31/12/2004
Quantitative factors
PRU 2.3.52
See Notes
- 31/12/2004
PRU 2.3.53
See Notes
Good models will have as inputs (in addition to the specific examples given under the stress and scenario guidance):
For both firms carrying on general insurance business and long-term insurance business:
- (1) assumed future investment returns. In particular, assumptions for future interest rates (to the extent that they impact on interest income on funds on deposit, price of and yield on fixed stock that may be purchased in future and interest income on variable interest rate assets), equity prices, dividend income, property prices, property rental income and inflation. The assumptions should take account of likely volatility and historic volatility in interest rates and asset prices;
- (2) five-year predictions as to premium rates in each homogeneous category of business taking account of the effect of underwriting cycles;
- (3) predictions of exposures written in each homogeneous category of business in the next five years;
- (4) predictions of premium volume and expected growth under a five year business plan;
- (5) expenses and commission;
- (6) catastrophic events, aggregations of claims and claims affecting more than one class of business;
- (7) inflation in terms of how it might affect future claims, non-settled claims that have occurred to date, future expenses, future reinsurance costs and future investment returns;
- (8) reinsurance programmes in place, allowing for changing term conditions, reinstatements and loss experience features;
- (9) estimates of non-recovery of reinsurance and other debtors taking account of the financial strength of each reinsurance or other counterparty; and
- (10) foreign exchange movements.
- (11) frequency and severity of claims (including costs associated with claims such as professional fees) for each homogeneous category of business, allowing for any impact of future social, legal and inflationary effects (especially concerning price, earnings, medical and claims) on future claims costs;
- (12) settlement patterns of claims and reinsurance recoveries for each homogeneous category of business (including occurred and future claims);
- (13) unintended coverage of risks; and
- (14) correlation between these risks.
- For firms carrying on long-term insurance business in particular:
- (15) projected claims experience for each homogeneous category of business allowing for trends in mortality/ morbidity experience;
- (16) assumptions for future policyholder actions such as lapsing or surrendering a policy, ceasing to pay premiums or choosing to exercise an option under the contract; and
- (17) for business where management has discretion over the level of benefits or charges, assumptions about management reactions to changes in economic conditions and consequent changes to the benefits or charges.
- 31/12/2004
PRU 2.3.54
See Notes
- 31/12/2004
PRU 2.3.55
See Notes
- 31/12/2004
PRU 2.3.56
See Notes
- 31/12/2004
PRU 2 Annex 1
Admissible assets in insurance
- 31/12/2004
See Notes
(1) | Investments
that are, or amounts owed arising from the disposal of: (a)debt securities, bonds
and other money and capital market instruments; (b) loans;(c)shares and other variable
yield participations;(d) units in UCITS schemes, non-UCITS retail schemes, recognised schemes and
any other collective investment
scheme that invests only in admissible assets (including any derivatives or quasi-derivatives held
by the scheme);(e) land, buildings
and immovable property rights;(f) an approved derivative or quasi-derivative transaction
that satisfies the conditions in PRU 4.3.5 R or
an approved stock lending transaction that
satisfies the conditions in PRU 4.3.36 R. |
(2) | Debts
and claims (a)debts owed by reinsurers, including reinsurers' shares of technical provisions;(b)deposits with and debts owed by ceding undertakings;(c) debts owed
by policyholders and
intermediaries arising out of direct and reinsurance operations
(except where overdue for more than 3 months and other than commission prepaid to agents or intermediaries);(d) for general insurance business only,
claims arising out of salvage and subrogation;(e) for long-term insurance business only,
advances secured on, and not exceeding the surrender value of, long-term insurance contracts issued by the insurer;(f) tax recoveries;(g) claims against compensation funds. |
(3) | Other
assets (a) tangible fixed
assets, other than land and buildings;(b) cash at bank
and in hand, deposits with credit institutions and
any other bodies authorised to receive deposits;(c) for general insurance business only, deferred acquisition costs;(d) accrued interest
and rent, other accrued income and prepayments;(e) for long-term insurance business only,
reversionary interests. |
- 31/12/2004
PRU 2 Annex 2
Guidance on applications for waivers relating to implicit items Implicit items under the Act
- 31/12/2004
See Notes
1 | PRU 2.2.14 R does not permit implicit items to be included in the calculation of a firm'scapital resources, except subject to a waiver under section 148 of the Act. Article 27(4) of the Consolidated Life Directive states that implicit items can be included in the calculation of a firm'scapital resources, within limits, provided that the supervisory authority agrees. Certain implicit items, however, are not eligible for inclusion beyond 31 December 2009 (see paragraph 5). The FSA may be prepared to grant a waiver from PRU 2.2.14 R to allow implicit items, in line with the purpose of the Consolidated Life Directive, and provided the conditions as set out in article 27(4) of the Consolidated Life Directive are met. Such a waiver would allow an implicit item to count towards the firm'scapital resources available to count against its capital resources requirement (CRR) set out for realistic basis life firms in PRU 2.1.15 R and for regulatory basis only life firms in PRU 2.1.20 R. Where a firm applies for an implicit item waiver the firm may also apply for a waiver from PRU 2.2.16 R, which requires at least 50% of a firm's MCR to be covered by core tier one capital and perpetual non-cumulative preference shares. Under PRU 2.2.17 R a firm must meet the guarantee fund from the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E of PRU 2.2.14 R. PRU 2.2.17 R addresses the requirement in article 29(1) of the Consolidated Life Directive that implicit items should be excluded from capital eligible to cover the guarantee fund. Where an implicit items waiver is granted, an implicit item may potentially count as either tier one or tier two capital, but not core tier one capital. PRU 2.2.20 R requires that at least 50% of a firm's tier one capital resources must be accounted for by core tier one capital. | ||
2 | Under section 148 of the Act, the FSA may, on the application of a firm, grant a waiver from PRU. There are general requirements that must be met before any waiver can be granted. As explained in SUP 8, the FSA may not give a waiver unless the FSA is satisfied that: | ||
(1) | compliance by the firm with the rules will be unduly burdensome, or would not achieve the purpose for which the rules were made; and | ||
(2) | the waiver would not result in undue risk to persons whose interests the rules are intended to protect. | ||
3 | The FSA will assess compliance with the requirements in the light of all the relevant circumstances. This will include consideration of the costs incurred by compliance with a particular rule or whether a rule is framed in a way that would make compliance difficult in view of the firm's circumstances. For example, the firm may demonstrate that if an implicit item were not allowed, the firm would either have to suffer increased (and unwarranted) costs in injecting further capital resources or operate with a lower equity backing ratio (see case studies in paragraph 43). Even if a firm can demonstrate a case for an implicit item waiver, it should not assume that the FSA will grant the waiver requested, or that any waiver will be granted for the full amount of the implicit item which could be granted, as set out in this annex. The FSA will consider each application on its own merits, and taking into account all relevant circumstances, including the financial situation and business prospects of the firm. | ||
4 | Implicit items are economic reserves which are contained within the long-term insurance business provisions. Article 27(4) of the Consolidated Life Directive identifies three types of implicit item, in respect of: future profits, zillmerisation and hidden reserves. This annex is intended to amplify the guidance in SUP 8 relating to the granting of waivers for implicit items and to provide guidance on other aspects. Whilst this guidance applies to applications for waivers for implicit items generally, for a realistic basis life firm, to the extent that an implicit item is allocated to a with-profits fund, this guidance relates to implicit items for the purposes of determining the regulatory value of assets (see PRU 7.4.24 R). | ||
5 | The Consolidated Life Directive (reflecting the changes introduced by the Solvency 1 Directive) requires member states to end a firm's ability to take into account future profits implicit items by (at the latest) 31 December 2009. Until then, the maximum amount of the implicit item relating to future profits permitted under the Consolidated Life Directive is limited to 50% of the product of the estimated annual profits and the average period to run (not exceeding six years) on the policies in the portfolio. The Consolidated Life Directive further limits the maximum amount of these economic reserves that can be counted to 25% of the lesser of the available solvency margin and the required solvency margin. The changes introduced by the Solvency 1 Directive take effect for financial years beginning on or after 1 January 2004. However, the Consolidated Life Directive allows for a transitional period of five years, which runs from 20 March 2002 (the publication date of the Solvency 1 Directive), for firms to become fully compliant with these new requirements. Firms will need to consider the potential impact of these changes when engaging in future capital planning. When applying for an implicit item waiver a firm should provide the FSA with a plan showing how the firm intends to maintain its capital adequacy over the period to 31 December 2009. Firms should also be aware that the FSA will typically only grant waivers for a maximum of 12 months. | ||
Future Profits | |||
6 | The future profits implicit item allows firms to take credit for margins in the mathematical reserves to the extent that these are expected to emerge from in force business. The future profit from in force business should be assessed, in the first instance, on prudent assumptions, to demonstrate that there is an 'economic reserve'. Having demonstrated that it exists, the amount should be limited to an amount calculated using a formula that takes into account the actual profit which has emerged over the last five years (see paragraph 28). | ||
Zillmerisation | |||
7 | Zillmerisation is an allowance for acquisition costs that are expected, under prudent assumptions, to be recoverable from future premiums. Firms can make a direct adjustment to their reserves for zillmerisation, subject to the rules on mathematical reserves. However, where no such adjustment has been made, the FSA will consider an application for a waiver to take into account an implicit item. | ||
Hidden reserves | |||
8 | Hidden reserves are reserves resulting from the underestimation of assets (other than mathematical reserves). | ||
Process for applying for a waiver, including limits applicable when a waiver is granted | |||
9 | This annex sets out the procedures to be followed and the form of calculations and data which should be submitted by firms to the FSA. This guidance should also be read in conjunction with the general requirements relating to the waiver process described in SUP 8. The FSA expects that applications for waivers in respect of future profits and zillmerising will not normally be considered to pass the "not result in undue risk to persons whose interests the rules are intended to protect" test unless the relevant criteria set out in this guidance have been satisfied and an application for such a waiver may require further criteria to be satisfied for this test to be passed. As set out below, waivers in respect of either zillmerising or hidden reserves will not normally be given except in very exceptional circumstances. | ||
Timing | |||
10 | A long-term insurer may apply to the FSA for a waiver in respect of implicit items. A waiver will not apply retrospectively (see SUP 8.3.6 G). Consequently, applications intended for a particular accounting reference date will normally need to be made well before that reference date. Applications by firms must be made to the FSA in writing and include the relevant details specified under SUP 8.3.3 D. Given the uncertainty in predicting the future, waivers will normally be granted for a maximum of 12 months at a time and any further applications will need to be made accordingly. | ||
11 | The information that will be required to enable an application to be considered as set out below, should normally include a demonstration of how the capital resources requirement is to be met, with and without the waiver. Clearly, up-to-date information may not be available before the financial year-end. In some cases information from the previous year-end's return may be used, as long as any known significant changes in the structure of the firm, or the assumptions used, have been taken into account. | ||
12 | If the application for a waiver is granted, when a firm submits its next return the amount of the implicit item shown should not exceed that supported by the firm's calculations as at the valuation date. In the event that the amount of the future profits item calculated by the firm based on these updated assumptions is less than the amount calculated at the time of the firm's waiver application, the lower figure should be used in the return. | ||
13 | An implicit item in respect of zillmerising or hidden reserves is related to the basis on which liabilities or assets have been valued. In the case of hidden reserves, as explained below, the granting of a waiver will be dependent on the overall capital resources of the firm. Waivers in respect of these implicit items will, therefore, only be made in relation to the position shown in a particular set of returns and it will be essential for firms to submit applications to the FSA well in advance of the latest date for the submission of the relevant return. | ||
14 | Waivers may be withdrawn by the FSA at any time (e.g. where the FSA considers the amount in respect of which a waiver has been given can no longer be justified). This may be as a result of changes in the firm's position or as a result of queries arising on scrutiny of the returns. | ||
Information to be submitted | |||
15 | An application for a waiver (which includes an application for an extension to or other variation of a waiver) should be prepared using the standard application form for a waiver (see SUP 8 Annex 2D). In addition, the application should be accompanied by full supporting information to enable the FSA to arrive at a decision on the merits of the case. In particular, the application should state clearly the nature and the amounts of the implicit items that a firm wishes to count against its capital resources requirement and the treatment it proposes to adopt in counting the implicit items towards the firm's capital resources. Furthermore, the application should demonstrate that in allowing for implicit items there has been no double counting of future margins and that the basis for valuing such margins is prudent. | ||
16 | The FSA recognises that the assessment of the insurance technical provisions reflects the contractual obligations of the firm. Implicit items are therefore margins over and above an economic assessment in these technical provisions only. Non-contractual "constructive" obligations arising from a firm's regulatory duty to treat customers fairly e.g. regarding future terminal bonuses, are not fully captured by the technical provisions. A firm must instead be satisfied that it has sufficient capital resources at all times to meet its obligations under Principle 6. The granting of a waiver for an implicit item does not in any way detract from this requirement and a firm will need to be satisfied that this condition is still met. | ||
17 | As a minimum, applications for a future profits implicit item should be supported by the information contained in Forms 13, 14, 18, 19, 40, 41, 42, 48, 49, the answers to questions 1 to 12 of the abstract of the valuation report, Appendix 9.4 of IPRU(INS), the abstract of the valuation report for the realistic valuation, Appendix 9.4A of IPRU(INS) and Forms 51, 52, 53, 54 and 58. For a zillmerisation implicit item, only those items noted above forming part of the abstract valuation report will normally be needed. Applications for a waiver in respect of a hidden reserves implicit item will normally be considered only if accompanied by the information which is contained in the annual regulatory returns. In particular, the balance sheet forms, long-term insurance business revenue accounts, and abstract of the valuation report as set out in Appendices 9.1, 9.3 and 9.4 of IPRU(INS) should be provided. This is not to say that a full regulatory return must be provided in the specified format, simply that the information contained in these forms should be provided. Where appropriate, the information may be summarised. | ||
18 | The
following supporting information relating to the calculation of the amounts
claimed should be supplied for each type of implicit item in respect of which a waiver is sought: Future profits: in addition to information related to the prospective calculation and retrospective calculation described below, the profits reported in each of the last five financial years up to the date of the most recent available valuation under rule 9.4 of IPRU(INS) which has been submitted to the FSA prior to, or together with, the application, and the amounts and nature of any exceptional items left out of account; the method used for calculating the average period to run and the results for each of the main categories of business, both before and after allowing for premature termination (where the calculation has been made in two stages); and the basis on which this allowance has been made. Zillmerising: the categories of contracts for which an item has been calculated and the percentages of the relevant capital sum in respect of which an adjustment has been made. Hidden reserves: particulars, with supporting evidence, of the undervaluation of assets for which recognition is sought. | ||
Continuous monitoring by firms | |||
19 | Firms should take into account any material changes in financial conditions or other relevant circumstances that may have an impact on the level of future profits that can prudently be taken into account. Firms should also re-evaluate whether an application to vary an implicit item waiver should be made whenever circumstances have changed. In the event that circumstances have changed such that an amendment is appropriate, the firm must contact the FSA as quickly as possible in accordance with Principle 11. (See SUP 8.5.1 R). In this context, the FSA would expect notice of any matter that materially impacts on the firm's financial condition, or any waivers granted. | ||
Future profits - factors to take into account when submitting calculations to support waiver applications | |||
20 | Where an application is made in respect of a firm which has separate with-profits funds and non-profit funds, the firm should ensure that the capital resources requirement in respect of the non-profit fund is not covered by future profits attributable to policyholders arising in the with-profits fund. Furthermore, for a realistic basis life firm the amount of the implicit item allocated to each with-profits fund should be calculated separately, as the amount allocated to each with-profits fund will be taken into consideration in the calculation of the with-profits insurance capital component (see PRU 7.4.24 R). | ||
21 | Firms need to assess prospective future profit (i.e. how much can reasonably be expected to arise) and compare this to maximum limits (in article 27(4) of the Consolidated Life Directive), which relate to past profits. | ||
Future profits - prospective calculation | |||
22 | The application for a waiver should be supported by details of a prospective calculation of future profits arising from in-force business. The information supplied to the FSA should include a description of the method used in the calculation and of the assumptions made, together with the results arising. From 31 December 2009 at the latest, future profits implicit items will no longer be permitted under the Consolidated Life Directive. Where a firm first applies for an implicit items waiver after PRU 2.2 comes into effect, under the prospective calculation a firm should only take into consideration future profits that are expected to emerge in the period up to 31 December 2009. Implicit item waivers granted before PRU 2.2 comes into effect will continue to operate under the terms of those waivers, but an application to vary the terms of such a waiver, for example to extend the effective period, is an application for a new waiver for which a firm should usually only take into consideration future profits that are expected to emerge in the period up to 31 December 2009. | ||
Assumptions | |||
23 | The assumptions made should be prudent, rather than best estimate, assumptions of future experience (that is, the prudent assumptions should allow for the fair market price for assuming that risk including associated expenses). In particular, it would not normally be considered appropriate for the projected return on any asset to be taken to be higher than the risk-free yield (that is, assessed by reference to the yield arrived at using a model of future risk free yields properly calibrated from the forward gilts market). It may also be appropriate to bring future withdrawals into account on a suitably prudent basis. For with-profits business, the assumptions for future investment returns should not capitalise future bonus loadings except where the with-profits policyholders share in risks other than the investment performance of the fund. Furthermore, the rate at which future profits are discounted should include an appropriate margin over a risk free rate of return. Calculations should also be carried out to demonstrate that the prospective calculation of the future profits arising from the in-force business supporting the application for the implicit item would be sufficient to support the amount of the implicit item under each scenario described for use in determining the resilience capital requirement - where the waiver relates to an implicit item allocated to more than one fund, this should be demonstrated separately for that element of the implicit item allocated to each fund. For an implicit item allocated to a with-profits fund, proper allowance should be made for any shareholder transfers to ensure that the implicit item is not supported by future profits which will be required to support those transfers. To the extent, if any, that future profits are dependent on the levying of explicit expense related charges (for example as in the case of unit-linked business) the documentation submitted should include a demonstration of the prudence of the assumptions made as to the level at which future charges will be levied and expenses incurred. | ||
Other limitations on the extent to which waivers for implicit items will be granted to a realistic basis life firm | |||
24 | Where a waiver in respect of an implicit item is granted to a realistic basis life firm additional limits may apply by reference to a comparison of realistic excess capital and regulatory excess capital including allowance for the effect of the waiver. Where the waiver relates to an implicit item allocated partly or entirely to a with-profits fund, the waiver will contain a limitation to the effect that the regulatory excess capital for that with-profits fund, allowing for the effect of the waiver, may not exceed that fund's realistic excess capital. This limitation will apply on an ongoing basis so that, for example, in the case of an implicit item allocated to a with-profits fund, the amount of the implicit item would be limited to zero whenever the regulatory excess capital exceeded the realistic excess capital of that fund. | ||
Other charges to future profits | |||
25 | To avoid double counting, no account should be taken of any future surplus arising from assets corresponding to explicit items which have been counted towards the capital resources requirement such as shareholders funds, surplus carried forward or investment reserves. Deductions should be made in the calculation of future surpluses for the impact of any other arrangements which give rise to a charge over future surplus emerging (e.g. financial reinsurance arrangements, subordinated loan capital or contingent loan agreements). Deductions should also be made to the extent that any credit has been taken for the purposes of PRU 7.4.45 R (2)(c) for the present value of future profits relating to non-profit business written in a non-profit fund. The information supplied to the FSA should identify the amount and reason for any adjustments made to the calculation of the prospective amount of future profits. | ||
26 | The firm should confirm to the FSA that the calculations have been properly carried out and that there are no other factors that should be taken into account. | ||
Future profits - retrospective calculation | |||
Overriding limit | |||
27 | The maximum amount of the implicit item relating to future profits permitted under the Consolidated Life Directive is 50% of the product of the estimated annual profit and the average period to run (not exceeding six years (ten years during the transitional period referred to in paragraph 5)) on the policies in the portfolio. Article 27(4) of the Consolidated Life Directive also imposes a further limit on the amount of the implicit item equal to 25% of the lower of: | ||
(1) | the firm's capital resources; and | ||
(2) | the higher of its base capital resources requirement for long-term insurance business and its long-term insurance capital requirement. | ||
Once the transitional period set out in article 71(1) of the Consolidated Life Directive has expired in 2007 (see paragraph 5), the FSA will not allow a waiver for more than the amount permitted by article 27(4) of the Directive. | |||
Definition of profits | |||
28 | The estimated annual profit should be taken as the average annual surplus arising in the long-term insurance fund over the last five financial years up to the date of the most recent available valuation which has been submitted to the FSA prior to, or together with, the application. For this purpose, deficiencies arising should be treated as negative surpluses. Where a firm's financial year has altered, the surplus arising in a period falling partly outside the relevant five year period should be assumed to accrue uniformly over the period in question for the purpose of estimating the profits arising within the five year period. When there has been a transfer of a block of business into the firm (or out of the firm) during the period, the impact of the transfer will need to be taken into account to reflect the remaining portfolio. | ||
29 | Where a firm has been carrying on long-term insurance business for less than 5 years, the total profits made during the past five years should be taken to be the aggregate of any surpluses that have arisen during the period in which long-term insurance business has been carried on less any deficiencies that may have arisen during that period. The resulting total should still be divided by five to obtain the estimated annual profit. | ||
Exceptional items | |||
30 | Substantial items of an exceptional nature should be excluded from the calculation of the estimated annual profit. Such items include profits arising from an exceptional change in the value at which assets are brought into account, where this is not reflected in a similar change in the amount of the liabilities, and profits arising from a change in the overall valuation approach between one year and another. An exceptional loss (i.e. a reduction of an exceptional nature in the surplus arising) may be excluded from the calculation only to the extent that it can be set against a profit or profits up to the amount of the loss and arising from a similar cause. It is not intended, however, that any adjustment should be made for the effect on surplus of a net strengthening of reserves for costs associated with an expansion of the business or for special capital expenditure, such as the purchase of computer systems. | ||
Double counting | |||
31 | The inclusion of investment income arising from the assets representing the explicit components of capital resources (as part of the estimated annual profit for the purpose of determining the future profits implicit item) would result in double-counting. If those assets were required to meet the effects of adverse developments, this would automatically result in the cessation of the contribution to profits from the associated investment income. It would clearly not be appropriate for the FSA to grant a waiver which would enable a firm to meet the capital resources requirement on the basis of counting both the capital values of the assets and the value of the income flow which they can be expected to generate. | ||
32 | The definition of the estimated annual profit as the surplus arising in the long-term insurance fund ensures that any contribution to surplus arising from transfers from the profit and loss account, including investment income on shareholders' assets, is not included in the estimated annual profit. Thus double-counting should not arise in respect of shareholders' assets. Double-counting may arise, however, in respect of the investment income from the assets representing the explicit components of capital resources carried within the long-term insurance fund (e.g. surplus carried forward or investment reserves), but the amount of such investment income is not separately identified in the return. | ||
33 | Where there is reason to suspect that the elimination of any such double-counting would reduce a firm's capital resources to close to or below the required level, or would otherwise be significant, the FSA will request this information with a view to taking account of this factor in determining the amount of the implicit item. Additional information concerning investment income should be furnished with an application for a waiver, if a firm believes that any double-counting would fall into one of the categories mentioned above. | ||
Average period to run | |||
34 | The average number of years remaining to run on policies should be calculated on the basis of the weighted average of the periods for individual contracts of insurance, using as weights the actuarial present value of the benefits payable under the contracts. A separate weighted average should be calculated for each of the various categories of contract and the results combined to obtain the weighted average for the portfolio as a whole. Approximate methods of calculation, which the firm considers will give results similar to the full calculation, will be accepted. In particular, the FSA will normally accept the calculation of an average period to run for a specific category of contract on the basis of the average valuation factor for future benefits derived from data contained in the abstract of the valuation report in the regulatory returns. A firm will be asked to demonstrate the validity of the method adopted only where an abnormal distribution of the business in force gives grounds for doubt about its accuracy. | ||
35 | Calculations will normally be requested only for the main categories of insurance business, accounting for not less than 90% of the mathematical reserves, except where there are grounds for expecting that the exclusion of certain categories of policies under this provision might have a significant effect on the resulting average period to run. Detailed calculations will not be required where a waiver is sought in respect of a low multiple of the annual profits, well within the average period to run for the firm. | ||
36 | Where, for a particular category of business, a method of valuation is used which does not involve the calculation of the value of future benefits and which is significant for the firm in question, the calculation of the average period to run should be based on estimates of the value of future benefits. | ||
Premature termination of contracts | |||
37 | Allowance should be made for the premature termination of contracts of insurance, based on the actual experience of the firm over the last five years, or other appropriate period, and taking into account specific features of contracts such as options which can be expected to lead to premature termination (e.g. guaranteed surrender values on income bonds written as long-term insurance contracts and option dates on flexible whole-life contracts). The adjustment should be made separately for each of the main categories of business. The use of industry-wide rates of termination will be acceptable where a firm is satisfied that this will result in sufficient allowance being made having regard to the firm's own experience. Methods of calculation that involve a degree of approximation will be permitted. | ||
38 | For certain types of contract, where the period left to run is most naturally defined as the term to a fixed maturity or expiry date, the allowance for premature termination should also take into account terminations resulting from death. | ||
Overall limit | |||
39 | The overall average period left to run calculated as described above should be limited to a maximum of six years under article 27(4) of the Consolidated Life Directive (or a maximum of ten years during the transitional period referred to in paragraph 5) before applying it to the estimated annual profit in order to determine the maximum value of the future profits implicit item. | ||
Definition of period to run | |||
40 | The definition of the period to run and the basis of the allowance for early termination should clearly be considered together. For certain types of contracts (e.g. pension contracts with a range of retirement ages or other options), there is inherent uncertainty about the likely term to run. In such circumstances any estimate for determining the amount of the future profits implicit item for which a waiver is sought should be based on prudent assumptions tending, if anything, to underestimate the average period to run. | ||
Zillmerising | |||
41 | The FSA does not normally expect to grant waivers permitting implicit items due to zillmerisation except in very exceptional circumstances. Zillmerisation is an allowance for acquisition costs that are expected, under prudent assumptions, to be recoverable from future premiums. Firms can make a direct adjustment to their reserves for zillmerisation, subject to the requirements on mathematical reserves set out in PRU 7.3.43 R, and this is the usual approach. However, where no such adjustment has been made, or where the maximum adjustment has not been made in the mathematical reserves, the FSA will consider an application for an implicit item, if the amount is consistent with the amount that would have been allowed as an adjustment to mathematical reserves under PRU 7.3.43 R. | ||
Hidden reserves | |||
42 | The FSA will grant waivers permitting implicit items due to hidden reserves only in very exceptional circumstances. These items relate to hidden reserves resulting from the underestimation of assets. The rules for the valuation of assets and liabilities (see PRU 1.3) which apply to assets and liabilities other than mathematical reserves are based on the valuation used by the firm for the purposes of its external accounts, with adjustments for regulatory prudence such as concentration limits for large holdings, and would not normally be expected to contain hidden reserves. | ||
Case studies on "unduly burdensome" | |||
43 | Some examples of situations where the existing rules might be considered to be unduly burdensome are given below: | ||
• | A firm writes with-profits business. The firm's investment policy is affected by its published financial position. Application of the rules without an implicit item would result in the firm adopting a lower equity backing ratio. It may be possible to demonstrate that, in the circumstances, it would be unduly burdensome to require the firm to incur costs (which might prejudice policyholders) resulting from the lower equity backing ratio, rather than take allowance for an implicit item. | ||
• | A firm has purchased a block of in-force business, on which the future profits may be reasonably estimated. However, this asset is given no value under the rules. It may be possible to demonstrate that it is unduly burdensome for the firm to recognise the cost of acquiring the assets whilst giving no value to the asset acquired. | ||
• | A firm has a block of in-force business, on which the future profits may be reasonably estimated. Application of the rules without an implicit item would result in a need to obtain additional capital. It may be possible to demonstrate that it is unduly burdensome, having regard to the particular circumstances of the firm, to require it to incur the costs involved in the injection of further capital rather than take allowance for an implicit item. | ||
• | A firm has purchased matching assets for guaranteed annuity liabilities. The operation of the asset and liability valuation rules leads to statutory losses in certain circumstances in spite of good matching of assets and liabilities on a realistic basis of assessment. It may be possible to demonstrate that it is unduly burdensome to require the firm to incur the costs involved in the injection of further capital rather than take allowance for an implicit item. | ||
Conditions which will typically be applied to implicit items waivers | |||
Limits | |||
44 | Where implicit items waivers are granted, the value cannot exceed (and will normally be less than) the monetary limits described in paragraph 27, except that during the transitional period the pre-Solvency I limits will apply. In addition, time limits will apply and waivers will normally only last for 12 months. | ||
Publicity | |||
45 | The FSA will publish the waiver (see SUP
8.6 and SUP 8.7).
Public disclosure is standard practice unless the FSA is satisfied that publication is inappropriate
or unnecessary (see section 148 of the Act).
Any request that a direction not be published should be made to the FSA in writing with grounds
in support, as set out in SUP 8.6. Disclosure of a waiver will normally be required in the firm's annual returns. |
- 31/12/2004
PRU 2 Annex 3
- 31/12/2004
See Notes
Annex 3G | ||
A1 | This annex provides an illustrative qualitative example of how a small firm could undertake its stress and scenario analysis without this being disproportionate to the size and complexity of its business so as to comply with PRU 1.2.35 R. For these reasons, the example does not provide any quantitative guidance as we believe this would be impractical given the diverse nature of each firm's individual circumstances. | |
A2 | This example is based on guidance contained in PRU 2.3. The areas discussed are not exhaustive and it is likely that in practice a firm will need to consider a range of other issues. | |
A3 | The scenarios that the firm generates as part of its analysis should aim to reflect the degree of risk in a variety of areas. How extreme these scenarios are will influence the ultimate level of capital required by the firm. The firm should not necessarily develop scenarios based on the current trading or economic conditions, but on possible trading or economic conditions that could occur during the next three to five years. | |
A4 | In addition to examining its event scenarios, a firm should also be able to meet any individual risk (however unlikely) that it has accepted (or proposes to accept through its business plan) from policyholders. It therefore should analyse its exposures and ensure that it has sufficient capital or available reinsurance to cover its largest individual risks and accumulations. | |
Worked example | ||
Background | ||
A5 | The firm used for this example is an insurer carrying on general insurance business within a large group, writing predominantly personal lines, household and motor policies of approximately £25m gross written premium. This business has a reasonable geographical spread, sourced significantly from within the United Kingdom. The firm has purchased appropriate reinsurance cover from a variety of reinsurers and has a demonstrated record of utilising this cover. Its settlement pattern for claims averages three years, however, there is a small element of the account with longer tail liability claims. The firm's investments and IT support are outsourced. | |
Insurance risk | ||
A6 | The risk of incorrect or inaccurate pricing of business over the scenario period can be addressed by examining typical uncertainties within the pricing basis and the volatility of claims experience. | |
A7 | In examining the adequacy of its pricing, the firm establishes its underwriting and claims trend over a ten-year base period by reviewing profit and loss accounts (particularly underwriting profit). In particular it examines the following: | |
(i) | the volatility of losses in a particular line of business; | |
(ii) | whether the loss ratio exceeded 100% in any line of business; and | |
(iii) | whether the deferred acquisition cost (DAC) amount had been written down; e.g. whether an unexpired risk provision (URP) was necessary. | |
A8 | The firm also examines whether its premiums over the last ten years have been: | |
(i) | reasonably stable; | |
(ii) | responsive enough to changes in claim exposures (so that profitability is maintained); | |
(iii) | providing adequately for contingencies (such as major losses e.g. hail, earthquake etc); | |
(iv) | encouraged loss control (through the use of deductibles, no claim bonuses etc); | |
A9 | The firm also reviews its method of pricing. The firm considers and performs the following: | |
(i) | a review of acceptable rates, e.g. premiums being charged by competitors for similar products; | |
(ii) | an examination of whether there have been any difficulties in the past with delegated authorities in relation to pricing including the ability and experience of staff members setting or recommending premium prices; | |
(iii) | an examination of whether the firm has the appropriate mechanisms in place regarding premium rate changes (that is, who makes these decisions, frequency, and on what basis?); and | |
(iv) | a benchmark price assessment (e.g. the ability to provide adequate competitive premium rates). For example, indicative rates being determined through the use of industry statistics, competitor statistics and the firm's own analysis for all classes. | |
A10 | Other factors the firm considers are: | |
(i) | changes in environment (e.g. legislation, social, economic etc); | |
(ii) | changes in policy conditions and deductibles; and | |
(iii) | impact of market segments (e.g. the effects of different claim frequencies and costs impacting the price charged). | |
A11 | Having completed its analysis, the firm makes the following assumptions to define its underwriting risk: | |
(i) | claims costs. The firm assumes these are X% higher than in the premium basis; | |
(ii) | claims inflation. The firm assumes a X% claims inflation over the scenario period, compared to Y% in the pricing basis; | |
(iii) | policy expenses (fixed and variable) are X% higher than anticipated in the pricing basis; | |
(iv) | reinsurance charges are X% higher than anticipated in the pricing basis; and | |
(v) | investment income is X% lower than anticipated in the pricing basis. | |
As a result of the above analysis on a per risk basis, the firm considers that capital of between £X and £Y would cover the possibility of material deviations to projected results. | ||
Allowing for catastrophes | ||
A12 | The allowance for catastrophic events within the insurance risk scenario should reflect both the severity and the frequency of these events. | |
A13 | After considering the catastrophe reinsurance programme it may be clear that the upper limit is set at a level unlikely to be breached e.g. a 1 in 200 year event. Thus, for the purposes of the capital assessment, it would not be necessary to assume losses in excess of this retention. | |
A14 | However, it may be determined that there is possible exhaustion of free reinstatements or of horizontal cover in total. For example, if there were a significant chance of three catastrophic losses in any one period but the reinsurance allowed only one free reinstatement, then the assessment may be to hold two retentions and the entire gross loss for the third event. | |
As a result of the above analysis, the firm considers it appropriate to hold capital sufficient to absorb three catastrophic losses: one European windstorm of £X, one UK flood of £Y, and one large man made explosion of £Z. | ||
The reinsurance structure in place allows for X number of reinstatements at full premium. | ||
Deterioration of reserves | ||
A15 | The firm considers the adequacy of its claims reserves by focussing on the liability valuation. | |
A16 | The liability valuation may contain a range of answers that might indicate possible reserve variability. Also, the valuation will contain areas where judgement has been applied and assumptions formulated which are subjective. These areas are considered and stressed as appropriate. | |
A17 | The firm also reviews the historic level of claims reserves and subsequent level of settlements to help determine the size of any historic levels of under and over reserving. | |
A18 | Reinsurance arrangements are considered and the extent to which these arrangements protect against reserve deterioration is assessed. | |
A19 | For unearned premium, where losses have yet to occur, the firm considers that the level of uncertainty is greater and considers similar factors to those relating to underwriting risk in addition to those discussed above. | |
As a result of the above analysis, the firm considers it appropriate to apply a X% loading to the outstanding claims provision, a Y% loading to the unearned premium provision and Z% to all other liability values. The firm considers that capital of between £X and £Y would adequately cover reserve deterioration. | ||
Credit risk | ||
A20 | Credit risk relates to the risk of default by counterparties. The firm believes its exposure to credit risk results from financial transactions with counterparties including issuers, debtors, borrowers, brokers, policyholders, reinsurers and guarantors. | |
A21 | When assessing credit risk the firm makes an assessment of the creditworthiness of counterparties to the assets of the firm. | |
A22 | The assessment includes an evaluation of the credit risk associated with loans and investment portfolios; the quality of on and off balance sheet assets; the ongoing management of the loans and investment portfolios; as well as loss provisions and reserves. | |
A23 | The firm believes its exposure to credit risk also arises due to its exposure to its reinsurers. In this regard, the firm uses the credit ratings assigned to particular counterparties as a measure of credit risk, most notably Standard & Poor's, Moody's Investors Service and AM Best's (particularly for reinsurers). | |
A24 | When forming an opinion on credit risk the firm considers: | |
Reinsurance | ||
A25 | The firm's strategy is to lessen exposure to a single lead reinsurer to less than 30%, with other participants holding no more than 15%. In all cases, the panel of reinsurers all have a specified rating. The firm has no prior experience of disputes, and their working relationship with the panel may be excellent, and thus the firm does not envisage any future difficulties arising in this regard. | |
A26 | Bond default rates could then be used to assess a likely credit risk figure for reinsurance recoveries (including IBNR recoveries). | |
The firm considers that capital of between £X and £Y would cover reinsurance defaults, with no additional allowance for disputes. | ||
Overseas financial institutions and banks | ||
A27 | The firm investigates its business relationships with overseas financial institution counterparties including banks, and decides no additional allowance is required. | |
Quality of counterparties and trends in counterparty risk | ||
A28 | The firm assesses the level and age of debtors, focussing particularly upon unpaid premiums, especially those greater than three months old, and reviews the level and trend of contingent liabilities. For example, the firm estimates that the credit risk scenario equates to taking a 10% reduction in the asset value of debtors, based on bond default rates and age of debt. | |
The firm considers that capital of between £X and £Y would cover credit risk to counterparties. | ||
Off-balance sheet transactions | ||
A29 | The firm investigates any unfunded commitments, credit derivatives, commercial or standby letters of credit. Where these exist the possibility of a loss on these instruments is considered in relation to the requirement of the credit risk scenario. | |
The firm considers that no additional capital is necessary. | ||
Market risk | ||
A30 | Market risk encompasses an adverse movement in the value of the assets as a consequence of market movements such as interest rates, foreign exchange rates, equity prices, etc. which is not matched by a corresponding movement in the value of the liabilities. | |
A31 | In examining possible market risks, the firm considers its sensitivity to market risk by evaluating the degree to which changes in interest rates, foreign exchange rates, equity prices, or other areas can adversely affect the firm's earnings or capital. | |
A32 | The firm believes its assets and liabilities are approximately matched e.g. there is no existence of large unmatched or unhedged currency positions; short tail business is backed by cash/fixed interest assets of suitable term and long tail business with real assets e.g. shares/property. If mismatching does exist this should be allowed for within the estimate. | |
A33 | In developing the scenario the firm estimates the effect of a X% increase in interest rates on bond values. | |
A34 | Similarly, the firm estimates the effect on equity values of a major recession to estimate the possible reduction in the value of equity capital. Also, it uses a suitable equity index to determine the size of historical falls in equity values and indicate possible future falls. | |
A35 | Counterparty risk might be allowed for by assuming one or several major corporate bond holding defaults. | |
A36 | For all investments, the stability of trading revenues should be examined to determine the volatility of investment. | |
From the above analysis, the firm considers that capital of between £X and £Y would be appropriate to protect it against adverse movement in market risk. | ||
Liquidity risk | ||
A37 | Liquidity risk is the potential that the firm may be unable to meet its obligations as they fall due as a consequence of having a timing mismatch. The firm considers liquidity risk relates to the risk associated with the processes of managing timing relationship between asset and liability cash flow patterns. | |
A38 | When assessing liquidity risk, the firm considers the extent of mismatch between assets and liabilities and the amount of assets held in a highly liquid, marketable form should unexpected cashflows lead to a liquidity crunch. | |
A39 | The price concession of liquidating assets is a prime concern when assessing liquidity risk and is built into the scenario. | |
A40 | In examining the liquidity risk, the firm examines the following: | |
Marketability, quality and liquidity of assets | ||
A41 | The firm considers the assets held and makes an assessment regarding the quality and liquidity of these assets. Even though the assets matched the liabilities, residual risk remains given that timings are uncertain and there is a possibility that assets will be realised at unfavourable times. This is allowed for by assuming a 2.5% reduction in the market value of assets at realisation compared to the current market value. | |
The firm considers that capital of between £X and £Y would cover timing risk to counterparties. | ||
Reliance on new business income | ||
A42 | The firm relies partially upon new business cash flows to meet current liabilities as they fall due. The firm analyses the sensitivity of future cash flow projections and new business assumptions and considers the effect of a reduced level of new business. | |
A43 | The firm finds that it did not have immediate alternatives in place in case these expected new business cash flows were reduced. In this regard, it considers that these sources should be stressed by X%. | |
The firm considers that capital of between £X and £Y would cover possible effects of adjusting the asset portfolio to switch to more liquid assets. | ||
A44 | The firm also examines the volatility and cost of on- and off-balance sheet funding sources. The firm is satisfied that no concerns need to be raised and that there should not be any impact on its liquidity position. | |
A45 | The firm believes it is well placed to manage unplanned changes in funding sources as well as react to changes in market conditions that affect its ability to quickly liquidate assets with minimal loss. The firm assesses that it has reasonable access to money markets and other sources of funding such as lines of credit. | |
A46 | The firm has no previous problems or delays in meeting obligations (or accessing external funding). | |
Overall, from the above analysis, the firm considers that capital of between £X and £Y would be necessary to withstand the effects of deterioration in liquidity. | ||
Governance Risk | ||
A47 | Governance risk relates to the risk associated with the board and/or senior management of the firm not effectively performing their respective roles. | |
A48 | The existence and level of directors and officers insurance in place is investigated compared to known incidence of claims of this type. | |
A49 | The firm assesses whether the current level of governance is appropriate for the firm, and the likelihood that the firm's practices may result in the board and/or senior management not adequately undertaking their roles. The cost of altering and strengthening the current board structure is considered. | |
A50 | In this regard, the firm makes an assessment that it may be reliant on only a few senior executives, and may be exposed if they experience any misadventure. | |
The firm considers that capital of between £X and £Y would cover governance risk. | ||
Strategic Risk | ||
A51 | Strategic risk arises from an inability to implement appropriate business plans and strategies, make decisions, allocate resources or adapt to changes in the business environment. | |
A52 | The firm therefore assesses the prudence and appropriateness of its business strategy in the context of the firm's competitive and economic environment. In particular the assumptions, forecasting and projections are assessed considering the possibility of a fundamental market change due, for example, to higher numbers of competitors, changes in sales channels, new forms of insurance or changes in legislation. This review includes whether the reinsurance programme is appropriate for the risks selected by the firm and whether it adequately takes account of the underwriting and business plans of the firm generally. | |
A53 | The firm considers the likelihood of a fundamental strategic shift too remote to include within the scenario given the maturity of the market in which they operate. | |
Operational risks | ||
A54 | In reviewing the operational risk exposures, the firm has examined its administration, compliance, event, fraud, governance, strategic and technological risks. | |
Administration | ||
A55 | The firm considers the risk of error or failure associated with the administrative aspects of the operation of its business. In this regard, the firm considers likelihood of financial loss and reputation harm due to failure or errors occurring and the likely size of these losses. | |
A56 | None of the firm's administration is out-sourced to service providers. | |
A57 | In undertaking the assessment, the firm considers the history of failure or error from transaction processing or control within the firm. Exception reports are produced on a quarterly basis. Past reports highlighted past administrative deficiencies. The biggest event in the past 10 years related to a situation where claim-handling staff shared access codes to the claims administration system. This resulted in an overpayment to some clients. | |
A58 | The firm also examines the nature and extent of centralised and decentralised functions within the firm. Three branches report regularly to the central office and an appropriate system is in place to record financial information, handle complaints etc. | |
A59 | The firm also reviews the segregation of duties between staff. It is satisfied that an adequate segregation of duties between underwriting claims and payments divisions exist in terms of acceptance, authorisation and payments. It is also satisfied that sufficient interaction between the front, middle and back offices exist in terms of financial control and risk management. For example, it is confident that its guidelines for accepting risks are adequate and that any breach would be picked up by exception reporting. | |
A60 | The firm also investigates the level of staff expertise and training to administer its product range/services. | |
The firm considers that capital of between £X and £Y would cover the risk of future administration issues. | ||
Compliance Risk | ||
A61 | The firm believes its main compliance risk relates to the risk of non-adherence to legislative and internal firm requirements. | |
A62 | An investigation into compliance over the last 10 years finds no history of non-compliance with firm policy and control systems nor have there been any reported areas of non-compliance with legislation or other requirements. | |
A63 | Regulatory reforms including corporate and consumer law are considered and it is assumed that expenses costs will rise as a result of developments in the next 5 years. As a result an additional X% of premium income was assumed for the expense ratio. | |
The firm considers that capital of between £X and £Y would cover the risk of future compliance issues. | ||
Event risk | ||
A64 | Event risk relates to risks associated with the potential impact of significant events (e.g., financial system crisis, major change in fiscal system, natural disaster) on the operations of the firm. | |
A65 | The definition of event risk is not intended to cover events that are directly associated with products and services offered, for example, events which may directly impact on the general insurance business. | |
A66 | The firm concludes that no additional specific allocation is required. | |
Fraud Risk | ||
A67 | Fraud risk relates to the risk associated with intentional misappropriation of funds, undertaken with the objective of personal benefit at the expense of the firm. | |
A68 | In assessing fraud risk, the firm considers the possibility of fraudulent acts occurring within the firm and the extent of controls which management has established to mitigate such acts. | |
A69 | The firm examines fraud issues over a period of 10 years and finds one major incident where it was subject to a fraudulent activity. This involved fraudulent payments being made by a member of staff which resulted in a loss for the firm of £Xm. Based on this previous incident and allowing for improvements in controls, the company assessed a financial figure that it believes is consistent with the probability for this scenario. | |
The firm considers that capital of between £X and £Y would cover the risk of future fraud. | ||
Technology Risk | ||
A70 | The firm considers the risk of error or failure associated with the technological aspects (IT systems) of its operations. Specifically, technology risk refers to both the hardware systems and the software utilised to run those systems. | |
A71 | In relation to the firm's information systems, the firm assesses the past reliability and future functionality and believes them to be adequate. It does not have any future plans to either replace its systems or make major systems modifications. | |
A72 | Concerning business continuity management and disaster recovery planning (and testing of plans), the firm reviews these plans regularly and tests them quarterly. A full back-up site exists with full recovery capabilities. Costs associated with utilising the site and associated business interruption insurance was estimated. | |
The firm considers that capital of between £X and £Y would cover technology risk. | ||
Group risk | ||
A73 | The size of the group risk element within operational risk will depend on the ownership structure of the firm and how it is funded by the parent. | |
A74 | The firm considers the likelihood and financial consequences of both insolvency and credit downgrading of its parent. Given the firm shares the parent's name there is a large risk of association. | |
A75 | The firm considers it within the scope of the scenario to allow for a single downgrade of the parent's credit rating from AA to A. It does not believe the chance of insolvency great enough to allow for directly. | |
A76 | The firm estimates the effect on its business plan and profit margins of the downgrade. It estimates the amount of business lost and the increase in marketing costs required to maintain the client base. It also allows for a change in the pricing basis to incorporate a reduced profit margin (with knock on impacts on the business volume and loss ratios). | |
From the above analysis, the firm considers that capital of between £X and £Y would be required to cover group risks. | ||
Overall assessment | ||
A77 | After individually assessing each risk area, the firm considers the capital that it has estimated might be absorbed under each scenario. In aggregate the range of capital absorbed is between £X and £Y. It considers how many of these scenarios might reasonably occur within a period and the extent to which it could replace capital within that period. It takes into account scenarios which might reasonably be linked, the difficulty with which capital might be replaced if the scenarios occurred, and the changes in strategy which might need to be adopted if the scenarios occurred. | |
A78 | The firm decides that the worst realistic combination of circumstances that might arise would absorb capital of between £A and £B. |
- 31/12/2004
PRU 3
Credit risk
PRU 3.1
Credit risk management systems and controls
- 31/12/2004
Application
PRU 3.1.1
See Notes
- 31/12/2004
PRU 3.1.2
See Notes
PRU 3.1 applies to:
- (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.
- 31/12/2004
Purpose
PRU 3.1.3
See Notes
- 31/12/2004
PRU 3.1.4
See Notes
- 31/12/2004
PRU 3.1.5
See Notes
Credit risk concerns the FSA in a prudential context because inadequate systems and controls for credit risk management can create a threat to the regulatory objectives of market confidence and consumer protection by:
- (1) the erosion of a firm's capital due to excessive credit losses thereby threatening its viability as a going concern;
- (2) an inability of a firm to meet its own obligations to depositors, policyholders or other market counterparties due to capital erosion.
- 31/12/2004
PRU 3.1.6
See Notes
- 31/12/2004
Requirements
PRU 3.1.7
See Notes
High level requirements for prudential systems and controls, including those for credit risk, are set out in PRU 1.4. In particular:
- (1) PRU 1.4.19R (2) requires a firm to document its policy for credit risk, including its risk appetite and how it identifies, measures, monitors and controls that risk;
- (2) PRU 1.4.19R (2) requires a firm to document its provisioning policy. Documentation should describe the systems and controls that it intends to use to ensure that the policy is correctly implemented;
- (3) PRU 1.4.18 R requires it to establish and maintain risk management systems to identify, measure, monitor and control credit risk (in accordance with its credit risk policy), and to take reasonable steps to ensure that its systems are adequate for that purpose;
- (4) In line with PRU 1.4.11 G, the ultimate responsibility for the management of credit risk should rest with a firm's governing body. Where delegation of authority occurs the governing body and relevant senior managers should approve and periodically review systems and controls to ensure that delegated duties are being performed correctly.
- 31/12/2004
Credit risk policy
PRU 3.1.8
See Notes
PRU 1.4.18 R requires a firm to establish, maintain and document a business plan and risk policies. They should provide a clear indication of the amount and nature of credit risk that the firm wishes to incur. In particular, they should cover for credit risk:
- (1) how, with particular reference to its activities, the firm defines and measures credit risk;
- (2) the firm's business aims in incurring credit risk including:
- (a) identifying the types and sources of credit risk to which the firm wishes to be exposed (and the limits on that exposure) and those to which the firm wishes not to be exposed (and how that is to be achieved, for example how exposure is to be avoided or mitigated);
- (b) specifying the level of diversification required by the firm and the firm's tolerance for risk concentrations (and the limits on those exposures and concentrations); and
- (c) drawing the distinction between activities where credit risk is taken in order to achieve a return (for example, lending) and activities where credit exposure arises as a consequence of pursuing some other objective (for example, the purchase of a derivative in order to mitigate market risk);
- (3) how credit risk is assessed both when credit is granted or incurred and subsequently, including how the adequacy of any security and other risk mitigation techniques is assessed;
- (4) the detailed limit structure for credit risk which should:
- (a) address all key risk factors, including intra-group exposures and indirect exposures (for example, exposures held by related and subsidiary undertakings);
- (b) be commensurate with the volume and complexity of activity;
- (c) be consistent with the firm's business aims, historical performance, and its risk appetite;
- (5) procedures for:
- (a) approving new or additional exposures to counterparties;
- (b) approving new products and activities that give rise to credit risk;
- (c) regular risk position and performance reporting;
- (d) limit exception reporting and approval; and
- (e) identifying and dealing with problem exposures caused by the failure or the downgrading of a counterparty;
- (6) the methods and assumptions used for the stress testing and scenario analysis required by PRU 1.2 (Adequacy of financial resources), including how these methods and assumptions are selected and tested;
- (7) the allocation of responsibilities for implementing the credit risk policy and for monitoring adherence to, and the effectiveness of, the policy.
- 31/12/2004
Counterparty assessment
PRU 3.1.9
See Notes
The firm should make a suitable assessment of the risk profile of the counterparty. The factors to be considered will vary according to both the type of credit and the counterparty being considered. This may include:
- (1) the purpose of the credit, the duration of the agreement and the source of repayment;
- (2) an assessment and continuous monitoring of the credit quality of the counterparty;
- (3) an assessment of the claims payment record where the counterparty is a reinsurer;
- (4) an assessment of the nature and amount of risk attached to the counterparty in the context of the industrial sector or geographical region or country in which it operates, as well as the potential impact on the counterparty of political, economic and market changes; and
- (5) the proposed terms and conditions attached to the granting of credit, including ongoing provision of information by the counterparty, covenants attached to the facility as well as the adequacy and enforceability of collateral, security and guarantees.
- 31/12/2004
PRU 3.1.10
See Notes
- 31/12/2004
PRU 3.1.11
See Notes
- 31/12/2004
PRU 3.1.12
See Notes
- 31/12/2004
PRU 3.1.13
See Notes
- 31/12/2004
PRU 3.1.14
See Notes
- 31/12/2004
PRU 3.1.15
See Notes
- 31/12/2004
Credit risk measurement
PRU 3.1.16
See Notes
- 31/12/2004
PRU 3.1.17
See Notes
- 31/12/2004
PRU 3.1.18
See Notes
- 31/12/2004
PRU 3.1.19
See Notes
- 31/12/2004
Risk monitoring
PRU 3.1.20
See Notes
- 31/12/2004
PRU 3.1.21
See Notes
- 31/12/2004
PRU 3.1.22
See Notes
- 31/12/2004
PRU 3.1.23
See Notes
- 31/12/2004
Problem exposures
PRU 3.1.24
See Notes
- 31/12/2004
PRU 3.1.25
See Notes
- 31/12/2004
Provisioning
PRU 3.1.26
See Notes
- 31/12/2004
PRU 3.1.27
See Notes
- 31/12/2004
PRU 3.1.28
See Notes
- 31/12/2004
PRU 3.1.29
See Notes
- 31/12/2004
PRU 3.1.30
See Notes
- 31/12/2004
PRU 3.1.31
See Notes
- 31/12/2004
Risk mitigation
PRU 3.1.32
See Notes
- 31/12/2004
PRU 3.1.33
See Notes
- 31/12/2004
PRU 3.1.34
See Notes
- 31/12/2004
PRU 3.1.35
See Notes
- 31/12/2004
Record keeping
PRU 3.1.36
See Notes
Prudential records made under PRU 1.4.53 R should include appropriate records of:
- (1) credit exposures, including aggregations of credit exposures, as appropriate, by:
- (a) groups of connected counterparties;
- (b) types of counterparty as defined, for example, by the nature or geographical location of the counterparty;
- (2) credit decisions, including details of the decision and the facts or circumstances upon which it was made; and
- (3) information relevant to assessing current counterparty and risk quality.
- 31/12/2004
PRU 3.1.37
See Notes
- 31/12/2004
PRU 3.2
Credit risk in insurance
- 31/12/2004
Application
PRU 3.2.1
See Notes
PRU 3.2 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.
- 31/12/2004
PRU 3.2.2
See Notes
All of PRU 3.2, except PRU 3.2.20 R and PRU 3.2.23 R to PRU 3.2.32 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.
- 31/12/2004
PRU 3.2.3
See Notes
- 31/12/2004
PRU 3.2.4
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.
- 31/12/2004
Purpose
PRU 3.2.5
See Notes
- 31/12/2004
PRU 3.2.6
See Notes
- 31/12/2004
PRU 3.2.7
See Notes
- 31/12/2004
Overall limitation of credit risk
PRU 3.2.8
See Notes
- 31/12/2004
PRU 3.2.9
See Notes
- (1) For the purposes of PRU 3.2, 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 PRU 3.2, 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 PRU 2.2.14 R 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 PRU 3.2.35 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:
- (a) would be realised by the firm were it to exercise its rights in relation to the collateral; and
- (b) does not exceed any of the relevant limits in PRU 3.2.22R (3).
- 31/12/2004
PRU 3.2.10
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;
- (2) exposure from the holding of assets that the firm has deducted from capital resources; and
- (3) exposure in respect of which (and to the extent that) the firm has established a provision.
- 31/12/2004
PRU 3.2.11
See Notes
In assessing the adequacy of diversification required by PRU 3.2.8 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.
- 31/12/2004
PRU 3.2.12
See Notes
- 31/12/2004
PRU 3.2.13
See Notes
In assessing its exposure to a counterparty for the purpose of PRU 3.2.8 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.
- 31/12/2004
PRU 3.2.14
See Notes
In assessing the loss that might result from the default of a counterparty for the purposes of PRU 3.2.8 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.
- 31/12/2004
PRU 3.2.15
See Notes
- 31/12/2004
PRU 3.2.16
See Notes
- 31/12/2004
PRU 3.2.17
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.
- 31/12/2004
PRU 3.2.18
See Notes
- 31/12/2004
PRU 3.2.19
See Notes
- 31/12/2004
Large exposure limits
PRU 3.2.20
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
- (b) a counterparty exposure or asset exposure to an approved credit institution.
- 31/12/2004
PRU 3.2.21
See Notes
- 31/12/2004
Market risk and counterparty limits
PRU 3.2.22
See Notes
- (1) A firm must calculate the amount of the deduction from total capital required by stage L in the Table in PRU 2.2.14 R 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 PRU, whenever:
- (a) a rule in PRU 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's counterparty 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 PRU 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) 5% for that part of the exposure not arising from short term deposits made with an approved credit institution; this limit is increased to 10% if the total of such exposures which exceed 5% is less than 40%;
- (ii) 20% or £2 million if larger for the whole exposure (after deduction of the excess arising from the limit in (b)(i));
- (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, bonds, debt securities and other money market instruments and capital market instruments from the same counterparty that are not dealt in on a regulated market, or any beneficial interest in a collective investment scheme which is not a UCITS scheme, a non-UCITS retail scheme or a recognised scheme; 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 that fall within (c)(ii) whether or not they arise from persons who are closely related, but excluding amounts that are in excess of the limit in (c)(ii);
- (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.
- (4) In (3) a firm's business amount means the sum of:
- (a) the firm's total gross technical provisions;
- (b) the amount of its other liabilities (except those included in the calculation of capital resources in accordance with PRU 2.2.14 R); and
- (c) such amount as the firm may select not exceeding the amount of the firm's total capital after deductions as calculated at stage M of the calculation in PRU 2.2.14 R or, 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 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.
- (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.
- 31/12/2004
Large exposure calculation for reinsurance exposures
PRU 3.2.23
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, excluding capital resources held to cover property-linked liabilities; or
- (2) if (1) does not apply, that it has exceeded this limit.
- 31/12/2004
PRU 3.2.24
See Notes
Upon notification under PRU 3.2.23 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.
- 31/12/2004
PRU 3.2.25
See Notes
- (1) For the purposes of PRU 3.2, 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 PRU 2.2.14 R 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 PRU 3.2.35 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:
- (a) would be realised by the firm were it to exercise its rights in relation to the collateral; and
- (b) does not exceed any of the relevant limits in PRU 3.2.22R (3).
- 31/12/2004
PRU 3.2.26
See Notes
- 31/12/2004
PRU 3.2.27
See Notes
- 31/12/2004
PRU 3.2.28
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:
- (a) 20% of the firm's projected gross earned premiums for that financial year; or
- (b) £4 million.
- (2) Compliance with this provision may be relied upon as tending to establish compliance with PRU 3.2.8 R.
- 31/12/2004
PRU 3.2.29
See Notes
- 31/12/2004
PRU 3.2.30
See Notes
- 31/12/2004
PRU 3.2.31
See Notes
- 31/12/2004
PRU 3.2.32
See Notes
- 31/12/2004
Exposures excluded from limits
PRU 3.2.33
See Notes
In PRU 3.2.20 R and PRU 3.2.22 R, references to a counterparty exposure or an asset exposure do not include such an exposure arising from:
- (1) a debt which is fully secured on assets whose value at least equals the amount of the debt;
- (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;
- (5) deferred acquisition costs;
- (6) 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, PRU 3.2.20 R and PRU 3.2.22 R will nevertheless apply to assets held to cover that guaranteed element;
- (7) moneys due from, or guaranteed by, a Zone A country;
- (8) an approved security;
- (9) a holding in a UCITS scheme.
- 31/12/2004
PRU 3.2.34
See Notes
- 31/12/2004
PRU 3.2.35
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; and
- (2) the assets constituting that collateral would, if owned by the firm, be admissible assets;
- 31/12/2004
PRU 3.2.36
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 PRU 3.2.20 R, PRU 3.2.22 R and PRU 3.2.23 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.
- 31/12/2004
PRU 3.2.37
See Notes
- 31/12/2004
PRU 3.2.38
See Notes
- 31/12/2004
PRU 3.2.39
See Notes
- 31/12/2004
Meaning of closely related
PRU 3.2.40
See Notes
For the purposes of PRU 3.2, a group of persons is closely related if it consists solely of two or more natural or legal 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 PRU 3.2.41 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 PRU 3.2.41 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.
- 31/12/2004
PRU 3.2.41
See Notes
- 31/12/2004
PRU 3.3
Asset-related Capital Requirement
- 31/12/2004
Application
PRU 3.3.1
See Notes
PRU 3.3 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.
- 31/12/2004
PRU 3.3.2
See Notes
- 31/12/2004
PRU 3.3.3
See Notes
- 31/12/2004
PRU 3.3.4
See Notes
- 31/12/2004
Purpose
PRU 3.3.6
See Notes
- 31/12/2004
PRU 3.3.7
See Notes
- 31/12/2004
PRU 3.3.8
See Notes
- 31/12/2004
PRU 3.3.9
See Notes
- 31/12/2004
Calculation of asset-related capital requirement
PRU 3.3.10
See Notes
- 31/12/2004
PRU 3.3.11
See Notes
- (1) The value of each of the firm's assets of a kind listed in the table in PRU 3.3.16 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 PRU 3.2.22 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 PRU 3.3.16 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).
- 31/12/2004
PRU 3.3.12
See Notes
- 31/12/2004
PRU 3.3.13
See Notes
- 31/12/2004
PRU 3.3.14
See Notes
- (1) The asset-related capital charge factor for money market funds set out in the Table PRU 3.3.16 R must be applied to exposures to funds that meet the definition in (2).
- (2) In PRU 3.3 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).
- 31/12/2004
PRU 3.3.15
See Notes
- 31/12/2004
PRU 3.3.16
See Notes
Asset item | ECR asset-related capital charge factor | |||
Investments | Land and Buildings | 7.5% | ||
Investments in group undertakings and participating interests | Shares in group undertakings excluding participating interests | Insurance dependants | 0% | |
Other | 7.5% | |||
Debt securities issued by, and loans to, group undertakings | 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% |
- 31/12/2004
PRU 4
Market risk
PRU 4.1
Market risk management systems and controls
- 31/12/2004
Application
PRU 4.1.1
See Notes
PRU 4.1 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.
- 31/12/2004
PRU 4.1.2
See Notes
PRU 4.1 applies to:
- (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.
- 31/12/2004
PRU 4.1.3
See Notes
- 31/12/2004
Purpose
PRU 4.1.4
See Notes
- (1) The purpose of this section is to amplify PRU 1.4 insofar as it relates to market risk.
- (2) Market risk includes equity, interest rate, FX, commodity risk and interest rate risk on long-term insurance contracts. The price of financial instruments may also be influenced by other risks such as spread risk, basis risk, correlation, specific risk and volatility risk.
- (3) This section does not deal with the risk management of market risk in a group context. A firm that is a member of a group should also read PRU 8.1 (Group risk systems and controls) which outlines the FSA's requirements for the risk management of market risk within a group.
- (4) Appropriate systems and controls for the management of market risk will vary with the scale, nature and complexity of the 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.
- 31/12/2004
Requirements
PRU 4.1.5
See Notes
High level requirements for prudential systems and controls, including those for market risk, are set out in PRU 1.4. In particular:
- (1) PRU 1.4.19R (2) requires a firm to document its policy for market risk, including its risk appetite and how it identifies, measures, monitors and controls that risk;
- (2) PRU 1.4.19R (4) requires a firm to document its asset and liability recognition policy. Documentation should describe the systems and controls that it intends to use to comply with the policy;
- (3) PRU 1.4.19 R requires a firm to establish and maintain risk management systems to identify, measure, monitor and control market risk (in accordance with its market risk policy), and to take reasonable steps to establish systems adequate for that purpose;
- (4) In line with PRU 1.4.11 G, the ultimate responsibility for the management of market risk should rest with a firm's governing body. Where delegation of authority occurs the governing body and relevant senior managers should approve and adequately review systems and controls to check that delegated duties are being performed correctly.
- 31/12/2004
Market risk policy
PRU 4.1.6
See Notes
PRU 1.4 requires a firm to establish, maintain and document a business plan and risk policies. They should provide a clear indication of the amount and nature of market risk that the firm wishes to incur. In particular, they should cover for market risk:
- (1) how, with particular reference to its activities, the firm defines and measures market risk;
- (2) the firm's business aims in incurring market risk including:
- (a) identifying the types and sources of market risk to which the firm wishes to be exposed (and the limits on that exposure) and those to which the firm wishes not to be exposed (and how that is to be achieved, for example how exposure is to be avoided or mitigated); and
- (b) specifying the level of diversification required by the firm and the firm's tolerance for risk concentrations (and the limits on those exposures and concentrations).
- 31/12/2004
PRU 4.1.7
See Notes
- 31/12/2004
PRU 4.1.8
See Notes
The market risk policy of a firm should enforce the risk management and control principles and include detailed information on:
- (1) the financial instruments, commodities, assets and liabilities (and mismatches between assets and liabilities) that a firm is exposed to and the limits on those exposures;
- (2) the firm's investment strategy as applicable between each insurance fund;
- (3) activities that are intended to hedge or mitigate market risk including mismatches caused by for example differences in the assets and liabilities and maturity mismatches; and
- (4) the methods and assumptions used for measuring linear, non-linear and geared market risk including the rationale for selection, ongoing validation and testing. Methods might include stress testing and scenario analysis, option Greeks, asset/liability analysis, correlation analysis and Value-at-Risk (VaR). Exposure to non-linear or geared market risk is typically through the use of derivatives.
- 31/12/2004
Risk identification
PRU 4.1.9
See Notes
A firm should have in place appropriate risk reporting systems that enable it to identify the types and amount of market risk to which it is, and potentially could be, exposed. The information that systems should capture may include but is not limited to:
- (1) position information which may include a description of individual financial instruments and their cash flows; and
- (2) market data which may consist of raw time series of market rates, index levels and prices and derived time series of benchmark yield curves, spreads, implied volatilities, historical volatilities and correlations.
- 31/12/2004
Risk measurement
PRU 4.1.10
See Notes
Having identified the market risk that the firm is exposed to on at least a daily basis, a firm should be able to measure and manage that market risk on a consistent basis. This may be achieved by:
- (1) regularly stress testing all or parts of the firm's portfolio to estimate potential economic losses in a range of market conditions including abnormal markets. Corporate level stress test results should be discussed regularly by risk monitors, senior management and risk takers, and should guide the firm's market risk appetite (for example, stress tests may lead to discussions on how best to unwind or hedge a position), and influence the internal capital allocation process;
- (2) measuring the firm's exposure to particular categories of market risk (for example, equity, interest rate, foreign exchange and commodities) as well as across its entire portfolio of market risks;
- (3) analysing the impact that new transactions or businesses may have on its market risk position on an on-going basis; and
- (4) regularly backtesting realised results against internal model generated market risk measures in order to evaluate and assess its accuracy. For example, a firm should keep a database of daily risk measures such as VaR and option Greeks, and use these to back test predicted profit and loss against actual profit and loss for all trading desks and business units, and monitor the number of exceptions from agreed confidence bands.
- 31/12/2004
Valuation
PRU 4.1.11
See Notes
- 31/12/2004
PRU 4.1.12
See Notes
The systems and controls referred to in PRU 4.1.11 G should include the following:
- (1) the department responsible for the validation of the value of assets and liabilities should be independent of the business trading area, and should be adequately resourced by suitably qualified staff. The department should report to a suitably qualified individual, independent from the business trading area, who has sufficient authority to enforce the systems and controls policies and any alterations to valuation treatments where necessary;
- (2) all valuations should be checked and validated at appropriate intervals. Where a firm has chosen not to validate all valuations on a daily basis this should be agreed by senior management;
- (3) a firm should establish a review procedure to check that the valuation procedures are followed and are producing valuations in compliance with the requirements in this section. The review should be undertaken by suitably qualified staff independent of the business trading area, on a regular and ad hoc basis. In particular, this review procedure should include:
- (a) the quality and appropriateness of the price sources used;
- (b) valuation reserves held; and
- (c) the valuation methodology employed for each product and consistent adherence to that methodology;
- (4) where a valuation is disputed and the dispute cannot be resolved in a timely manner it should be reported to senior management. It should continue to be reported to senior management until agreement is reached;
- (5) where a firm is marking positions to market it should take reasonable steps to establish a price source that is reliable and appropriate to enable compliance with the provisions in this section on an ongoing basis;
- (6) a firm should document its policies and procedures relating to the entire valuation process. In particular, the following should be documented:
- (a) the valuation methodologies employed for all product categories;
- (b) details of the price sources used for each product;
- (c) the procedures to be followed where a valuation is disputed;
- (d) the valuation adjustment and reserving policies;
- (e) the level at which a difference between a valuation assigned to an asset or liability and the valuation used for validation purposes will be reported on an exceptions basis and investigated;
- (f) where a firm is using its own internal estimate to produce a valuation, it should document in detail the process followed in order to produce the valuation; and
- (g) the review procedures established by a firm in relation to the requirements of this section should be adequately documented and include the rationale for the policy;
- (7) a firm should maintain records which demonstrate:
- (a) senior management's approval of the policies and procedures established; and
- (b) management sign-off of the reviews undertaken in accordance with PRU 4.1.11 G.
- 31/12/2004
Risk monitoring
PRU 4.1.13
See Notes
- 31/12/2004
PRU 4.1.14
See Notes
The market risk policy of a firm may require the production of market risk reports at various levels within the firm. These reports should provide sufficiently accurate market risk data to relevant functions within the firm, and should be timely enough to allow any appropriate remedial action to be proposed and taken, for example:
- (1) at firm wide level, a market risk report may include information:
- (a) summarising and commenting on the total market risk that a firm is exposed to and market risk concentrations by business unit, asset class and country;
- (b) on VaR reports against risk limits by business unit, asset class and country;
- (c) commenting on significant risk concentrations and market developments; and
- (d) on market risk in particular legal entities and geographical regions;
- (2) at the business unit level, a market risk report may include information summarising market risk by currency, trading desk, maturity or duration band, or by instrument type;
- (3) at the trading desk level, a market risk report may include detailed information summarising market risk by individual trader, instrument, position, currency, or maturity or duration band; and
- (4) all risk data should be readily reconcilable back to the prime books of entry with a fully documented audit trail.
- 31/12/2004
PRU 4.1.15
See Notes
Risk monitoring may also include information on:
- (1) the procedures for taking appropriate action in response to the information within the market risk reports;
- (2) ensuring that there are controls and procedures for identifying and reporting trades and positions booked at off-market rates;
- (3) the process for new product approvals;
- (4) the process for dealing with situations (authorised and unauthorised) where particular market risk exposures exceed predetermined risk limits and criteria; and
- (5) the periodic review of the risk monitoring process in order to check its suitability for both current market conditions and the firm's overall risk appetite.
- 31/12/2004
PRU 4.1.16
See Notes
- 31/12/2004
Risk control
PRU 4.1.17
See Notes
Risk control is the independent monitoring, assessment and supervision of business units within the defined policies and procedures of the market risk policy. This may be achieved by:
- (1) setting an appropriate market risk limit structure to control the firm's exposure to market risk; for example, by setting out a detailed market risk limit structure at the corporate level, the business unit level and the trading desk level which addresses all the key market risk factors and is commensurate with the volume and complexity of activity that the firm undertakes;
- (2) setting limits on risks such as price or rate risk, as well as those factors arising from options such as delta, gamma, vega, rho and theta;
- (3) setting limits on net and gross positions, market risk concentrations, the maximum allowable loss (also called "stop-loss"), VaR, potential risks arising from stress testing and scenario analysis, gap analysis, correlation, liquidity and volatility; and
- (4) considering whether it is appropriate to set intermediate (early warning) thresholds that alert management when limits are being approached, triggering review and action where appropriate.
- 31/12/2004
Record keeping
PRU 4.1.18
See Notes
- 31/12/2004
PRU 4.1.19
See Notes
In relation to market risk, a firm should retain appropriate prudential records of:
- (1) off and on market trades in financial instruments;
- (2) the nature and amounts of off and on balance sheet exposures, including aggregations of exposures;
- (3) trades in financial instruments and other assets and liabilities; and
- (4) methods and assumptions used in stress testing and scenario analysis and in VaR models.
- 31/12/2004
PRU 4.1.20
See Notes
- 31/12/2004
PRU 4.2
Market risk in insurance
- 31/12/2004
Application
PRU 4.2.1
See Notes
PRU 4.2 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.
- 31/12/2004
PRU 4.2.2
See Notes
- 31/12/2004
PRU 4.2.3
See Notes
- (1) PRU 4.2 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, PRU 4.2 applies separately to each type of business.
- 31/12/2004
Purpose
PRU 4.2.4
See Notes
- 31/12/2004
PRU 4.2.5
See Notes
- 31/12/2004
PRU 4.2.6
See Notes
- 31/12/2004
PRU 4.2.7
See Notes
PRU 4.2 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 must 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 PRU 4.2.9 G to PRU 4.2.26 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's mathematical reserve requirements. PRU 7.3 contains rules and guidance as to the methods and assumptions to be used in calculating these 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. PRU 4.2.28 R to PRU 4.2.48 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. PRU 4.2.49 G to PRU 4.2.56 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 PRU 4.2.27 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. PRU 4.2.57 R and PRU 4.2.58 R set out these cover requirements.
- 31/12/2004
Definitions
PRU 4.2.8
See Notes
For the purposes of PRU 4.2:
- (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's long-term insurance assets (by market value), excluding assets held to cover index-linked liabilities or property-linked liabilities (see PRU 4.2.57 R and PRU 4.2.58 R), are invested; and
- (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.
- 31/12/2004
Resilience capital requirement (applicable to long-term insurance business only)
PRU 4.2.9
See Notes
- 31/12/2004
PRU 4.2.10
See Notes
- (1) A firm that carries on long-term insurance business must calculate a resilience capital requirement in accordance with (2) to (5).
- (2) From amongst its long-term insurance assets, the firm must identify assets which, after applying the scenarios in (3), have a value that is equal to the firm's long-term insurance liabilities under those scenarios.
- (3) For the purpose of (2), the scenarios are:
- (a) for those assets invested in the United Kingdom, the market risk scenario set out in PRU 4.2.16 R;
- (b) subject to (c) and to PRU 4.2.26 R, for those assets invested outside of the United Kingdom, the market risk scenario set out in PRU 4.2.23 R; and
- (c) where the assets in (b) are:
- (i) held to cover index-linked liabilities or property-linked liabilities; or
- (ii) not invested in a significant territory outside the United Kingdom;
- the market risk scenario set out in PRU 4.2.16 R.
- (4) The resilience capital requirement is the result of deducting B from A, where:
- (a) A is the value of the assets which will produce the result described in (2); and
- (b) B is the firm's long-term insurance liabilities.
- (5) In calculating the value of the firm's long-term insurance liabilities under any scenario, a firm is not required to adjust the provision made under PRU 1.3.5 R in respect of a defined benefits pension scheme.
- 31/12/2004
PRU 4.2.11
See Notes
The purpose of the resilience capital requirement is to cover adverse deviation from:
- (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.
- 31/12/2004
PRU 4.2.12
See Notes
- 31/12/2004
PRU 4.2.13
See Notes
- 31/12/2004
PRU 4.2.14
See Notes
- 31/12/2004
PRU 4.2.15
See Notes
- 31/12/2004
Market risk scenario for assets invested in the United Kingdom
PRU 4.2.16
See Notes
In PRU 4.2.10 R (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 PRU 4.2.19 R);
- (2) a fall in real estate values of 20% less the real estate market adjustment ratio for an appropriate real estate index (see PRU 4.2.21 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.
- 31/12/2004
PRU 4.2.17
See Notes
For the purposes of PRU 4.2.16 R (1) and PRU 4.2.16R (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 PRU 4.2.36 R to PRU 4.2.38 R); and
- (2) model a fall in equity and real estate markets as if the fall occurred instantaneously.
- 31/12/2004
PRU 4.2.18
See Notes
- 31/12/2004
Equity market adjustment ratio
PRU 4.2.19
See Notes
The equity market adjustment ratio referred to in PRU 4.2.16 R (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%.
- 31/12/2004
PRU 4.2.20
See Notes
- 31/12/2004
Real estate market adjustment ratio
PRU 4.2.21
See Notes
The real estate market adjustment ratio for a real estate index referred to in PRU 4.2.16 R (2) and PRU 4.2.23 R (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%.
- 31/12/2004
PRU 4.2.22
See Notes
For the purpose of calculating the real estate market adjustment ratio in PRU 4.2.21 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 PRU 4.2.10 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.
- 31/12/2004
Market risk scenario for assets invested outside the United Kingdom
PRU 4.2.23
See Notes
In PRU 4.2.10 R (3)(b), subject to PRU 4.2.26 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 PRU 4.2.16 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 PRU 4.2.21 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.
- 31/12/2004
PRU 4.2.24
See Notes
For the purposes of PRU 4.2.23 R (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).
- 31/12/2004
PRU 4.2.25
See Notes
For the purpose of PRU 4.2.24 R (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 PRU 4.2.10 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.
- 31/12/2004
PRU 4.2.26
See Notes
- 31/12/2004
Interest rates: general insurance liabilities
PRU 4.2.27
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. These 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.
- 31/12/2004
Interest rates: long-term insurance liabilities
PRU 4.2.28
See Notes
The rates of interest to be used for the calculation of the present value of a long-term insurance liability must not exceed 97.5% of the risk-adjusted yield (see PRU 4.2.30 R to PRU 4.2.48 G) that is expected to be achieved on:
- (1) the assets allocated to cover that liability;
- (2) the reinvestment of sums expected to be received from those assets (see PRU 4.2.45 R to PRU 4.2.48 G); and
- (3) the investment of future premium receipts (see PRU 4.2.45 R to PRU 4.2.48 G).
- 31/12/2004
PRU 4.2.29
See Notes
- 31/12/2004
Risk-adjusted yield
PRU 4.2.30
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 PRU 4.2.33 R);
- (3) valuing the asset (together with any offsetting transaction) in accordance with PRU 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.
- 31/12/2004
PRU 4.2.31
See Notes
Examples of calculating a combined yield for the purposes of PRU 4.2.30 R (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.
- 31/12/2004
PRU 4.2.32
See Notes
- 31/12/2004
PRU 4.2.33
See Notes
For the purpose of PRU 4.2.30 R (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.
- 31/12/2004
PRU 4.2.34
See Notes
The risk-adjusted yield is either:
- (1) (for equities and real estate) a running yield (see PRU 4.2.36 R to PRU 4.2.38 R, PRU 4.2.41 R and PRU 4.2.44 R); or
- (2) (for all other assets) the internal rate of return (see PRU 4.2.39 R, PRU 4.2.41 R and PRU 4.2.44 R).
- 31/12/2004
PRU 4.2.35
See Notes
- 31/12/2004
The running yield for real estate
PRU 4.2.36
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.
- 31/12/2004
The running yield for equities
PRU 4.2.37
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.
- 31/12/2004
PRU 4.2.38
See Notes
For the purposes of PRU 4.2.37 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.
- 31/12/2004
The internal rate of return
PRU 4.2.39
See Notes
- 31/12/2004
PRU 4.2.40
See Notes
- 31/12/2004
Credit risk
PRU 4.2.41
See Notes
- 31/12/2004
PRU 4.2.42
See Notes
- 31/12/2004
PRU 4.2.43
See Notes
- 31/12/2004
PRU 4.2.44
See Notes
- 31/12/2004
Investment and reinvestment
PRU 4.2.45
See Notes
Except as provided in PRU 4.2.46 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 long-term gilt yield;
- (b) 3% per annum, increased by two thirds of the excess, if any, of the long-term gilt yield 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).
- 31/12/2004
PRU 4.2.46
See Notes
- 31/12/2004
PRU 4.2.47
See Notes
- 31/12/2004
PRU 4.2.48
See Notes
- 31/12/2004
Currency risk
PRU 4.2.49
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.
- 31/12/2004
Cover for spot and forward currency transactions
PRU 4.2.50
See Notes
- 31/12/2004
PRU 4.2.51
See Notes
- 31/12/2004
Currency matching of assets and liabilities
PRU 4.2.52
See Notes
- 31/12/2004
PRU 4.2.53
See Notes
- 31/12/2004
PRU 4.2.54
See Notes
PRU 4.2.53 R does not apply to:
- (1) a pure reinsurer; or
- (2) assets held to cover index-linked liabilities or property-linked liabilities.
- 31/12/2004
PRU 4.2.55
See Notes
For the purpose of PRU 4.2.53 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
- (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) (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.
- 31/12/2004
PRU 4.2.56
See Notes
- 31/12/2004
Covering linked liabilities
PRU 4.2.57
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).
- 31/12/2004
PRU 4.2.58
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).
- 31/12/2004
PRU 4.2.59
See Notes
- 31/12/2004
PRU 4.2.60
See Notes
- 31/12/2004
PRU 4.2.61
See Notes
- 31/12/2004
PRU 4.3
Derivatives in insurance
- 31/12/2004
Application
PRU 4.3.1
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.
- 31/12/2004
PRU 4.3.2
See Notes
- 31/12/2004
PRU 4.3.3
- (1) This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.
- (2) Where a firm carries on both long-term insurance business and general insurance business, this section applies separately to each type of business.
- 31/12/2004
Purpose
PRU 4.3.4
See Notes
- 31/12/2004
Derivatives and quasi-derivatives
PRU 4.3.5
See Notes
For the purpose of PRU 2 Annex 1R (Admissible assets in insurance), a derivative or quasi-derivative is approved if:
- (1) it is held for the purpose of efficient portfolio management (PRU 4.3.6 R to PRU 4.3.7 R) or reduction of investment risk (PRU 4.3.8 R to PRU 4.3.13 G);
- (2) it is covered (PRU 4.3.14 R to PRU 4.3.33 G); and
- (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 (PRU 4.3.34 R to PRU 4.3.35 R).
- 31/12/2004
Efficient portfolio management
PRU 4.3.6
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:
- (1) generating additional capital or income in one of the ways described in PRU 4.3.7 R; or
- (2) reducing tax or investment cost in relation to admissible assets; or
- (3) acquiring or disposing of rights in relation to admissible assets, or their equivalent, more efficiently or effectively.
- 31/12/2004
Generation of additional capital or income
PRU 4.3.7
See Notes
The generation of additional capital or income falls within PRU 4.3.6 R (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
- (2) receiving a premium for selling a covered call option or its equivalent, the underlying of which is an admissible asset, even if that additional capital or income is obtained at the expense of surrendering the chance of greater capital or income.
- 31/12/2004
Reduction of investment risk
PRU 4.3.8
See Notes
- 31/12/2004
Significant increase in risk
PRU 4.3.9
See Notes
For the purposes of PRU 4.3.8 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.
- 31/12/2004
PRU 4.3.10
See Notes
- 31/12/2004
PRU 4.3.11
See Notes
- 31/12/2004
Investment risk
PRU 4.3.12
See Notes
For the purposes of PRU 4.3.8 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 PRU 7.2.20 R; or
- (b) of appropriate safety, yield and marketability as required by PRU 7.2.34R (1)(a); or
- (c) of an appropriate currency match as required by PRU 4.2.53 R;
- (2) (where they are held to cover index-linked liabilities) might not be appropriate cover for those liabilities as required by PRU 4.2.58 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 PRU 7.6.36 R and appropriate cover for those liabilities as required by PRU 4.2.57 R.
- 31/12/2004
PRU 4.3.13
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.
- 31/12/2004
Cover
PRU 4.3.14
See Notes
A firm must cover an obligation to transfer assets or pay monetary amounts that arises from:
- (1) a derivative or quasi-derivative; or
- (2) a contract (other than a contract of insurance) for the purchase, sale or exchange of assets.
- 31/12/2004
PRU 4.3.15
See Notes
An obligation to transfer assets or pay monetary amounts (see PRU 4.3.14 R) must be covered:
- (1) by assets, a liability or a provision (see PRU 4.3.16 R to PRU 4.3.24 R); or
- (2) by an offsetting transaction (see PRU 4.3.25 R to PRU 4.3.27 R).
- 31/12/2004
PRU 4.3.16
See Notes
- 31/12/2004
PRU 4.3.17
See Notes
An obligation to pay a monetary amount (whether or not falling in PRU 4.3.16 R) is covered if:
- (1) the firm holds admissible 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) 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 PRU 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.
- 31/12/2004
PRU 4.3.18
See Notes
- 31/12/2004
PRU 4.3.19
See Notes
- 31/12/2004
PRU 4.3.20
See Notes
- 31/12/2004
PRU 4.3.21
See Notes
- 31/12/2004
PRU 4.3.22
See Notes
- 31/12/2004
PRU 4.3.23
See Notes
- 31/12/2004
PRU 4.3.24
See Notes
- 31/12/2004
Offsetting transactions
PRU 4.3.25
See Notes
An offsetting transaction means:
- (1) an approved derivative, approved stock lending transaction or an approved quasi-derivative; or
- (2) a covered transaction with an approved counterparty for the purchase of assets.
- 31/12/2004
PRU 4.3.26
See Notes
- 31/12/2004
PRU 4.3.27
See Notes
- 31/12/2004
Lending and borrowing assets
PRU 4.3.28
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 PRU 4.3.36 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.
- 31/12/2004
PRU 4.3.29
See Notes
- 31/12/2004
PRU 4.3.30
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.
- 31/12/2004
PRU 4.3.31
See Notes
- 31/12/2004
Examples of cover requirements
PRU 4.3.32
See Notes
Examples of cover by assets for the purposes of PRU 4.3.16 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 PRU 4.3.16 R (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.
- 31/12/2004
PRU 4.3.33
See Notes
- 31/12/2004
Over the counter transactions
PRU 4.3.34
See Notes
- 31/12/2004
PRU 4.3.35
See Notes
- 31/12/2004
Stock lending
PRU 4.3.36
See Notes
For the purposes of PRU 2 Annex 1R (Admissible assets in insurance), a stock lending transaction is approved if:
- (1) the assets lent are admissible assets;
- (2) the counterparty is an authorised person or an approved counterparty; and
- (3) adequate and sufficiently immediate collateral (PRU 4.3.38 R to PRU 4.3.41 R) is obtained to secure the obligation of the counterparty.
- 31/12/2004
PRU 4.3.37
See Notes
- 31/12/2004
Collateral
PRU 4.3.38
See Notes
For the purposes of PRU 4.3.36 R (3), collateral is adequate only if it:
- (1) is transferred to the firm or its agent;
- (2) is, at the time of the transfer, at least equal in value to the value of the securities transferred, or consideration provided, by the firm; and
- (3) is of adequate quality.
- 31/12/2004
PRU 4.3.39
See Notes
- 31/12/2004
PRU 4.3.40
See Notes
For the purposes of PRU 4.3.36 R (3), collateral is sufficiently immediate only if:
- (1) it is transferred before, or at the same time as, the transfer of the securities by the firm; or
- (2) it will be transferred, at latest, by the close of business on the day of the transfer.
- 31/12/2004
PRU 4.3.41
See Notes
- 31/12/2004
PRU 5
Liquidity
PRU 5.1
Liquidity risk systems and controls
- 31/12/2004
Application
PRU 5.1.1
See Notes
- 31/12/2004
PRU 5.1.2
See Notes
All of PRU 5.1, except PRU 5.1.17 G, PRU 5.1.27 G, PRU 5.1.58 G to PRU 5.1.60 G, PRU 5.1.61 E, PRU 5.1.62 G, PRU 5.1.85 G, PRU 5.1.86 E, and PRU 5.1.87 G to PRU 5.1.91 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.
- 31/12/2004
PRU 5.1.3
See Notes
Subject to PRU 5.1.5 R, PRU 5.1.6 R and PRU 5.1.8 R, the following provisions of PRU 5.1 apply to a firm described in PRU 5.1.4 R:
- (1) PRU 5.1.18 G;
- (2) PRU 5.1.58 G to PRU 5.1.60 G;
- (3) PRU 5.1.61 E;
- (4) PRU 5.1.62 G;
- (5) PRU 5.1.85 G;
- (6) PRU 5.1.86 E; and
- (7) PRU 5.1.87 G to PRU 5.1.91 G.
- 31/12/2004
PRU 5.1.4
See Notes
The firms referred to in PRU 5.1.3 R are:
- (1) a building society;
- (2) a bank or an own account dealer (other than a venture capital firm) that is a UK firm;
- (3) an incoming EEA firm which:
- (a) is a full BCD credit institution; and
- (b) has a branch in the United Kingdom;
- (4) an overseas firm which is a bank or an own account dealer (other than a venture capital firm) but which is not:
- (a) an incoming EEA firm; or
- (b) a lead-regulated firm;
- (5) an overseas firm which:
- (a) is a bank;
- (b) is a lead-regulated firm;
- (c) is not an incoming EEA firm; and
- (d) has a branch in the United Kingdom.
- 31/12/2004
PRU 5.1.5
See Notes
- 31/12/2004
PRU 5.1.6
See Notes
- 31/12/2004
PRU 5.1.7
See Notes
If a firm carries on:
- (1) long-term insurance business; and
- (2) general insurance business;
this section applies separately to each type of business.
- 31/12/2004
PRU 5.1.8
See Notes
This section does not apply to:
- (1) a non-directive friendly society; or
- (2) a UCITS qualifier; or
- (3) an ICVC; or
- (4) an incoming EEA firm (unless PRU 5.1.4 R applies); or
- (5) an incoming Treaty firm.
- 31/12/2004
PRU 5.1.9
See Notes
- 31/12/2004
Purpose
PRU 5.1.10
See Notes
- 31/12/2004
PRU 5.1.11
See Notes
- 31/12/2004
PRU 5.1.12
See Notes
- 31/12/2004
PRU 5.1.13
See Notes
- 31/12/2004
PRU 5.1.14
See Notes
- 31/12/2004
Requirements
PRU 5.1.15
See Notes
High level requirements for prudential systems and controls including for liquidity risk are set out in PRU 1.4. In particular:
- (1) PRU 1.4.18 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) PRU 1.4.19 R (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.
- 31/12/2004
PRU 5.1.16
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 PRU 5.1.23 G to PRU 5.1.25 G), including:
- (a) the role of marketable, or otherwise realisable, assets (see PRU 5.1.32 G); and
- (b) its strategy for mitigating liquidity risk on the liability side (see PRU 5.1.37 G);
- (2) its method for measuring liquidity risk (see PRU 5.1.55 G);
- (3) its system for monitoring liquidity risk (see PRU 5.1.63 G); and
- (4) its system for controlling liquidity risk (see PRU 5.1.71 G).
- 31/12/2004
PRU 5.1.17
See Notes
- 31/12/2004
Firms with group liquidity management
PRU 5.1.18
See Notes
- 31/12/2004
Managing liquidity risk
PRU 5.1.19
See Notes
- 31/12/2004
Governing body and senior management oversight
PRU 5.1.20
See Notes
- 31/12/2004
PRU 5.1.21
See Notes
In relation to liquidity risk, the governing body's responsibilities should normally include:
- (1) approving the firm's liquidity risk policy, which includes taking reasonable steps to ensure that it is consistent with the firm's expressed risk tolerance (see PRU 5.1.23 G to PRU 5.1.25 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's liquidity 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.
- 31/12/2004
PRU 5.1.22
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 PRU 5.1.23 G to PRU 5.1.25 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 PRU 5.1.66 G to PRU 5.1.70 G) and other systems that identify, measure, monitor and control the firm's liquidity risk; and
- (4) oversee the establishment of effective internal controls over the liquidity risk management process (see PRU 5.1.71 G to PRU 5.1.90 G (Controlling liquidity risk)).
- 31/12/2004
Liquidity risk policy
PRU 5.1.23
See Notes
- 31/12/2004
PRU 5.1.24
See Notes
- 31/12/2004
PRU 5.1.25
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;
- (3) a policy for managing the liability side of liquidity risk (see PRU 5.1.37 G);
- (4) the role of marketable, or otherwise realisable, assets (see PRU 5.1.32 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;
- (7) the use of derivatives to minimise liquidity risk; and
- (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.
- 31/12/2004
Identifying liquidity risk
PRU 5.1.26
See Notes
- 31/12/2004
PRU 5.1.27
See Notes
- 31/12/2004
Asset liquidity
PRU 5.1.28
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.
- 31/12/2004
PRU 5.1.29
See Notes
- 31/12/2004
PRU 5.1.30
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.
- 31/12/2004
Marketable assets
PRU 5.1.31
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 PRU 5.1.29 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.
- 31/12/2004
PRU 5.1.32
See Notes
- 31/12/2004
PRU 5.1.33
See Notes
- 31/12/2004
Adjusting for the behavioural characteristics of assets
PRU 5.1.34
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.
- 31/12/2004
PRU 5.1.35
See Notes
- 31/12/2004
Inflows from off balance sheet items
PRU 5.1.36
See Notes
- 31/12/2004
Liability liquidity
PRU 5.1.37
See Notes
- 31/12/2004
PRU 5.1.38
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.
- 31/12/2004
PRU 5.1.39
See Notes
- 31/12/2004
PRU 5.1.40
See Notes
- 31/12/2004
Adjusting for the behavioural characteristics of liabilities
PRU 5.1.41
See Notes
- 31/12/2004
PRU 5.1.42
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;
- (4) options available to the insurer and any incentive for the insurer to exercise them;
- (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.
- 31/12/2004
Outflows from off balance sheet items
PRU 5.1.43
See Notes
- 31/12/2004
PRU 5.1.44
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.
- 31/12/2004
PRU 5.1.45
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.
- 31/12/2004
Asset securitisations
PRU 5.1.46
See Notes
- 31/12/2004
PRU 5.1.47
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 PRU 5.1.62G (3)(c);
- (3) its plans for meeting its funding requirements (including their timing);
- (4) strategies for obtaining substantial amounts of liquidity at short notice (see also PRU 5.1.86 E and PRU 5.1.88 G); and
- (5) operational issues associated with the rollover of short-dated securities, particularly commercial paper.
- 31/12/2004
PRU 5.1.48
See Notes
- 31/12/2004
PRU 5.1.49
See Notes
- 31/12/2004
Foreign currency liquidity
PRU 5.1.50
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.
- 31/12/2004
PRU 5.1.51
See Notes
- 31/12/2004
Intra-day liquidity
PRU 5.1.52
See Notes
- 31/12/2004
PRU 5.1.53
See Notes
- 31/12/2004
PRU 5.1.54
See Notes
- 31/12/2004
Measuring liquidity risk
PRU 5.1.55
See Notes
- 31/12/2004
PRU 5.1.56
See Notes
- 31/12/2004
PRU 5.1.57
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
- (4) where appropriate, measuring the firm's exposure to foreign currency liquidity risk.
- 31/12/2004
Stress testing and scenario analysis
PRU 5.1.58
See Notes
- 31/12/2004
PRU 5.1.59
See Notes
- 31/12/2004
PRU 5.1.60
See Notes
- 31/12/2004
PRU 5.1.61
See Notes
- (1) A scenario analysis in relation to liquidity risk required under PRU 1.2.35 R should include a cash-flow projection for each scenario tested, based on reasonable estimates of the impact (both on and off balance sheet) of that scenario on the firm's funding needs and sources.
- (2) Contravention of (1) may be relied on as tending to establish contravention of PRU 1.2.35 R.
- 31/12/2004
PRU 5.1.62
See Notes
In identifying the possible on and off balance sheet impact referred to in PRU 5.1.61E (1), a firm may take into account:
- (1) possible changes in the market's perception of the firm and the effects that this might have on the firm's access to the markets, including:
- (a) (where the firm funds its holdings of assets in one currency with liabilities in another) access to foreign exchange markets, particularly in less frequently traded currencies;
- (b) access to secured funding, including by way of repo transactions; and
- (c) the extent to which the firm may rely on committed facilities made available to it;
- (2) (if applicable) the possible effect of each scenario analysed on currencies whose exchange rates are currently pegged or fixed; and
- (3) that:
- (a) general market turbulence may trigger a substantial increase in the extent to which persons exercise rights against the firm under off balance sheet instruments to which the firm is party;
- (b) access to OTC derivative and foreign exchange markets are sensitive to credit-ratings;
- (c) the scenario may involve the triggering of early amortisation in asset securitisation transactions with which the firm has a connection; and
- (d) its ability to securitise assets may be reduced.
- 31/12/2004
Monitoring liquidity risk
PRU 5.1.63
See Notes
- 31/12/2004
PRU 5.1.64
See Notes
- 31/12/2004
PRU 5.1.65
See Notes
- 31/12/2004
Management information systems
PRU 5.1.66
See Notes
- 31/12/2004
PRU 5.1.67
See Notes
- 31/12/2004
PRU 5.1.68
See Notes
For a firm described in PRU 5.1.4 R, management information would normally contain the following:
- (1) a cash-flow or funding gap report;
- (2) a funding maturity schedule;
- (3) a list of large providers of funding; and
- (4) a limit monitoring and exception report.
- 31/12/2004
PRU 5.1.69
See Notes
- 31/12/2004
PRU 5.1.70
See Notes
For a firm described in PRU 5.1.4 R, the additional information referred to in PRU 5.1.69 G may include:
- 31/12/2004
Controlling liquidity risk
PRU 5.1.71
See Notes
- 31/12/2004
PRU 5.1.72
See Notes
- 31/12/2004
PRU 5.1.73
See Notes
- 31/12/2004
PRU 5.1.74
See Notes
- 31/12/2004
PRU 5.1.75
See Notes
- 31/12/2004
Limit setting
PRU 5.1.76
See Notes
- 31/12/2004
PRU 5.1.77
See Notes
- 31/12/2004
PRU 5.1.78
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 PRU 1.4.18 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 PRU 1.4.18 R.
- 31/12/2004
PRU 5.1.79
See Notes
The FSA would normally expect a firm described in PRU 5.1.4 R to consider setting limits on:
- (1) liability concentrations in relation to:
- (a) individual, or related groups of, liability providers;
- (b) instrument types;
- (c) maturities, including the amount of debt maturing in a particular period; and
- (d) retail and wholesale liabilities; and
- (2) where appropriate, net leverage and gross leverage.
- 31/12/2004
PRU 5.1.80
See Notes
- 31/12/2004
PRU 5.1.81
See Notes
- 31/12/2004
Managing market access
PRU 5.1.82
See Notes
- 31/12/2004
PRU 5.1.83
See Notes
- 31/12/2004
PRU 5.1.84
See Notes
- 31/12/2004
Contingency funding plans
PRU 5.1.85
See Notes
- 31/12/2004
PRU 5.1.86
See Notes
- (1) A firm should have a contingency funding plan for taking action to ensure, so far as it can, that, in each of the scenarios analysed under PRU 1.2.3 R (2), it would still have sufficient liquid financial resources to meet liabilities as they fall due.
- (2) The contingency funding plan should cover what events or circumstances will lead the firm to put into action any part of the plan.
- (3) Contravention of (1) or (2) may be relied upon as tending to establish contravention of PRU 1.2.22 R.
- 31/12/2004
PRU 5.1.87
See Notes
- 31/12/2004
PRU 5.1.88
See Notes
The contingency funding plan of a firm described in PRU 5.1.4 R should cover the extent to which the actions in PRU 5.1.86E (1) include:
- (1) selling, using as collateral in secured funding (including repo), or securitising, its assets;
- (2) otherwise reducing its assets;
- (3) modifying the structure of its liabilities or increasing its liabilities; and
- (4) the use of committed facilities.
- 31/12/2004
PRU 5.1.89
See Notes
A firm's contingency funding plan should, where relevant, take account of the impact of stressed market conditions on:
- (1) the behaviour of any credit-sensitive liabilities it has; and
- (2) its ability to securitise assets.
- 31/12/2004
PRU 5.1.90
See Notes
The contingency funding plan should contain administrative policies and procedures that will enable the firm to manage the plan's implementation effectively, including:
- (1) the responsibilities of senior management;
- (2) names and contact details of members of the team responsible for implementing the contingency funding plan;
- (3) where, geographically, team members will be assigned;
- (4) who within the team is responsible for contact with head office (if appropriate), analysts, investors, external auditors, press, significant customers, regulators, lawyers and others; and
- (5) mechanisms that enable senior management and the governing body to receive management information that is both relevant and timely.
- 31/12/2004
Documentation
PRU 5.1.91
See Notes
- 31/12/2004
PRU 6
Operational risk
PRU 6.1
Operational Risk: Prudential Systems and Controls
- 31/12/2004
Application
PRU 6.1.1
See Notes
PRU 6.1 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.
- 31/12/2004
PRU 6.1.2
See Notes
PRU 6.1 applies to:
- (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.
- 31/12/2004
Purpose
PRU 6.1.3
See Notes
- 31/12/2004
PRU 6.1.4
See Notes
- 31/12/2004
PRU 6.1.5
See Notes
- 31/12/2004
PRU 6.1.6
See Notes
- 31/12/2004
PRU 6.1.7
See Notes
- 31/12/2004
PRU 6.1.8
See Notes
- 31/12/2004
General Requirements
PRU 6.1.9
See Notes
High level rules and guidance for prudential systems and controls including those for operational risk are set out in PRU 1.4. In particular:
- (1) PRU 1.4.18 R requires a firm to take reasonable steps to ensure that the risk management systems put in place to identify, assess, monitor and control operational risk are adequate for that purpose;
- (2) PRU 1.4.19 R (2) requires a firm to document its policy for operational risk, including its risk appetite and how it identifies, assesses, monitors and controls that risk; and
- (3) PRU 1.4.27 R requires a firm to take reasonable steps to establish and maintain adequate internal controls to enable it to assess and monitor the effectiveness and implementation of its business plan and prudential risk management systems.
- 31/12/2004
Operational risk policy
PRU 6.1.10
See Notes
- 31/12/2004
PRU 6.1.11
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 PRU 1.4.19 R (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 3A.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 PRU 6.1.13 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.
- 31/12/2004
PRU 6.1.12
See Notes
- 31/12/2004
PRU 6.1.13
See Notes
- 31/12/2004
PRU 6.1.14
See Notes
- 31/12/2004
Risk identification
PRU 6.1.15
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's customers, 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.
- 31/12/2004
PRU 6.1.16
See Notes
- 31/12/2004
PRU 6.1.17
See Notes
- 31/12/2004
Risk assessment
PRU 6.1.18
See Notes
- 31/12/2004
PRU 6.1.19
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.
- 31/12/2004
PRU 6.1.20
See Notes
- 31/12/2004
PRU 6.1.21
See Notes
- 31/12/2004
Risk monitoring
PRU 6.1.22
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:
- 31/12/2004
Risk control
PRU 6.1.23
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 3A.6 People);
- (2) adapting internal processes and systems (see SYSC 3A.7 Processes and systems);
- (3) transferring or changing the operational exposure through mechanisms such as outsourcing (see SYSC 3A.9 Outsourcing) and insurance (see SYSC 3A.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.
- 31/12/2004
Record keeping
PRU 6.1.24
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 PRU 1.4.51 G to PRU 1.4.64 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.
- 31/12/2004
PRU 7
Insurance risk
PRU 7.1
Insurance risk systems and controls
- 31/12/2004
Application
PRU 7.1.1
See Notes
PRU 7.1 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.
- 31/12/2004
PRU 7.1.2
See Notes
PRU 7.1 applies to:
- (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.
- 31/12/2004
Purpose
PRU 7.1.3
See Notes
- 31/12/2004
PRU 7.1.4
See Notes
Insurance risk concerns the FSA in a prudential context because inadequate systems and controls for its management can create a threat to the regulatory objectives of market confidence and consumer protection. Inadequately managed insurance risk may result in:
- (1) the inability of a firm to meet its contractual insurance liabilities as they fall due; and
- (2) the inability of a firm to treat its policyholders fairly consistent with the firm's obligations under Principle 6 (for example, in relation to bonus payments).
- 31/12/2004
PRU 7.1.5
See Notes
- 31/12/2004
PRU 7.1.6
See Notes
- 31/12/2004
PRU 7.1.7
See Notes
- 31/12/2004
General requirements
PRU 7.1.8
See Notes
High level rules and guidance for prudential systems and controls for insurance risk are set out in PRU 1.4. In particular:
- (1) PRU 1.4.18 R requires a firm to take reasonable steps to establish and maintain a business plan and appropriate risk management systems;
- (2) PRU 1.4.19R (2) requires a firm to document its policy for insurance risk, including its risk appetite and how it identifies, measures, monitors and controls that risk; and
- (3) PRU 1.4.27 R requires a firm to take reasonable steps to establish and maintain adequate internal controls to enable it to assess and monitor the effectiveness and implementation of its business plan and prudential risk management systems.
- 31/12/2004
Insurance risk policy
PRU 7.1.9
See Notes
A firm's insurance risk policy should outline its objectives in carrying out insurance business, its appetite for insurance risk and its policies for identifying, measuring, monitoring and controlling insurance risk. The insurance risk policy should cover any activities that are associated with the creation or management of insurance risk. For example, underwriting, claims management and settlement, assessing technical provisions in the balance sheet, risk mitigation and risk transfer, record keeping and management reporting. Specific matters that should normally be in a firm's insurance risk policy include:
- (1) a statement of the firm's willingness and capacity to accept insurance risk;
- (2) the classes and characteristics of insurance business that the firm is prepared to accept;
- (3) the underwriting criteria that the firm intends to adopt, including how these can influence its rating and pricing decisions;
- (4) its approach to limiting significant aggregations of insurance risk, for example, by setting limits on the amount of business that can be underwritten in one region or with one policyholder;
- (5) where relevant, the firm's approach to pricing long-term insurance contracts, including the determination of the appropriate level of any reviewable premiums;
- (6) the firm's policy for identifying, monitoring and managing risk when it has delegated underwriting authority to another party (additional guidance on the management of outsourcing arrangements is provided in SYSC 3A.9);
- (7) the firm's approach to managing its expense levels, including acquisition costs, recurring costs, and one-off costs, taking account of the margins available in both the prices for products and in the technical provisions in the balance sheet;
- (8) the firm's approach to the exercise of any discretion (e.g. on charges or the level of benefits payable) that is available in its long-term insurance contracts, in the context also of the legal and regulatory constraints existing on the application of this discretion;
- (9) the firm's approach to the inclusion of options within new long-term insurance contracts and to the possible exercise by policyholders of options on existing contracts;
- (10) the firm's approach to managing persistency risk;
- (11) the firm's approach to managing risks arising from timing differences in taxation or from changes in tax laws;
- (12) the firm's approach to the use of reinsurance or the use of some other means of risk transfer;
- (13) how the firm intends to assess the effectiveness of its risk transfer arrangements and manage the residual or transformed risks (for example, how it intends to handle disputes over contract wordings, potential payout delays and counterparty performance risks);
- (14) a summary of the data and information to be collected and reported on underwriting, claims and risk control (including internal accounting records), management reporting requirements and external data for risk assessment purposes;
- (15) the risk measurement and analysis techniques to be used for setting underwriting premiums, technical provisions in the balance sheet, and assessing capital requirements; and
- (16) the firm's approach to stress testing and scenario analysis, as required by PRU 1.2 (Adequacy of financial resources), including the methods adopted, any assumptions made and the use that is to be made of the results.
- 31/12/2004
PRU 7.1.10
See Notes
- 31/12/2004
Risk identification
PRU 7.1.11
See Notes
- 31/12/2004
PRU 7.1.12
See Notes
The identification of insurance risk should normally include:
- (1) in connection with the firm's business plan:
- (a) processes for identifying the types of insurance risks that may be associated with a new product and for comparing the risk types that are present in different classes of business (in order to identify possible aggregations in particular insurance risks); and
- (b) processes for identifying business environment changes (for example landmark legal rulings) and for collecting internal and external data to test and modify business plans;
- (2) at the point of sale, processes for identifying the underwriting risks associated with a particular policyholder or a group of policyholders (for example, processes for identifying potential claims for mis-selling and for collecting information on the claims histories of policyholders, including whether they have made any potentially false or inaccurate claims, to identify possible adverse selection or moral hazard problems);
- (3) after the point of sale, processes for identifying potential and emerging claims for the purposes of claims management and claims provisioning; this could include:
- (a) identifying possible judicial rulings;
- (b) keeping up to date with developments in market practice; and
- (c) collecting information on industry wide initiatives and settlements.
- 31/12/2004
PRU 7.1.13
See Notes
- 31/12/2004
Risk measurement
PRU 7.1.14
See Notes
- 31/12/2004
PRU 7.1.15
See Notes
A firm should ensure that the data it collects and the measurement methodologies that it uses are sufficient to enable it to evaluate, as appropriate:
- (1) its exposure to insurance risk at all relevant levels, for example, by contract, policyholder, product line or insurance class;
- (2) its exposure to insurance risk across different geographical areas and time horizons;
- (3) its total, firm-wide, exposure to insurance risk and any other risks that may arise out of the contracts of insurance that it issues;
- (4) how changes in the volume of business (for example via changes in premium levels or the number of new contracts that are underwritten) may influence its exposure to insurance risk;
- (5) how changes in policy terms may influence its exposure to insurance risk; and
- (6) the effects of specific loss scenarios on the insurance liabilities of the firm.
- 31/12/2004
PRU 7.1.16
See Notes
- 31/12/2004
PRU 7.1.17
See Notes
- 31/12/2004
PRU 7.1.18
See Notes
- 31/12/2004
PRU 7.1.19
See Notes
- 31/12/2004
PRU 7.1.20
See Notes
- 31/12/2004
PRU 7.1.21
See Notes
A firm should have the capability to measure its exposure to insurance risk on a regular basis. In deciding on the frequency of measurement, a firm should consider:
- (1) the time it takes to acquire and process all necessary data;
- (2) the speed at which exposures could change; and
- (3) that it may need to measure its exposure to certain types of insurance risk on a daily basis (for example, weather catastrophes).
- 31/12/2004
Risk monitoring
PRU 7.1.22
See Notes
A firm should provide regular and timely information on its insurance risks to the appropriate level of management. This could include providing reports on the following:
- (1) a statement of the firm's profits or losses for each class of business that it underwrites (with an associated analysis of how these have arisen for any long-term insurance contracts), including a variance analysis detailing any deviations from budget or changes in the key performance indicators that are used to assess the success of its business plan for insurance;
- (2) the firm's exposure to insurance risk at all relevant levels (see PRU 7.1.15 G (1)), as well as across different geographical areas and time zones (see PRU 7.1.15 G (2)), also senior management should be kept informed of the firm's total exposure to insurance risk (see PRU 7.1.15 G (3));
- (3) an analysis of any internal or external trends that could influence the firm's exposure to insurance risk in the future (e.g. new weather patterns, socio-demographic changes, expense overruns etc);
- (4) any new or emerging developments in claims experience (e.g. changes in the type of claims, average claim amounts or the number of similar claims);
- (5) the results of any stress testing or scenario analyses;
- (6) the amount and details of new business written and the amount of business that has lapsed or been cancelled;
- (7) identified fraudulent claims;
- (8) a watch list, detailing, for example, material/catastrophic events that could give rise to significant numbers of new claims or very large claims, contested claims, client complaints, legal and other developments;
- (9) the performance of any reinsurance/risk transfer arrangements; and
- (10) progress reports on matters that have previously been referred under escalation procedures (see PRU 7.1.23 G).
- 31/12/2004
PRU 7.1.23
See Notes
A firm should establish and maintain procedures for the escalation of appropriate matters to the relevant level of management. Such matters may include:
- (1) any significant new exposures to insurance risk, including for example any landmark rulings in the courts;
- (2) a significant increase in the size or number of claims;
- (3) any breaches of the limits set out in PRU 7.1.27 G and PRU 7.1.28 G, in particular senior management should be informed where any maximum limits have been breached (see PRU 7.1.29 G); and
- (4) any unauthorised deviations from its insurance risk policy (including those by a broker, appointed representative or other delegated authority).
- 31/12/2004
PRU 7.1.24
See Notes
- 31/12/2004
PRU 7.1.25
See Notes
- 31/12/2004
Risk control
PRU 7.1.26
See Notes
- 31/12/2004
PRU 7.1.27
See Notes
A firm should consider setting limits for its exposure to insurance risk, which trigger action to be taken to control exposure. Periodically these limits should be amended in the light of new information (e.g. on the expected number or size of claims). For example, limits could be set for:
- (1) the firm's aggregate exposure to a single source of insurance risk or for events that may be the result of a number of different sources;
- (2) the firm's exposure to specific geographic areas or any other groupings of risks whose outcomes may be positively correlated;
- (3) the number of fraudulent claims;
- (4) the number of very large claims that could arise;
- (5) the number of unauthorised deviations from its insurance risk policy;
- (6) the amount of insurance risk than can be transferred to a particular reinsurer;
- (7) the level of expenses incurred in respect of each relevant business area; and
- (8) the level of persistency by product line or distribution channel.
- 31/12/2004
PRU 7.1.28
See Notes
- 31/12/2004
PRU 7.1.29
See Notes
- 31/12/2004
PRU 7.1.30
See Notes
A firm should pay close attention to the wording of its policy documentation to ensure that these wordings do not expose it to more, or higher, claims than it is expecting. In so doing, the firm should consider:
- (1) whether it has adequate in-house legal resources;
- (2) the need for periodic independent legal review of policy documentation;
- (3) the use of standardised documentation and referral procedures for variation of terms;
- (4) reviewing the documentation used by other insurance companies;
- (5) revising documentation for new policies in the light of past experience; and
- (6) the operation of law in the jurisdiction of the policyholder.
- 31/12/2004
PRU 7.1.31
See Notes
- 31/12/2004
PRU 7.1.32
See Notes
- 31/12/2004
PRU 7.1.33
See Notes
- 31/12/2004
Reinsurance and other forms of risk transfer
PRU 7.1.34
See Notes
Before entering into or significantly changing a reinsurance agreement, or any other form of insurance risk transfer agreement, a firm should:
- (1) analyse how the proposed reinsurance/risk transfer agreement will affect its exposure to insurance risk, its underwriting strategy and its ability to meet its regulatory obligations;
- (2) ensure there are adequate legal checking procedures in respect of the draft agreement;
- (3) conduct an appropriate due diligence of the reinsurer's financial stability (that is, solvency) and expertise; and
- (4) understand the nature and limits of the agreement (particular attention should be given to the wording of contracts to ensure that all of the required risks are covered, that the level of available cover is appropriate, and that all the terms, conditions and warranties are unambiguous and understood).
- 31/12/2004
PRU 7.1.35
See Notes
In managing its reinsurance agreements, or any other form of insurance risk transfer agreement, a firm should have in place appropriate systems that allow it to maintain its desired level of cover. This could involve systems for:
- (1) monitoring the risks that are covered (that is, the scope of cover) by these agreements and the level of available cover;
- (2) keeping underwriting staff informed of any changes in the scope or level of cover;
- (3) properly co-ordinating all reinsurance/risk transfer activities so that, in aggregate, the desired level and scope of cover is maintained;
- (4) ensuring that the firm does not become overly reliant on any one reinsurer or other risk transfer provider;
- (5) conducting regular stress testing and scenario analysis to assess the resilience of its reinsurance and risk transfer programmes to catastrophic events that may give rise to large and or numerous claims.
- 31/12/2004
PRU 7.1.36
See Notes
In making a claim on a reinsurance contract (that is, its reinsurance recoveries) or some other risk transfer contract a firm should ensure:
- (1) that it is able to identify and recover any money that it is due in a timely manner; and
- (2) that it makes adequate financial provision for the risk that it is unable to recover any money that it expected to be due, as a result of either a dispute with or a default by the reinsurer/risk transfer provider. Additional guidance on credit risk in reinsurance/risk transfer contracts is provided in PRU 3.2 (Credit risk in insurance).
- 31/12/2004
PRU 7.1.37
See Notes
- 31/12/2004
Record keeping
PRU 7.1.38
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 PRU 1.4.51 G to PRU 1.4.64G. In complying with these rules and guidance, a firm should retain an appropriate record of its insurance risk management activities. This may, for example, include records of:
- (1) each new risk that is underwritten (noting that these records may be held by agents or cedants, rather than directly by the firm provided that the firm has adequate access to those records);
- (2) any material aggregation of exposure to risk from a single source, or of the same kind or to the same potential catastrophe or event;
- (3) each notified claim including the amounts notified and paid, precautionary notices and any re-opened claims;
- (4) policy and contractual documents and any relevant representations made to policyholders;
- (5) other events or circumstances relevant to determining the risks and commitments that arise out of contracts of insurance (including discretionary benefits and charges under any long-term insurance contracts);
- (6) the formal wordings of reinsurance contracts; and
- (7) any other relevant information on the firm's reinsurance or other risk-transfer arrangements, including the extent to which they:
- 31/12/2004
PRU 7.1.39
See Notes
- 31/12/2004
PRU 7.2
Capital resources requirements and technical provisions for insurance business
- 31/12/2004
Application
PRU 7.2.1
See Notes
PRU 7.2 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.
- 31/12/2004
PRU 7.2.2
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.
- 31/12/2004
PRU 7.2.3
See Notes
- 31/12/2004
PRU 7.2.4
See Notes
- 31/12/2004
PRU 7.2.5
See Notes
- 31/12/2004
PRU 7.2.6
See Notes
- 31/12/2004
Purpose
PRU 7.2.7
See Notes
- 31/12/2004
PRU 7.2.8
See Notes
- 31/12/2004
PRU 7.2.9
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).
- 31/12/2004
PRU 7.2.10
See Notes
This section also sets out detailed rules and guidance on the calculation of the following elements of a firm's capital resources requirement (CRR) (see PRU 2.1):
- (1) the general insurance capital requirement; and
- (2) the long-term insurance capital requirement.
- 31/12/2004
PRU 7.2.11
See Notes
- 31/12/2004
Establishing technical provisions
PRU 7.2.12
See Notes
For general insurance business, a firm must establish adequate technical provisions:
- (1) in accordance with the rules in PRU 7.5 for equalisation provisions; and
- (2) otherwise, in accordance with PRU 1.3.5R.
- 31/12/2004
PRU 7.2.13
See Notes
- 31/12/2004
PRU 7.2.14
See Notes
- 31/12/2004
PRU 7.2.15
See Notes
- 31/12/2004
PRU 7.2.16
See Notes
For long-term insurance business, a firm must establish adequate technical provisions:
- (1) for its long-term insurance contracts, in accordance with the rules and guidance in PRU 7.3 relating to mathematical reserves, and with due regard to generally accepted actuarial practice; and
- (2) for long-term insurance liabilities which have fallen due, in accordance with PRU 1.3.5R.
- 31/12/2004
PRU 7.2.17
See Notes
- 31/12/2004
PRU 7.2.18
See Notes
- 31/12/2004
PRU 7.2.19
See Notes
- 31/12/2004
Assets of a value sufficient to cover technical provisions
PRU 7.2.20
See Notes
- 31/12/2004
PRU 7.2.21
See Notes
A composite firm must ensure that:
- (1) its separately identified long-term insurance assets have a value at least equal to the amount of:
- (a) its technical provisions for long-term insurance liabilities; and
- (b) any other liabilities connected with long-term insurance business; and
- (2) that it has other admissible assets of a value at least equal to the amount of its technical provisions for general insurance liabilities.
- 31/12/2004
PRU 7.2.22
See Notes
- 31/12/2004
PRU 7.2.23
See Notes
When valuing assets for the purposes of PRU 7.2.20 R and PRU 7.2.21 R, a firm should bear in mind:
- (1) that the technical provisions should be covered by admissible assets (see PRU 2 Annex 1 RR); and
- (2) the market and counterparty limits set out in PRU 3.2 (Credit risk in insurance). PRU 3.2 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.
- 31/12/2004
PRU 7.2.24
See Notes
- 31/12/2004
PRU 7.2.25
See Notes
For the purpose of determining the value of assets available to meet long-term insurance liabilities in accordance with PRU 7.2.20 R, PRU 7.2.21 R, PRU 7.2.27 R and PRU 7.2.28 R, no value is to be attributed to debts and claims other than in respect of:
- (1) amounts that have already fallen due;
- (2) tax recoveries and claims against compensation funds to the extent not already offset in mathematical reserves.
- 31/12/2004
PRU 7.2.26
See Notes
- 31/12/2004
PRU 7.2.27
See Notes
- 31/12/2004
PRU 7.2.28
See Notes
- 31/12/2004
PRU 7.2.29
See Notes
- 31/12/2004
Localisation (UK firms only)
PRU 7.2.30
See Notes
- (1) Subject to (2), a UK firm must hold admissible assets held pursuant to PRU 4.2.53R:
- (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.
- 31/12/2004
PRU 7.2.31
See Notes
- 31/12/2004
PRU 7.2.32
See Notes
PRU 7.2.30 R does not apply to:
- (1) a pure reinsurer; or
- (2) debts owed by reinsurers; or
- (3) insurance business carried on by a UK firm outside the EEA States; or
- (4) general insurance business class groups 3 and 4 in IPRU(Ins), Annex 11.2, Part II.
- 31/12/2004
PRU 7.2.33
See Notes
For the purposes of PRU 7.2.30 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 listed security is to be treated as held in any country or territory where there is a regulated market on which the security is dealt; and
- (4) a security which is not a listed security is to be treated as held in the country or territory in which the issuer has its head office.
- 31/12/2004
Matching of assets and liabilities
PRU 7.2.34
See Notes
- (1) Subject to (4), the assets held by a firm to cover its technical provisions (see PRU 7.2.20 R and PRU 7.2.21 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's contracts of insurance.
- (4) (1) does not apply to 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.
- 31/12/2004
PRU 7.2.35
See Notes
- 31/12/2004
PRU 7.2.36
See Notes
For the purpose of PRU 7.2.34 R (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. 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.
- 31/12/2004
PRU 7.2.37
See Notes
- 31/12/2004
PRU 7.2.38
See Notes
- 31/12/2004
PRU 7.2.39
See Notes
- 31/12/2004
PRU 7.2.40
See Notes
- 31/12/2004
Premiums for new business
PRU 7.2.41
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:
- (a) establish adequate technical provisions as required by PRU 7.2.16 R;
- (b) hold admissible assets of a value at least equal to the amount of the technical provisions as required by PRU 7.2.20 R to PRU 7.2.28 R; and
- (c) maintain adequate overall financial resources as required by PRU 1.2.22R.
- 31/12/2004
PRU 7.2.42
See Notes
- 31/12/2004
Capital requirements for insurers
PRU 7.2.43
See Notes
- (1) PRU 2.1.9R requires a firm to maintain capital resources equal to or in excess of its capital resources requirement (CRR). PRU 2.1 sets out the overall framework of the CRR; in particular, PRU 2.1.14 R requires that for a firm carrying on general insurance business the CRR is equal to the minimum capital requirement (MCR). PRU 2.1.15 R requires that for realistic basis life firms the CRR is the higher of the MCR and the ECR. PRU 2.1.20 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. PRU 2.1.21 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. PRU 2.1.22 R provides that, for a firm carrying on long-term insurance business, 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 PRU 2.1.10 R, a firm carrying on both general insurance business and long-term insurance business must apply PRU 2.1.9R (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 PRU 7.2.44 G to PRU 7.2.72 R below. PRU 7.2.73 G to PRU 7.2.79 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 PRU 7.2.80 G to PRU 7.2.91 R below.
- 31/12/2004
General insurance capital requirement
PRU 7.2.44
See Notes
In relation to the MCR (see PRU 7.2.43 G), PRU 2.1.30 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 PRU 7.2 as follows:
- (1) the premiums amount in PRU 7.2.45 R;
- (2) the claims amount in PRU 7.2.47 R; and
- (3) the brought forward amount in PRU 7.2.51 R.
- 31/12/2004
The premiums amount
PRU 7.2.45
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 €50 million; multiplied by
- (2) the reinsurance ratio set out in PRU 7.2.54 R.
- 31/12/2004
PRU 7.2.46
See Notes
- 31/12/2004
The claims amount
PRU 7.2.47
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 € 35 million; multiplied by
- (2) the reinsurance ratio set out in PRU 7.2.54 R.
- 31/12/2004
PRU 7.2.48
See Notes
- 31/12/2004
PRU 7.2.49
See Notes
- (1) Subject to (2) and (3), the Euro amounts specified in PRU 7.2.45 R (1) and PRU 7.2.47 R (1) will increase each year, starting on the first review date of 20 September 2005 (and annually after that), by the percentage change in the European index of consumer prices (comprising all European Union member states, as published by Eurostat) from 20 March 2002 to the relevant review date, rounded up to a multiple of €100,000.
- (2) In any year, if the percentage change since the last increase is less than 5%, then there will be no increase.
- (3) The increase will take effect 30 days after the EU Commission has informed the European Parliament and Council of its review and the relevant percentage change.
- 31/12/2004
PRU 7.2.50
See Notes
- 31/12/2004
The brought forward amount
PRU 7.2.51
See Notes
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:
- (1) the technical provisions (calculated net of reinsurance) for claims outstanding at the end of the prior financial year, determined in accordance with PRU 7.2.12 R; to
- (2) the technical provisions (calculated net of reinsurance) for claims outstanding at the beginning of the prior financial year, determined in accordance with PRU 7.2.12 R.
- 31/12/2004
PRU 7.2.52
See Notes
- 31/12/2004
PRU 7.2.53
See Notes
- 31/12/2004
Reinsurance ratio used in calculating the premiums amount and the claims amount
PRU 7.2.54
See Notes
The reinsurance ratio referred to in PRU 7.2.45 R (2) and PRU 7.2.47 R (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.
- 31/12/2004
PRU 7.2.55
See Notes
- 31/12/2004
Gross adjusted premiums amount used in calculating the premiums amount
PRU 7.2.56
See Notes
For the purpose of PRU 7.2.45 R, the gross adjusted premiums amount is the higher of the written and earned gross premiums (as determined in accordance with PRU 7.2.66 R) for the financial year in question, adjusted by:
- (1) except for a pure reinsurer that does not have permission under the Act to effect contracts of insurance, increasing by 50% the amount included in respect of the premiums for general insurance business classes 11, 12 and 13;
- (2) deducting 66.7% of the premiums for actuarial health insurance that meets the conditions set out in PRU 7.2.72 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.
- 31/12/2004
PRU 7.2.57
See Notes
- 31/12/2004
PRU 7.2.58
See Notes
- 31/12/2004
PRU 7.2.59
See Notes
- 31/12/2004
Gross adjusted claims amount used in calculating the claims amount
PRU 7.2.60
See Notes
For the purpose of PRU 7.2.47 R and subject to PRU 7.2.62 R, the gross adjusted claims amount is the amount of gross claims incurred (as determined in accordance with PRU 7.2.66 R) over the reference period (as specified in PRU 7.2.63 R) and adjusted by:
- (1) except for a pure reinsurer that does not have permission under the Act to effect contracts of insurance, increasing by 50% the amount included in respect of the claims incurred for general insurance business classes 11, 12 and 13;
- (2) deducting 66.7% of the claims for actuarial health insurance that meets the conditions set out in PRU 7.2.72 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.
- 31/12/2004
PRU 7.2.61
See Notes
- 31/12/2004
PRU 7.2.62
See Notes
- 31/12/2004
PRU 7.2.63
See Notes
- (1) Except in those cases where paragraph (2) applies, the reference period to be used in PRU 7.2.60 R and PRU 7.2.62 R must be:
- (a) the financial year in question and the two previous financial years; or
- (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:
- (a) the financial year in question and the six previous financial years; or
- (b) the period the firm had been in existence at the end of the financial year in question, if shorter.
- 31/12/2004
PRU 7.2.64
See Notes
- 31/12/2004
PRU 7.2.65
See Notes
- 31/12/2004
Accounting for premiums and claims
PRU 7.2.66
See Notes
For the purposes of PRU 7.2.54 R, PRU 7.2.56 R, PRU 7.2.60 R and PRU 7.2.62 R, amounts of premiums and claims must be:
- (1) determined in accordance with PRU 1.3 (Valuation); 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 to the firm.
- 31/12/2004
PRU 7.2.67
See Notes
- 31/12/2004
PRU 7.2.68
See Notes
- 31/12/2004
PRU 7.2.69
See Notes
- 31/12/2004
PRU 7.2.70
See Notes
- 31/12/2004
PRU 7.2.71
See Notes
- 31/12/2004
Actuarial health insurance
PRU 7.2.72
See Notes
The conditions referred to in PRU 7.2.56 R (2) and PRU 7.2.60 R (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.
- 31/12/2004
Insurance-related capital requirement (general insurance business only)
PRU 7.2.73
See Notes
- 31/12/2004
PRU 7.2.74
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
- (2) the premiums a firm charges in respect of particular business not being adequate to fund future liabilities arising from that business.
- 31/12/2004
PRU 7.2.75
See Notes
- 31/12/2004
Calculation of the insurance-related capital requirement
PRU 7.2.76
See Notes
- 31/12/2004
PRU 7.2.77
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 PRU 7.2.79 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).
- 31/12/2004
PRU 7.2.78
See Notes
In PRU 7.2.77 R references to technical provisions comprise:
- (1) outstanding claims;
- (2) provisions for incurred but not reported (IBNR) claims;
- (3) provisions for incurred but not enough reported (IBNER) claims;
- (4) unearned premium reserves less deferred acquisition costs; and
- (5) unexpired risk reserves;
in each case net of reinsurance receivables.
- 31/12/2004
PRU 7.2.79
See Notes
Class of Business | Net Written Premium capital charge factor | Technical provision capital charge factor |
Reporting Group: Direct Personal Motor | ||
Private motor - comprehensive | 10.0% | 9.0% |
Private motor - non-comprehensive | 10.0% | 9.0% |
Motor cycle | 10.0% | 9.0% |
Reporting Group: Direct Commercial Motor | ||
Fleets | 10.0% | 9.0% |
Commercial vehicles (non-fleet) | 10.0% | 9.0% |
Reporting Group: Direct Accident & Health | ||
Private medical insurance | 5.0% | 7.5% |
HealthCare cash plans | 5.0% | 7.5% |
Personal accident or sickness | 5.0% | 7.5% |
Travel | 5.0% | 7.5% |
Reporting Group: Direct Personal Lines Property | ||
Household and domestic all risks | 10.0% | 10.0% |
Reporting Group: Direct Personal Lines Pecuniary Loss | ||
Assistance | 25.0% | 14.0% |
Creditor | 25.0% | 14.0% |
Extended warranty | 25.0% | 14.0% |
Legal expenses | 25.0% | 14.0% |
Reporting Group: Direct Commercial Lines Property | ||
Commercial property damage and theft | 10.0% | 10.0% |
Engineering all risks | 10.0% | 10.0% |
Contractors all risks | 10.0% | 10.0% |
Energy | 10.0% | 10.0% |
Mixed commercial package | 10.0% | 10.0% |
Reporting Group: Direct Commercial Lines Liability | ||
Employers liability | 14.0% | 14.0% |
Product liability | 14.0% | 14.0% |
Public liability | 14.0% | 14.0% |
Professional indemnity | 14.0% | 14.0% |
Reporting Group: Direct Commercial Lines Pecuniary Loss | ||
Fidelity and contract guarantee | 25.0% | 14.0% |
Mortgage indemnity | 25.0% | 14.0% |
Credit | 25.0% | 14.0% |
Consequential loss | 25.0% | 14.0% |
Suretyship | 25.0% | 14.0% |
Reporting Group: Direct Aviation | ||
Aviation liability | 32.0% | 14.0% |
Aviation hull | 32.0% | 14.0% |
Space and satellite | 32.0% | 14.0% |
Reporting Group: Direct Marine | ||
Marine liability | 22.0% | 17.0% |
Marine hull | 22.0% | 17.0% |
Yacht | 22.0% | 17.0% |
War risks | 22.0% | 17.0% |
Protection and Indemnity | 22.0% | 17.0% |
Freight demurrage and defence | 22.0% | 17.0% |
Reporting Group: Direct Transport | ||
Goods in transit | 12.0% | 14.0% |
Reporting Group: Direct Miscellaneous | ||
Miscellaneous direct business | 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 non-catastrophe | 53.0% | 12.0% |
Non-proportional property catastrophe | 53.0% | 12.0% |
Non-proportional liability (non-motor) | 14.0% | 14.0% |
Non-proportional pecuniary loss | 39.0% | 14.0% |
Non-proportional aggregate cover | 53.0% | 12.0% |
Reporting Group: Proportional Treaty | ||
Proportional assumed accident & health | 12.0% | 16.0% |
Proportional assumed 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 pecuniary loss | 25.0% | 14.0% |
Proportional aggregate cover | 23.0% | 12.0% |
Reporting Group: Facultative Reinsurance Categories | ||
Facultative accident & health | 5.0% | 7.5% |
Facultative motor | 10.0% | 9.0% |
Facultative personal property | 10.0% | 10.0% |
Facultative personal financial loss | 25.0% | 14.0% |
Facultative commercial property | 10.0% | 10.0% |
Facultative commercial liability | 14.0% | 14.0% |
Facultative commercial financial loss | 25.0% | 14.0% |
Facultative marine | 22.0% | 17.0% |
Facultative aviation | 32.0% | 14.0% |
Facultative transport | 12.0% | 14.0% |
Reporting Group: Miscellaneous Reinsurance | ||
Miscellaneous reinsurance accepted business | 39.0% | 14.0% |
- 31/12/2004
Long-term insurance capital requirement
PRU 7.2.80
See Notes
- 31/12/2004
Insurance death risk capital component
PRU 7.2.81
See Notes
The insurance death risk capital component is the aggregate of the amounts which represent the fractions specified by PRU 7.2.82 R of the capital at risk, defined in PRU 7.2.83 R, for 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 preceding financial year of:
- (a) the aggregate capital at risk net of reinsurance cessions; to
- (b) the aggregate capital at risk gross of reinsurance cessions.
- 31/12/2004
PRU 7.2.82
See Notes
For the purpose of PRU 7.2.81 R, the fraction is:
- (1) for long-term insurance business classes 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 business classes III, VII and VIII, except for a pure reinsurer; and
- (3) 0.1% for a pure reinsurer.
- 31/12/2004
PRU 7.2.83
See Notes
For the purpose of PRU 7.2.81 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.
- 31/12/2004
PRU 7.2.84
See Notes
- 31/12/2004
Insurance health risk capital component
PRU 7.2.85
See Notes
The insurance health risk capital component is the highest of:
- (1) the premiums amount (determined in accordance with PRU 7.2.45 R);
- (2) the claims amount (determined in accordance with PRU 7.2.47 R); and
- (3) the brought forward amount (determined in accordance with PRU 7.2.51 R);
- in respect of:
- (a) contracts of insurance falling in long-term insurance business class IV (see PRU 7.2.86 R); and
- (b) risks falling in general insurance business classes 1 or 2 that are written as part of a long-term insurance contract.
- 31/12/2004
PRU 7.2.86
See Notes
- 31/12/2004
PRU 7.2.87
See Notes
- 31/12/2004
Insurance expense risk capital component
PRU 7.2.88
See Notes
The insurance expense risk capital component is:
- (1) in respect of long-term insurance business classes III, VII and VIII, an amount equivalent to 25% of the net administrative expenses in the preceding financial year 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 business class 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 PRU 7.2.90 R and PRU 7.2.91 R).
- 31/12/2004
Insurance market risk capital component
PRU 7.2.89
See Notes
The insurance market risk capital component is 3% of the "adjusted mathematical reserves" (as defined in PRU 7.2.90 R and PRU 7.2.91 R) for all contracts of insurance except those which:
- (1) fall in long-term insurance business classes III, VII or VIII and in respect of which the firm does not bear any investment risk; or
- (2) fall in long-term insurance business class V.
- 31/12/2004
PRU 7.2.90
See Notes
For the purpose of PRU 7.2.88 R and PRU 7.2.89 R, the "adjusted mathematical reserves" is the amount of mathematical reserves (gross of reinsurance cessions), multiplied 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 preceding financial year of:
- (a) the mathematical reserves net of reinsurance cessions; to
- (b) the mathematical reserves gross of reinsurance cessions.
- 31/12/2004
PRU 7.2.91
See Notes
The "adjusted mathematical reserves" do not include:
- (1) for the purposes of PRU 7.2.88 R (3) and PRU 7.2.89 R, amounts arising from tontines (long-term insurance business class V);
- (2) for the purposes of PRU 7.2.88 R (3), amounts arising from insurance business in classes III, VII or VIII, to the extent that such business meets the conditions in PRU 7.2.88 R (1);
- (3) for the purposes of PRU 7.2.89 R, amounts arising from insurance business in classes III, VII or VIII, to the extent that such business meets the conditions in PRU 7.2.89 R (1).
- 31/12/2004
PRU 7.3
Mathematical reserves
- 31/12/2004
Application
PRU 7.3.1
See Notes
PRU 7.3 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.
- 31/12/2004
Purpose
PRU 7.3.2
See Notes
- 31/12/2004
PRU 7.3.3
See Notes
- 31/12/2004
PRU 7.3.4
See Notes
- 31/12/2004
PRU 7.3.5
See Notes
- 31/12/2004
PRU 7.3.6
See Notes
- 31/12/2004
Basic valuation method
PRU 7.3.7
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.
- 31/12/2004
PRU 7.3.8
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.
- 31/12/2004
PRU 7.3.9
See Notes
- 31/12/2004
Methods and assumptions
PRU 7.3.10
See Notes
In the actuarial valuation under PRU 7.3.7 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 PRU 7.3.11 G);
- (3) are consistent with the method of valuing assets (see PRU 1.3);
- (4) include appropriate margins for adverse deviation of relevant factors (see PRU 7.3.12 G);
- (5) recognise the distribution of profits (that is, emerging surplus) in an appropriate way over the duration of each contract of insurance;
- (6) take into account its regulatory duty to treat its customers fairly (see Principle 6); and
- (7) are in accordance with generally accepted actuarial practice.
- 31/12/2004
PRU 7.3.11
See Notes
- 31/12/2004
PRU 7.3.12
See Notes
- 31/12/2004
Margins for adverse deviation
PRU 7.3.13
See Notes
- 31/12/2004
PRU 7.3.14
See Notes
- 31/12/2004
PRU 7.3.15
See Notes
- 31/12/2004
PRU 7.3.16
See Notes
When setting the margins for adverse deviation required by PRU 7.3.10 R (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.
- 31/12/2004
PRU 7.3.17
See Notes
- 31/12/2004
PRU 7.3.18
See Notes
- 31/12/2004
PRU 7.3.19
See Notes
Further detailed rules and guidance on margins for adverse deviation are included in PRU 7.3.32 G to PRU 7.3.91 G . In particular, the cross-references for the different assumptions used in calculating the mathematical reserves are as follows:
- (1) expenses (PRU 7.3.50 R to PRU 7.3.58 G);
- (2) mortality and morbidity (PRU 7.3.59 R to PRU 7.3.61 G);
- (3) options (PRU 7.3.62 R to PRU 7.3.72 G);
- (4) persistency (PRU 7.3.73 G to PRU 7.3.77 G); and
- (5) reinsurance ( PRU 7.3.78 G to PRU 7.3.91 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 PRU 4.2.28 R to PRU 4.2.48 G.
- 31/12/2004
Record keeping
PRU 7.3.20
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.
- 31/12/2004
PRU 7.3.21
See Notes
PRU 1.4.53 R requires firms to maintain accounting and other records for a minimum of three years, or longer as appropriate. For the purposes of PRU 7.3.20 R, a period of longer than three years will be appropriate for a firm's long-term insurance business. In determining an appropriate period, a firm should have regard to:
- (1) the detailed rules and guidance on record keeping in PRU 1.4.51 G - PRU 1.4.64 G;
- (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.
- 31/12/2004
Valuation of individual contracts
PRU 7.3.22
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 where they are likely to provide the same, or a higher, result.
- (3) A firm must set up additional mathematical reserves on an aggregated basis for general risks that are not specific to individual contracts.
- 31/12/2004
PRU 7.3.23
See Notes
- 31/12/2004
Contracts not to be treated as assets
PRU 7.3.24
See Notes
- 31/12/2004
PRU 7.3.25
See Notes
- 31/12/2004
Avoidance of future valuation strain
PRU 7.3.26
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) (1) may be applied to a group of similar contracts instead of to the individual contracts within that group.
- 31/12/2004
PRU 7.3.27
See Notes
- 31/12/2004
Cash flows to be valued
PRU 7.3.28
See Notes
In a prospective valuation, a firm must include the following in the cash flows to be valued:
- (1) future premiums (see PRU 7.3.35 G to PRU 7.3.47 G);
- (2) expenses, including commissions (see PRU 7.3.50 R to PRU 7.3.58 G);
- (3) benefits payable (see PRU 7.3.29 R); and
- (4) amounts to be received or paid in respect of the long-term insurance contracts under contracts of reinsurance or analogous non-reinsurance financing agreements (PRU 7.3.78 G to PRU 7.3.91 G).
- 31/12/2004
PRU 7.3.29
See Notes
For the purpose of PRU 7.3.28 R (3), 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
- (4) discretionary benefits payable in accordance with the firm's regulatory duty to treat its customers fairly.
- 31/12/2004
PRU 7.3.30
See Notes
- 31/12/2004
PRU 7.3.31
See Notes
- 31/12/2004
Valuation assumptions: detailed rules and guidance
PRU 7.3.32
See Notes
- 31/12/2004
Valuation rates of interest
PRU 7.3.33
See Notes
- 31/12/2004
PRU 7.3.34
See Notes
- 31/12/2004
Future premiums
PRU 7.3.35
See Notes
- 31/12/2004
PRU 7.3.36
See Notes
- 31/12/2004
Future premiums: firms reporting only on a regulatory basis
PRU 7.3.37
See Notes
- 31/12/2004
PRU 7.3.38
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 PRU 7.3.43 R.
- 31/12/2004
PRU 7.3.39
See Notes
- 31/12/2004
PRU 7.3.40
See Notes
- 31/12/2004
PRU 7.3.41
See Notes
A firm must treat the change referred to in PRU 7.3.40 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.
- 31/12/2004
PRU 7.3.42
See Notes
- 31/12/2004
Future net premiums: adjustment for deferred acquisition costs
PRU 7.3.43
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:
- (a) the value of the excess of actual premiums over net premiums; and
- (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.
- 31/12/2004
PRU 7.3.44
See Notes
- 31/12/2004
PRU 7.3.45
See Notes
- 31/12/2004
Future premiums: firms also reporting with-profits insurance liabilities on a realistic basis
PRU 7.3.46
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 PRU 7.3.48 R).
- 31/12/2004
PRU 7.3.47
See Notes
- 31/12/2004
Future premiums: accumulating with-profits policies
PRU 7.3.48
See Notes
- (1) This rule applies to accumulating with-profits policies written on a recurring single premium basis.
- (2) A firm must not attribute any value to a future premium under the contract.
- (3) Any liability arising only upon the payment of that premium may be ignored except to the extent that the value of that liability upon payment would exceed the amount of that premium.
- 31/12/2004
PRU 7.3.49
See Notes
- 31/12/2004
Expenses
PRU 7.3.50
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.
- (3) A firm must not rely upon an implicit provision arising from the method of valuing future premiums except to the extent that:
- 31/12/2004
PRU 7.3.51
See Notes
- 31/12/2004
PRU 7.3.52
See Notes
- 31/12/2004
PRU 7.3.53
See Notes
- 31/12/2004
PRU 7.3.54
See Notes
- 31/12/2004
PRU 7.3.55
See Notes
The provisions for expenses (whether implicit or explicit) required by PRU 7.3.50 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.
- 31/12/2004
PRU 7.3.56
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 PRU 7.3.13 R to PRU 7.3.19 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 by product type, by distribution channel and as between acquisition and non-acquisition expenses;
- (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.
- 31/12/2004
PRU 7.3.57
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.
- 31/12/2004
PRU 7.3.58
See Notes
- 31/12/2004
Mortality and Morbidity
PRU 7.3.59
See Notes
- 31/12/2004
PRU 7.3.60
See Notes
The rates of mortality or morbidity should contain prudent margins for adverse deviation (see PRU 7.3.13 R to PRU 7.3.19 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.
- 31/12/2004
PRU 7.3.61
See Notes
- 31/12/2004
Options
PRU 7.3.62
See Notes
- 31/12/2004
PRU 7.3.63
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.
- 31/12/2004
PRU 7.3.64
See Notes
- 31/12/2004
PRU 7.3.65
See Notes
- 31/12/2004
PRU 7.3.66
See Notes
- 31/12/2004
PRU 7.3.67
See Notes
- 31/12/2004
PRU 7.3.68
See Notes
- 31/12/2004
PRU 7.3.69
See Notes
- 31/12/2004
PRU 7.3.70
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 PRU 7.3.7 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
- (b) discretionary benefits and charges will be set so as to fulfil the firm's regulatory duty to treat its customers fairly.
- (4) (1) may be applied to a group of similar contracts instead of to the individual contracts within that group.
- 31/12/2004
PRU 7.3.71
See Notes
For the purposes of PRU 7.3.70 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.
- 31/12/2004
PRU 7.3.72
See Notes
- 31/12/2004
Persistency assumptions
PRU 7.3.73
See Notes
- 31/12/2004
PRU 7.3.74
See Notes
- 31/12/2004
PRU 7.3.75
See Notes
- 31/12/2004
PRU 7.3.76
See Notes
- 31/12/2004
PRU 7.3.77
See Notes
- 31/12/2004
PRU 7.3.78
See Notes
- 31/12/2004
PRU 7.3.79
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 that 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 need not be valued (see PRU 7.3.85 R); and
- (3) reinsurance cash inflows that are contingent on factors or conditions other than the insurance risks that are reinsured must not be valued.
- 31/12/2004
PRU 7.3.80
See Notes
In valuing reinsurance cash flows, a firm should establish prudent margins for adverse deviation (see PRU 7.3.13 R to PRU 7.3.19 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.
- 31/12/2004
PRU 7.3.81
See Notes
- 31/12/2004
PRU 7.3.82
See Notes
- 31/12/2004
PRU 7.3.83
See Notes
- 31/12/2004
PRU 7.3.84
See Notes
- 31/12/2004
PRU 7.3.85
See Notes
- 31/12/2004
PRU 7.3.86
See Notes
- 31/12/2004
PRU 7.3.87
See Notes
- 31/12/2004
PRU 7.3.88
See Notes
- 31/12/2004
PRU 7.3.89
See Notes
- 31/12/2004
PRU 7.3.90
See Notes
- 31/12/2004
PRU 7.3.91
See Notes
- 31/12/2004
PRU 7.4
With-profits insurance capital component
- 31/12/2004
Application
PRU 7.4.1
See Notes
- 31/12/2004
PRU 7.4.2
See Notes
- 31/12/2004
Purpose
PRU 7.4.3
See Notes
- 31/12/2004
PRU 7.4.4
See Notes
- 31/12/2004
PRU 7.4.5
See Notes
- 31/12/2004
Main requirements
PRU 7.4.6
See Notes
- 31/12/2004
PRU 7.4.7
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:
- (a) A is the amount of the regulatory excess capital for that fund (see PRU 7.4.23 R); and
- (b) B is the amount of the realistic excess capital for that fund (see PRU 7.4.32 R).
- (3) Where a capital instrument that can be included in the firm's capital resources in accordance with PRU 2.2 has been attributed wholly or partly to a with-profits fund and that instrument meets the requirements of PRU 2.2.93 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 PRU 7.4.43 R.
- 31/12/2004
PRU 7.4.8
See Notes
- 31/12/2004
PRU 7.4.9
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's mathematical 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's governing body; and
- (c) report to the firm's governing body on the results of that calculation.
- (2) As part of his duties under SUP 4.3.16 G, the with-profits actuary must advise the firm's governing 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's governing body as to whether the methods and assumptions (including the allowance for management actions) used for that calculation are consistent with the firm's Principles and Practices of Financial Management (PPFM - see COB 6.10 ) and with its regulatory duty to treat its customers fairly.
- 31/12/2004
Definitions
PRU 7.4.10
See Notes
- 31/12/2004
PRU 7.4.11
See Notes
- 31/12/2004
PRU 7.4.12
See Notes
- 31/12/2004
PRU 7.4.13
See Notes
- 31/12/2004
PRU 7.4.14
See Notes
- 31/12/2004
PRU 7.4.15
See Notes
- 31/12/2004
PRU 7.4.16
See Notes
- 31/12/2004
Record keeping
PRU 7.4.17
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.
- 31/12/2004
PRU 7.4.18
See Notes
PRU 1.4.53 R requires firms to maintain accounting and other records for a minimum of three years, or longer as appropriate. For the purposes of PRU 7.4.17 R, a period of longer than three years will be appropriate for a firm's long-term insurance business. In determining an appropriate time period, a firm should have regard to:
- (1) the detailed guidance on record keeping in PRU 1.4.51 G to PRU 1.4.64 G;
- (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.
- 31/12/2004
PRU 7.4.19
See Notes
- 31/12/2004
PRU 7.4.20
See Notes
- 31/12/2004
General principles for allocating aggregate amounts
PRU 7.4.21
See Notes
Where any calculation is required under this section which:
- (1) is to be made in respect of any with-profits fund of a firm; and
- (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).
- 31/12/2004
PRU 7.4.22
See Notes
In any case where:
- (1) non-profit insurance contracts are written in any with-profits fund of a firm; and
- (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;
- 31/12/2004
Calculation of regulatory excess capital
PRU 7.4.23
See Notes
A firm must calculate the regulatory excess capital for each of its with-profits funds by deducting B from A, where:
- (1) A is the regulatory value of assets of the fund (PRU 7.4.24 R); and
- (2) B is the sum of:
- (a) the regulatory value of liabilities of the fund (PRU 7.4.29 R);
- (b) the long-term insurance capital requirement in respect of the fund's with-profits insurance contracts; and
- (c) the resilience capital requirement in respect of the fund's with-profits insurance contracts.
- 31/12/2004
Regulatory value of assets
PRU 7.4.24
See Notes
- (1) For the purposes of PRU 7.4.23 R (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 contract written in the fund; and
- (b) the following amounts, to the extent that each of them is covered by the fund's long-term admissible assets:
- (i) an amount in respect of the non-profit insurance contracts written in the fund which represents an appropriate allocation of the firm's long-term insurance capital requirement; and
- (ii) 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.
- 31/12/2004
PRU 7.4.25
See Notes
For the purpose of determining the value of a fund's long-term admissible assets in accordance with PRU 7.4.24 R (1)(a), no value is to be attributed to debts and claims other than in respect of:
- (1) amounts that have already fallen due; and
- (2) tax recoveries and claims against compensation funds to the extent not already offset in the mathematical reserves.
- 31/12/2004
PRU 7.4.26
See Notes
- 31/12/2004
PRU 7.4.27
See Notes
- 31/12/2004
PRU 7.4.28
See Notes
- 31/12/2004
Regulatory value of liabilities
PRU 7.4.29
See Notes
For the purposes of PRU 7.4.23 R (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
- (2) the regulatory current liabilities of the fund (see PRU 7.4.30 R).
- 31/12/2004
PRU 7.4.30
See Notes
For the purposes of PRU 7.4.29 R (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 PRU 4.3.17 R).
- 31/12/2004
PRU 7.4.31
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:
- (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 9.6(1).
- 31/12/2004
Calculation of realistic excess capital
PRU 7.4.32
See Notes
A firm must calculate the realistic excess capital for each of its with-profits funds by deducting B from A, where:
- (1) A is the realistic value of assets of the fund (see PRU 7.4.33R); and
- (2) B is the sum of:
- (a) the realistic value of liabilities of the fund (see PRU 7.4.40 R); and
- (b) the risk capital margin for the fund (see PRU 7.4.43 R).
- 31/12/2004
Realistic value of assets
PRU 7.4.33
See Notes
- (1) For the purposes of PRU 7.4.32 R (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 PRU 7.4.24 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;
- (b) the amount of the fund's excess admissible assets (see PRU 7.4.36 R);
- (c) the present value of future profits (or losses) on any non-profit insurance contracts written in the with-profits fund (see PRU 7.4.37 R);
- (d) the value of any derivative or quasi-derivative held in the fund (see PRU 1.3.11 R to PRU 1.3.30 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):
- (a) are shares in a related undertaking (B) which carries on long-term insurance business; and
- (b) have been identified by A under PRU 7.4.21 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 excess of the present value of future profits (or losses) on any non-profit insurance contracts written by B (calculated on a basis consistent with PRU 7.4.37 R), excluding any amount arising from business that is written in a with-profits fund, over any present value of future profits (or losses) used in calculating B's regulatory capital requirements and arising from business outside its with-profits funds; 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) 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, to the extent that this 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 PRU 7.4.37 R.
- 31/12/2004
PRU 7.4.34
See Notes
- 31/12/2004
PRU 7.4.35
See Notes
- 31/12/2004
PRU 7.4.36
See Notes
- 31/12/2004
PRU 7.4.37
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;
- (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 PRU 7.4.22 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 PRU 7.4.26 R, of long-term admissible assets as between the with-profits insurance contracts and any non-profit insurance contracts written in the fund.
- 31/12/2004
PRU 7.4.38
See Notes
- 31/12/2004
PRU 7.4.39
See Notes
- 31/12/2004
Realistic value of liabilities: general
PRU 7.4.40
See Notes
For the purposes of PRU 7.4.32 R (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.
- 31/12/2004
PRU 7.4.41
See Notes
- 31/12/2004
PRU 7.4.42
See Notes
Detailed rules and guidance for the calculation of the three elements referred to in PRU 7.4.40 R are contained below in this section:
- (1) PRU 7.4.116 R to PRU 7.4.135 G refer to the with-profits benefits reserve;
- (2) PRU 7.4.136 G to PRU 7.4.189 G refer to the future policy related liabilities; and
- (3) PRU 7.4.190 R and PRU 7.4.191 R refer to the realistic current liabilities.
- 31/12/2004
Risk capital margin
PRU 7.4.43
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 (PRU 7.4.45 R) which, in the most adverse scenario, will have a value (PRU 7.4.46 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 PRU 7.4.44 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 PRU 7.4.45 R (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 PRU 7.4.33 R (1)(e) (related undertakings carrying on long-term insurance business) or PRU 7.4.45 R (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 PRU 7.4.190 R (1) in respect of a defined benefits pension scheme in accordance with PRU 7.4.191 R .
- 31/12/2004
PRU 7.4.44
See Notes
For the purposes of PRU 7.4.43 R (3), the scenarios are one scenario selected from each of the following:
- (1) in respect of UK and other assets within PRU 7.4.62 R (1)(a):
- (a) the range of market risk scenarios identified in accordance with PRU 7.4.68 R (1) (equities);
- (b) the range of market risk scenarios identified in accordance with PRU 7.4.68 R (2) (real estate); and
- (c) the range of market risk scenarios identified in accordance with PRU 7.4.68 R (3) (fixed interest securities);
- (2) in respect of non-UK assets within PRU 7.4.62 R (1)(b):
- (a) the range of market risk scenarios identified in accordance with PRU 7.4.73 R (1) (equities);
- (b) the range of market risk scenarios identified in accordance with PRU 7.4.73 R (2) (real estate); and
- (c) the range of market risk scenarios identified in accordance with PRU 7.4.73 R (3) (fixed interest securities);
- (3) the range of credit risk scenarios identified in accordance with PRU 7.4.78 R (1) (bond or debt items);
- (4) the range of credit risk scenarios identified in accordance with PRU 7.4.78 R (2) (reinsurance items or analogous non-reinsurance financing agreements);
- (5) the range of credit risk scenarios identified in accordance with PRU 7.4.78 R (3) (other items including derivatives and quasi-derivatives); and
- (6) the persistency risk scenario identified in accordance with PRU 7.4.100R.
- 31/12/2004
PRU 7.4.45
See Notes
- (1) In PRU 7.4.43 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 PRU 7.4.33 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's non-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.
- 31/12/2004
PRU 7.4.46
See Notes
In valuing the relevant assets identified under PRU 7.4.43 R (2), a firm must use the same methods of valuation as in PRU 7.4.33 R, except that:
- (1) the value of any admissible assets not identified as held within the with-profits fund (PRU 7.4.45 R (2)(b)) must be as determined under PRU 1.3; and
- (2) the value of any asset which forms part of the range of assets as a result of PRU 7.4.45 R (2)(c) must be determined on a basis consistent with that described in PRU 7.4.37 R.
- 31/12/2004
PRU 7.4.47
See Notes
The purpose of the risk capital margin for a with-profits fund is to cover adverse deviation from:
- (1) the fund's realistic value of liabilities;
- (2) the value of assets identified, in accordance with PRU 7.4.43 R (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.
- 31/12/2004
PRU 7.4.48
See Notes
- 31/12/2004
PRU 7.4.49
See Notes
- 31/12/2004
PRU 7.4.50
See Notes
- 31/12/2004
PRU 7.4.51
See Notes
- 31/12/2004
Management actions
PRU 7.4.52
See Notes
- 31/12/2004
PRU 7.4.53
See Notes
- 31/12/2004
PRU 7.4.54
See Notes
- 31/12/2004
PRU 7.4.55
See Notes
- 31/12/2004
PRU 7.4.56
See Notes
- 31/12/2004
PRU 7.4.57
See Notes
- 31/12/2004
Policyholder actions
PRU 7.4.58
See Notes
- 31/12/2004
PRU 7.4.59
See Notes
Policyholder actions refer to the foreseeable actions that would be taken by the firm's policyholders, 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.
- 31/12/2004
PRU 7.4.60
See Notes
- 31/12/2004
PRU 7.4.61
See Notes
- 31/12/2004
Market risk scenario
PRU 7.4.62
See Notes
- (1) For the purposes of PRU 7.4.44 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 PRU 7.4.68 R; and
- (b) for exposures to other non-UK assets, the ranges of scenarios set out in PRU 7.4.73 R.
- (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 (PRU 7.4.63 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.
- 31/12/2004
PRU 7.4.63
See Notes
- 31/12/2004
PRU 7.4.64
See Notes
- 31/12/2004
PRU 7.4.65
See Notes
- 31/12/2004
PRU 7.4.66
See Notes
In PRU 7.4.62 R to PRU 7.4.76 G, where there is reference to exposure to assets invested in a territory this should be interpreted as follows:
- (1) for equities, a stock that is listed on a stock market in that territory or, if unlisted, the stock of a company that is incorporated in that territory;
- (2) for bonds, one that is denominated in the currency of that territory, or issued by an institution incorporated in that territory;
- (3) for real estate, a property that is located in that territory; and
- (4) for derivatives, quasi-derivatives and other instruments, one where the assets to which the instrument is exposed are assets invested in that territory.
- 31/12/2004
PRU 7.4.67
See Notes
- 31/12/2004
Market risk scenario for exposures to UK assets and certain non-UK assets
PRU 7.4.68
See Notes
The range of market risk scenarios referred to in PRU 7.4.62(1)(a) is:
- (1) a rise or fall in the market value of equities of up to the greater of:
- (a) 10%; and
- (b) 20%, less the equity market adjustment ratio (see PRU 7.4.71 R);
- (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.
- 31/12/2004
PRU 7.4.69
See Notes
For the purposes of PRU 7.4.68 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.
- 31/12/2004
PRU 7.4.70
See Notes
- 31/12/2004
Equity market adjustment ratio
PRU 7.4.71
See Notes
The equity market adjustment ratio referred to in PRU 7.4.68 R (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%.
- 31/12/2004
PRU 7.4.72
See Notes
- 31/12/2004
Market risk scenario for exposures to other non-UK assets
PRU 7.4.73
See Notes
The range of market risk scenarios referred to in PRU 7.4.62 R (1)(b) is:
- (1) an appropriate rise or fall in the market value of equities listed in that territory (PRU 7.4.75 G), which must be at least equal to the percentage determined in PRU 7.4.68 R (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.
- 31/12/2004
PRU 7.4.74
See Notes
For the purposes of PRU 7.4.73 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.
- 31/12/2004
PRU 7.4.75
See Notes
For the purposes of PRU 7.4.73 R (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).
- 31/12/2004
PRU 7.4.76
See Notes
For the purpose of PRU 7.4.75 G (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 PRU 7.4.43 R (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.
- 31/12/2004
General
PRU 7.4.77
See Notes
- (1) The purpose of the credit risk scenarios in PRU 7.4.78 R to PRU 7.4.99 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 PRU 4.2.
- (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 PRU 7.4.43 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's counterparty for the option combined with a change in the quality of the counterparty should be allowed for.
- 31/12/2004
PRU 7.4.78
See Notes
For the purposes of PRU 7.4.44 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 PRU 7.4.84 R in respect of any bond or debt item;
- (2) changes in value determined according to PRU 7.4.94 R in respect of any reinsurance item or any analogous non-reinsurance financing agreement item; and
- (3) changes in value determined according to PRU 7.4.98 R for any other item (including any derivative or quasi-derivative).
- 31/12/2004
PRU 7.4.79
See Notes
- 31/12/2004
PRU 7.4.80
See Notes
- 31/12/2004
PRU 7.4.81
See Notes
- 31/12/2004
PRU 7.4.82
See Notes
- 31/12/2004
PRU 7.4.83
See Notes
- 31/12/2004
Spread stresses to be assumed for bonds and debt
PRU 7.4.84
See Notes
- (1) In PRU 7.4.78 R (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 PRU 7.4.87 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 PRU 7.4.89 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 PRU 7.4.90 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 PRU 7.4.89 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.
- 31/12/2004
PRU 7.4.85
See Notes
- 31/12/2004
PRU 7.4.86
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 PRU 7.4.90 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 PRU 7.4.84 R (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.
- 31/12/2004
PRU 7.4.87
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 PRU 7.4.92 R; and
- (b) the credit rating description in the first column of Table PRU 7.4.90 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 European Community;
- (b) the International Monetary Fund; and
- (c) the Bank for International Settlements.
- 31/12/2004
PRU 7.4.88
See Notes
- 31/12/2004
PRU 7.4.89
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 PRU 7.4.92 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 PRU 7.4.90 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 PRU 7.4.90 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.
- 31/12/2004
PRU 7.4.90
See Notes
Credit Rating Description | Listed rating agencies | Spread Factor | |||
A.M. Best Company | Fitch Ratings | Moody's Investors Service | Standard & Poor's 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 |
- 31/12/2004
PRU 7.4.91
See Notes
- 31/12/2004
PRU 7.4.92
See Notes
For the purposes of PRU 7.4.87 R and PRU 7.4.89 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 PRU 7.4.93 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.
- 31/12/2004
PRU 7.4.93
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.
- 31/12/2004
Credit risk scenario for reinsurance
PRU 7.4.94
See Notes
- (1) The contracts of reinsurance or analogous non-reinsurance financing agreements to which PRU 7.4.78 R (2) applies are those:
- (a) into which the firm has entered;
- (b) which represent an economic asset under the single event applicable under PRU 7.4.43 R (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 PRU 7.4.78 R (1).
- (4) For the purpose of (3), 5% should be replaced by 10% in PRU 7.4.84 R (2)(b).
- 31/12/2004
PRU 7.4.95
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 giving rise to charges on future surplus arising.
- (2) In assessing values in accordance with PRU 7.4.94 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 PRU 7.4.84 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 PRU 7.4.92 R for the nomination of financial strength ratings. Table PRU 7.4.97 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 PRU 7.4.78 R (1) are required to result in a reduction in market value for some items of 5% of their current value through the operation of PRU 7.4.84 R (2)(b). For reinsurance contracts and analogous non-reinsurance financing agreements, determining the change in value by reference to PRU 7.4.94 R (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. PRU 7.4.94 R (4) relates to this requirement.
- 31/12/2004
PRU 7.4.96
See Notes
- 31/12/2004
PRU 7.4.97
See Notes
Financial Strength Description | A.M. Best Company | Fitch Ratings | Moody's Investors Service | Standard & Poor's 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 |
- 31/12/2004
Credit risk scenario for other exposures (including any derivative or quasi-derivative)
PRU 7.4.98
See Notes
- 31/12/2004
PRU 7.4.99
See Notes
- 31/12/2004
Persistency risk scenario
PRU 7.4.100
See Notes
- 31/12/2004
PRU 7.4.101
See Notes
The termination rates referred to in PRU 7.4.100 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.
- 31/12/2004
PRU 7.4.102
See Notes
- 31/12/2004
PRU 7.4.103
See Notes
- 31/12/2004
Realistic value of liabilities: detailed provisions
PRU 7.4.104
See Notes
PRU 7.4.40 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:
- (1) general rules and guidance in PRU 7.4.105 R to PRU 7.4.115 G;
- (2) with-profits benefits reserve in PRU 7.4.116 R to PRU 7.4.135 G;
- (3) future policy related liabilities in PRU 7.4.136 G to PRU 7.4.189 G; and
- (4) realistic current liabilities in PRU 7.4.190 R and PRU 7.4.191 R.
- 31/12/2004
Methods and assumptions: general
PRU 7.4.105
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 (PRU 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 (PRU 7.4.53 R) and policyholder actions (PRU 7.4.59 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
- (9) are consistent with the firm's PPFM.
- 31/12/2004
PRU 7.4.106
See Notes
- 31/12/2004
PRU 7.4.107
See Notes
- 31/12/2004
PRU 7.4.108
See Notes
- 31/12/2004
Valuation of contracts: General
PRU 7.4.109
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.
- 31/12/2004
PRU 7.4.110
See Notes
- 31/12/2004
PRU 7.4.111
See Notes
- 31/12/2004
PRU 7.4.112
See Notes
- 31/12/2004
PRU 7.4.113
See Notes
- 31/12/2004
PRU 7.4.114
See Notes
- 31/12/2004
PRU 7.4.115
See Notes
- 31/12/2004
With-profits benefits reserve
PRU 7.4.116
See Notes
A firm must calculate a with-profits benefits reserve for a with-profits fund using either:
- (1) a retrospective calculation under PRU 7.4.118 R (the retrospective method); or
- (2) a prospective calculation under PRU 7.4.128 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).
- 31/12/2004
PRU 7.4.117
See Notes
- 31/12/2004
Retrospective method
PRU 7.4.118
See Notes
- 31/12/2004
PRU 7.4.119
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:
- (1) premiums received from the policyholder;
- (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.
- 31/12/2004
PRU 7.4.120
See Notes
- 31/12/2004
PRU 7.4.121
See Notes
- 31/12/2004
PRU 7.4.122
See Notes
- 31/12/2004
PRU 7.4.123
See Notes
- 31/12/2004
PRU 7.4.124
See Notes
- 31/12/2004
PRU 7.4.125
See Notes
- 31/12/2004
PRU 7.4.126
See Notes
- 31/12/2004
PRU 7.4.127
See Notes
- 31/12/2004
Prospective method
PRU 7.4.128
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 (PRU 7.4.129 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.
- 31/12/2004
PRU 7.4.129
See Notes
For the purposes of PRU 7.4.128 R (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.
- 31/12/2004
PRU 7.4.130
See Notes
- 31/12/2004
PRU 7.4.131
See Notes
- 31/12/2004
PRU 7.4.132
See Notes
- 31/12/2004
PRU 7.4.133
See Notes
- 31/12/2004
PRU 7.4.134
See Notes
- 31/12/2004
PRU 7.4.135
See Notes
- 31/12/2004
Overview of liabilities
PRU 7.4.136
See Notes
PRU 7.4.137 R lists the future policy related liabilities for a with-profits fund that form part of a firm's realistic value of liabilities in PRU 7.4.40 R. Detailed rules and guidance relating to particular types of liability and asset are set out in PRU 7.4.139 R to PRU 7.4.168 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) PRU 7.4.169 R to PRU 7.4.186 G refer to valuing the costs of guarantees, options and smoothing; and
- (2) PRU 7.4.187 R to PRU 7.4.189 G refer to the treatment of surplus on guarantees, options and smoothing.
- 31/12/2004
PRU 7.4.137
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 PRU 7.4.139 R);
- (2) planned enhancements to the with-profits benefits reserve (see PRU 7.4.141 R);
- (3) planned deductions for the costs of guarantees, options and smoothing from the with-profits benefits reserve (see PRU 7.4.144 R);
- (4) planned deductions for other costs deemed chargeable to the with-profits benefits reserve (see PRU 7.4.146 R);
- (5) future costs of contractual guarantees (other than financial options) (see PRU 7.4.148 R);
- (6) future costs of non-contractual commitments (see PRU 7.4.154 R);
- (7) future costs of financial options (see PRU 7.4.156 G);
- (8) future costs of smoothing (see PRU 7.4.158 R);
- (9) financing costs (see PRU 7.4.162 R);
- (10) any other further liabilities required for the firm to fulfil its regulatory duty to treat its customers fairly; and
- (11) other long-term insurance liabilities (see PRU 7.4.165 R).
- 31/12/2004
PRU 7.4.138
See Notes
- 31/12/2004
Past miscellaneous surplus (or deficit) planned to be attributed to the with-profits benefits reserve
PRU 7.4.139
See Notes
- 31/12/2004
PRU 7.4.140
See Notes
- 31/12/2004
Planned enhancements to the with-profits benefits reserve
PRU 7.4.141
See Notes
- 31/12/2004
PRU 7.4.142
See Notes
- 31/12/2004
PRU 7.4.143
See Notes
- 31/12/2004
Planned deductions for the costs of guarantees, options and smoothing from the with-profits benefits reserve
PRU 7.4.144
See Notes
- 31/12/2004
PRU 7.4.145
See Notes
- 31/12/2004
Planned deductions for other costs deemed chargeable to the with-profits benefits reserve
PRU 7.4.146
See Notes
- 31/12/2004
PRU 7.4.147
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.
- 31/12/2004
Future costs of contractual guarantees (other than financial options)
PRU 7.4.148
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:
- (1) the value of guarantees arising under a policy or group of policies in the fund; and
- (2) the fund's with-profits benefits reserve allocated in respect of that policy or group of policies.
- 31/12/2004
PRU 7.4.149
See Notes
- 31/12/2004
PRU 7.4.150
See Notes
- 31/12/2004
PRU 7.4.151
See Notes
- 31/12/2004
PRU 7.4.152
See Notes
- 31/12/2004
PRU 7.4.153
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.
- 31/12/2004
Future costs of non-contractual commitments
PRU 7.4.154
See Notes
- 31/12/2004
PRU 7.4.155
See Notes
Some examples of these non-contractual commitments are:
- (1) statements by the firm regarding the ability of policies to cover defined amounts, such as the repayment of a mortgage;
- (2) statements by the firm regarding regular withdrawals from a policy being without penalty;
- (3) guaranteed annuity and cash option rates being provided beyond the strict interpretation of the policy; and
- (4) the costs of any promises to customers or other benefits that need to be provided to fulfil a firm's regulatory duty to treat its customers fairly.
- 31/12/2004
Future costs of financial options
PRU 7.4.156
See Notes
- 31/12/2004
PRU 7.4.157
See Notes
- 31/12/2004
Future costs of smoothing
PRU 7.4.158
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 PRU 7.4.148 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 PRU 7.4.141 R;
- calculated as at the date of claim.
- 31/12/2004
PRU 7.4.159
See Notes
- 31/12/2004
PRU 7.4.160
See Notes
- 31/12/2004
PRU 7.4.161
See Notes
- 31/12/2004
Financing costs
PRU 7.4.162
See Notes
- 31/12/2004
PRU 7.4.163
See Notes
In PRU 7.4.162 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:
- 31/12/2004
PRU 7.4.164
See Notes
- 31/12/2004
Other long-term insurance liabilities
PRU 7.4.165
See Notes
- 31/12/2004
PRU 7.4.166
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.
- 31/12/2004
PRU 7.4.167
See Notes
- 31/12/2004
PRU 7.4.168
See Notes
- 31/12/2004
Valuing the costs of guarantees, options and smoothing
PRU 7.4.169
See Notes
For the purposes of PRU 7.4.137 R (5), PRU 7.4.137 R (7) and PRU 7.4.137 R (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 (PRU 7.4.170 R);
- (2) using the market costs of hedging the guarantee or option;
- (3) a series of deterministic projections with attributed probabilities.
- 31/12/2004
PRU 7.4.170
See Notes
The market-consistent asset model in PRU 7.4.169 R (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.
- 31/12/2004
PRU 7.4.171
See Notes
- 31/12/2004
PRU 7.4.172
See Notes
- 31/12/2004
PRU 7.4.173
See Notes
- 31/12/2004
PRU 7.4.174
See Notes
- 31/12/2004
PRU 7.4.175
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
- (2) where targeted payouts currently exceed retrospective reserves in respect of those claims, the assumptions used in reducing the excess, if applicable,
- 31/12/2004
Stochastic approach
PRU 7.4.176
See Notes
- 31/12/2004
PRU 7.4.177
See Notes
In performing the projections of assets and liabilities under the stochastic approach in PRU 7.4.169 R (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.
- 31/12/2004
PRU 7.4.178
See Notes
- 31/12/2004
PRU 7.4.179
See Notes
- 31/12/2004
PRU 7.4.180
See Notes
In calibrating asset models for the purposes of PRU 7.4.170 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 PRU 7.4.17 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 guidance from the actuarial profession on the calculation of the risk-free yield but should not assume a higher yield than suggested by any such guidance.
- 31/12/2004
Deterministic approach
PRU 7.4.181
See Notes
- 31/12/2004
PRU 7.4.182
See Notes
- 31/12/2004
PRU 7.4.183
See Notes
In performing the projections of assets and liabilities under the deterministic approach in PRU 7.4.169 R (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.
- 31/12/2004
PRU 7.4.184
See Notes
- 31/12/2004
Management and policyholder actions
PRU 7.4.185
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 PRU 7.4.53 R); and
- (2) must reflect a realistic assessment of the policyholder actions (within the meaning of PRU 7.4.59 R);
in its projections of the value of assets and liabilities.
- 31/12/2004
PRU 7.4.186
See Notes
- 31/12/2004
Treatment of surplus on guarantees, options and smoothing
PRU 7.4.187
See Notes
- 31/12/2004
PRU 7.4.188
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 PRU 7.4.148 R) or options (see PRU 7.4.156 G) or smoothing (see PRU 7.4.158 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 PRU 7.4.144 R) (as appropriate).
- 31/12/2004
PRU 7.4.189
See Notes
- 31/12/2004
Realistic current liabilities
PRU 7.4.190
See Notes
For the purposes of PRU 7.4.40 R (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 PRU 7.4.30 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 PRU 7.4.36 R) or on the recognition of future shareholder transfers.
- 31/12/2004
PRU 7.4.191
See Notes
- 31/12/2004
PRU 7.5
Equalisation provisions
- 31/12/2004
Application
PRU 7.5.1
See Notes
PRU 7.5 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.
- 31/12/2004
PRU 7.5.2
See Notes
- 31/12/2004
PRU 7.5.3
See Notes
- 31/12/2004
Purpose
PRU 7.5.4
See Notes
- 31/12/2004
PRU 7.5.5
See Notes
- 31/12/2004
PRU 7.5.6
See Notes
In general terms, PRU 7.5 sets out rules and guidance as to:
- (1) the circumstances in which a firm is required to maintain equalisation provisions;
- (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 PRU 7.5.7 G.
- 31/12/2004
PRU 7.5.7
See Notes
Type Of Firm | Credit Equalisation Provision | Non Credit Equalisation Provision | ||
Threshold in PRU 7.5.44 R | Provision in PRU 7.5.43 R | Threshold in PRU 7.5.18 R (2) and provision in PRU 7.5.17 R | ||
UK insurer | World-wide | World-wide | World-wide | |
Pure reinsurer with head office outside United Kingdom | PRU 7.5.39 R to PRU 7.5.47 G do not apply | UK | ||
Pure reinsurer with head office in United Kingdom | PRU 7.5.39 R to PRU 7.5.47 G do not apply | 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 |
- 31/12/2004
PRU 7.5.8
See Notes
- 31/12/2004
PRU 7.5.9
See Notes
- 31/12/2004
PRU 7.5.10
See Notes
- 31/12/2004
Firms carrying on non-credit insurance business
PRU 7.5.11
See Notes
- (1) PRU 7.5.11 R to PRU 7.5.37 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 PRU 7.5.12 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 PRU 7.5.12 R.
- 31/12/2004
PRU 7.5.12
See Notes
Insurance Business Grouping | General Insurance Contracts | |
A | Contracts of insurance which fall within general insurance business classes 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 business class 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. |
- 31/12/2004
PRU 7.5.13
See Notes
- 31/12/2004
PRU 7.5.14
See Notes
- 31/12/2004
PRU 7.5.15
See Notes
- 31/12/2004
PRU 7.5.16
See Notes
- 31/12/2004
Requirement to maintain non-credit equalisation provision
PRU 7.5.17
See Notes
In respect of each financial year, a firm must, unless PRU 7.5.18 R applies:
- (1) calculate the amount of its non-credit equalisation provision as at the end of that year in accordance with PRU 7.5.20 R; and
- (2) maintain a non-credit equalisation provision calculated in accordance with PRU 7.5.20 R for the following financial year.
- 31/12/2004
PRU 7.5.18
See Notes
- (1) PRU 7.5.17 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.
- 31/12/2004
PRU 7.5.19
See Notes
- 31/12/2004
Calculating the amount of the provision
PRU 7.5.20
See Notes
- (1) Unless PRU 7.5.22 R applies, the amount of a firm's non-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 PRU 7.5.24 R;
- (b) the amount of the provisional transfers-in in (2)(b)(i) is to be determined in accordance with PRU 7.5.26 R; and
- (c) the amount of the provisional transfers-out in (2)(b)(ii) is to be determined in accordance with PRU 7.5.29 R.
- 31/12/2004
PRU 7.5.21
See Notes
- 31/12/2004
PRU 7.5.22
See Notes
- (1) The amount of a firm's non-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 PRU 7.5.18 R (2): and
- (b) the relevant period is the period of four financial years ending immediately before the beginning of the financial year in (1).
- 31/12/2004
PRU 7.5.23
See Notes
- 31/12/2004
The calculation: the maximum provision
PRU 7.5.24
See Notes
- (1) For the purposes of the calculation required by PRU 7.5.20 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 PRU 7.5.25 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.
- 31/12/2004
PRU 7.5.25
See Notes
Insurance Business Grouping | Percentage of average annualised net written premiums |
A | 20 |
B | 20 |
C | 40 |
D | 600 |
E | 75 |
- 31/12/2004
The calculation: provisional transfers-in
PRU 7.5.26
See Notes
- (1) For the purposes of the calculation required by PRU 7.5.20 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 PRU 7.5.27 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.
- 31/12/2004
PRU 7.5.27
See Notes
Insurance Business Grouping | Percentage of net written premiums |
A | 3 |
B | 3 |
C | 6 |
D | 75 |
E | 11 |
- 31/12/2004
PRU 7.5.28
See Notes
- 31/12/2004
The calculation: provisional transfers-out
PRU 7.5.29
See Notes
- (1) For the purposes of the calculation required by PRU 7.5.20 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 PRU 7.5.24 R for that financial year; and
- (b) the abnormal loss for the grouping under PRU 7.5.30 R for that financial year.
- 31/12/2004
PRU 7.5.30
See Notes
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 PRU 7.5.31 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 PRU 7.5.31 R.
- 31/12/2004
PRU 7.5.31
See Notes
Insurance business grouping | Percentage of net written premiums |
A | 72.5 |
B | 72.5 |
C | 95 |
D | 25 |
E | 100 |
- 31/12/2004
Transfers of business from the firm
PRU 7.5.32
See Notes
- (1) This rule applies to modify the application of PRU 7.5.24 R and PRU 7.5.26 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 PRU 7.5.24 R or provisional transfers-in under PRU 7.5.26 R.
- 31/12/2004
PRU 7.5.33
See Notes
- 31/12/2004
Transfers of business to the firm
PRU 7.5.34
See Notes
- (1) This rule applies to modify the application of PRU 7.5.24 R, PRU 7.5.26 R and PRU 7.5.29 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 premiums (written or earned) before performing the calculations required by PRU 7.5.24 R (maximum provision) and PRU 7.5.26 R (provisional transfers in);
- (b) included in net premiums (written or earned) before performing the calculation required by PRU 7.5.30 R (abnormal loss); and
- (c) excluded from net claims (paid or incurred) before performing the calculation required by PRU 7.5.30 R (abnormal loss).
- 31/12/2004
PRU 7.5.35
See Notes
- 31/12/2004
PRU 7.5.36
See Notes
- 31/12/2004
PRU 7.5.37
See Notes
- 31/12/2004
Firms carrying on credit insurance business
PRU 7.5.38
See Notes
PRU 7.5.39 R to PRU 7.5.47 G apply to:
- (1) any UK insurer; and
- (2) any non-EEA direct insurer;
which carries on the business of effecting or carrying out general insurance contracts falling within general insurance business class 14 (which business, excluding contracts of reinsurance, is referred to in PRU 7.5 as "credit insurance business").
- 31/12/2004
PRU 7.5.39
See Notes
- 31/12/2004
PRU 7.5.40
See Notes
- (1) For the purposes of PRU 7.5.43 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) a UK-deposit insurer must take account of the credit insurance business carried on by it world-wide.
- (2) For the purposes of PRU 7.5.44 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 description of non-EEA direct insurer (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.
- 31/12/2004
PRU 7.5.41
See Notes
- 31/12/2004
PRU 7.5.42
See Notes
- 31/12/2004
Requirement to maintain credit equalisation provision
PRU 7.5.43
See Notes
In respect of each financial year, a UK insurer or a non-EEA direct insurer must, unless PRU 7.5.44 R applies:
- (1) calculate the amount of its credit equalisation provision as at the end of that year in accordance with PRU 7.5.45 R; and
- (2) maintain a credit equalisation provision calculated in accordance with PRU 7.5.45 R for the following financial year.
- 31/12/2004
PRU 7.5.44
See Notes
- 31/12/2004
Calculating the amount of the provision
PRU 7.5.45
See Notes
- (1) The amount of a UK insurer's, or a non-EEA direct insurer's, credit 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 PRU 7.5.46 R.
- 31/12/2004
PRU 7.5.46
See Notes
- 31/12/2004
PRU 7.5.47
See Notes
- 31/12/2004
Euro conversion
PRU 7.5.48
See Notes
- 31/12/2004
PRU 7.6
Internal-contagion risk
- 31/12/2004
Application
PRU 7.6.2
See Notes
PRU 7.6 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 PRU 7.6.33 R (payment of financial penalties) apply to firms which qualify for authorisation under Schedule 3 or 4 of the Act;
- (3) PRU 7.6.33 R (payment of financial penalties) does not apply to mutuals;
- (4) PRU 7.6.41 R to PRU 7.6.57 R (UK branches of certain non-EEA insurers) do not apply to:
- (a) UK insurers; or
- (b) non-EEA insurers which are pure reinsurers; or
- (c) EEA-deposit insurers; or
- (d) Swiss general insurers.
- 31/12/2004
PRU 7.6.3
See Notes
- 31/12/2004
PRU 7.6.4
See Notes
- 31/12/2004
PRU 7.6.5
See Notes
In the application of this section to activities carried on by a non-EEA insurer:
- (1) PRU 7.6.13 R to PRU 7.6.15 G and PRU 7.6.41 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
- (b) in any other case, activities carried on from a branch in the United Kingdom.
- 31/12/2004
PRU 7.6.6
See Notes
- 31/12/2004
PRU 7.6.7
See Notes
- 31/12/2004
Purpose
PRU 7.6.8
See Notes
- 31/12/2004
PRU 7.6.9
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
- (3) insurance activities from offices or branches located in both the United Kingdom and overseas.
- 31/12/2004
PRU 7.6.10
See Notes
- 31/12/2004
PRU 7.6.11
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:
- (1) general insurance business and long-term insurance business;
- (2) linked and non-linked insurance business.
- 31/12/2004
PRU 7.6.12
See Notes
- 31/12/2004
Restriction of business to insurance
PRU 7.6.13
See Notes
- (1) A firm 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.
- 31/12/2004
Financial limitation of non-insurance activities
PRU 7.6.14
See Notes
- 31/12/2004
PRU 7.6.15
See Notes
- 31/12/2004
Requirements: long-term insurance business
PRU 7.6.16
See Notes
- 31/12/2004
Permissions not to include both types of insurance
PRU 7.6.17
See Notes
- 31/12/2004
Separately identify and maintain long term insurance assets
PRU 7.6.18
See Notes
- 31/12/2004
PRU 7.6.19
See Notes
- 31/12/2004
PRU 7.6.20
See Notes
- 31/12/2004
PRU 7.6.21
See Notes
- (1) A firm's long-term insurance assets are the items in (2), adjusted to take account of:
- (a) outgo in respect of the firm's long-term insurance business; and
- (b) any transfers made in accordance with PRU 7.6.27 R.
- (2) The items are:
- (a) the assets identified under PRU 7.6.18 R (including assets into which those assets have been converted);
- (b) any other assets identified by the firm as being available to cover its long-term insurance liabilities;
- (c) premiums and other receivables in respect of long-term insurance contracts;
- (d) other receipts of the long-term insurance business; and
- (e) all income and capital receipts in respect of the items in (2).
- 31/12/2004
PRU 7.6.22
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.
- 31/12/2004
PRU 7.6.23
See Notes
- 31/12/2004
PRU 7.6.24
See Notes
- 31/12/2004
PRU 7.6.25
See Notes
- 31/12/2004
PRU 7.6.26
See Notes
- 31/12/2004
PRU 7.6.27
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.
- 31/12/2004
PRU 7.6.28
See Notes
- 31/12/2004
PRU 7.6.29
See Notes
- 31/12/2004
Exclusive use of long-term insurance assets
PRU 7.6.30
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.
- 31/12/2004
PRU 7.6.31
See Notes
- 31/12/2004
PRU 7.6.32
See Notes
- 31/12/2004
Payment of financial penalties
PRU 7.6.33
See Notes
- 31/12/2004
PRU 7.6.34
See Notes
- 31/12/2004
Requirements: property-linked funds
PRU 7.6.35
See Notes
- 31/12/2004
PRU 7.6.36
See Notes
A firm must select, allocate and manage the assets to which its property-linked liabilities are linked taking into account:
- 31/12/2004
PRU 7.6.37
See Notes
- 31/12/2004
Requirements: UK branches of certain non-EEA firms
PRU 7.6.38
See Notes
- 31/12/2004
PRU 7.6.39
See Notes
- 31/12/2004
PRU 7.6.40
See Notes
- (1) PRU 7.6.41 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 EEA branch assets other than to meet branch liabilities.
- (2) PRU 7.6.42 R to PRU 7.6.47 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) PRU 7.6.48 R to PRU 7.6.52 R require non-EEA direct insurers to hold a minimum level of assets in the United Kingdom or EEA.
- (4) PRU 7.6.54 R requires the deposit of a minimum level of assets in the United Kingdom.
- (5) PRU 7.6.56 R and PRU 7.6.57 R require non-EEA direct insurers to keep adequate accounting records in the United Kingdom.
- 31/12/2004
Worldwide financial resources
PRU 7.6.41
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 PRU 7.2.20 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 PRU 7.2.20 R as available to meet liabilities other than those arising from the activities of any UK branch.
- 31/12/2004
UK or EEA MCR to be covered by admissible assets
PRU 7.6.42
See Notes
A non-EEA direct insurer must:
- (1) calculate a UK or EEA MCR in accordance with PRU 7.6.44 R to PRU 7.6.47 R; and
- (2) hold admissible assets (in addition to those required under PRU 7.2.20 R) to represent its UK or EEA MCR calculated under (1).
- 31/12/2004
PRU 7.6.43
See Notes
- 31/12/2004
PRU 7.6.44
See Notes
For the purposes of PRU 7.6.42 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 PRU 7.2.81 R to PRU 7.2.91 R but only in relation to business carried on by the firm in the United Kingdom;
- (2) for general insurance business, in accordance with PRU 7.2.45 R to PRU 7.2.72 R but only in relation to business carried on by the firm in the United Kingdom.
- 31/12/2004
PRU 7.6.45
See Notes
- 31/12/2004
PRU 7.6.46
See Notes
For the purposes of PRU 7.6.42 R, a UK-deposit insurer must calculate an EEA MCR:
- (1) for long-term insurance business, in accordance with PRU 7.2.81 R to PRU 7.2.91 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 PRU 7.2.45 R to PRU 7.2.72 R but only in relation to business carried on by the firm in all EEA States, taken together.
- 31/12/2004
PRU 7.6.47
See Notes
- 31/12/2004
Localisation of assets
PRU 7.6.48
See Notes
A non-EEA direct insurer (except a UK-deposit insurer) must hold admissible assets, which are required to cover its technical provisions in accordance with PRU 7.2.20 R and to represent its UK MCR in accordance with PRU 7.6.44 R:
- (1) (where the assets cover the technical provisions and the guarantee fund) in the United Kingdom;
- (2) (where the assets represent the amount of the UK MCR in excess of the guarantee fund) in any EEA State.
- 31/12/2004
PRU 7.6.49
See Notes
A UK-deposit insurer must hold admissible assets, which are required to cover its technical provisions in accordance with PRU 7.2.20 R and to represent its EEA MCR in accordance with PRU 7.6.46 R:
- (1) (where the assets cover the technical provisions and the guarantee fund) within the EEA states where the firm carries on insurance business;
- (2) (where the assets represent the amount of the EEA MCR in excess of the guarantee fund) in any EEA State.
- 31/12/2004
PRU 7.6.50
See Notes
- 31/12/2004
PRU 7.6.51
See Notes
- 31/12/2004
PRU 7.6.52
See Notes
For the purpose of PRU 7.6.48 R and PRU 7.6.49 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 listed security is to be treated as held in any country or territory where there is a regulated market in which the security is dealt; and
- (4) a security which is not a listed security is to be treated as held in the country or territory in which the issuer has its head office.
- 31/12/2004
PRU 7.6.53
See Notes
- 31/12/2004
Deposit of assets as security
PRU 7.6.54
See Notes
- 31/12/2004
PRU 7.6.55
See Notes
- 31/12/2004
Branch accounting records in the United Kingdom
PRU 7.6.56
See Notes
A non-EEA direct insurer must maintain at a place of business in the United Kingdom adequate records relating to:
- (1) the activities carried on from its United Kingdom branch; and
- (2) if it is an EEA-deposit insurer, the activities carried on from the branches in other EEA States.
- 31/12/2004
PRU 7.6.57
See Notes
The records maintained as required by PRU 7.6.56 R must include a record of:
- (1) the income, expenditure and liabilities arising from activities of the branch or branches; and
- (2) the assets identified under PRU 7.2.20 R as available to meet those liabilities.
- 31/12/2004
PRU 7 Annex 1G
- 31/12/2004
See Notes
- 31/12/2004
PRU 8
Group risk
PRU 8.1
Group risk systems and controls requirement
- 01/01/2005
Application
PRU 8.1.1
See Notes
Subject to PRU 8.1.3 R to PRU 8.1.5 R, PRU 8.1 applies to each of the following which is a member of a group:
- (1) a firm that falls into any of the following categories:
- (a) a regulated entity;
- (b) a bank, ELMI or building society;
- (c) an insurer;
- (d) an own account dealer;
- (e) a matched principal broker;
- (f) a UCITS investment firm; and
- (g) a broker/manager or an arranger that satisfies the following conditions:
- (i) it is an ISD investment firm; and
- (ii) it is not an exempt CAD firm;
- (2) a UCITS firm, but only if its group contains a firm falling into (1); and
- (3) the Society.
- 01/01/2005
PRU 8.1.2
See Notes
Except as set out in PRU 8.1.5 R, PRU 8.1 applies with respect to different types of group as follows:
- (1) PRU 8.1.9 R and PRU 8.1.11 R apply with respect to all groups, including FSA regulated EEA financial conglomerates, other financial conglomerates and groups dealt with in PRU 8.1.14 R and PRU 8.1.15 R;
- (2) the additional requirements set out in PRU 8.1.12 R and PRU 8.1.13 R only apply with respect to FSA regulated EEA financial conglomerates; and
- (3) the additional requirements set out in PRU 8.1.14 R and PRU 8.1.15 R only apply with respect to groups of the kind dealt with by whichever of those rules apply.
- 01/01/2005
PRU 8.1.3
See Notes
PRU 8.1 does not apply to:
- (1) an incoming EEA firm; or
- (2) an incoming Treaty firm; or
- (3) a UCITS qualifier; or
- (4) an ICVC.
- 01/01/2005
PRU 8.1.4
See Notes
- 01/01/2005
PRU 8.1.5
See Notes
- (1) This rule applies to:
- (a) PRU 8.1.9 R (2);
- (b) PRU 8.1.11 R (1), so far as it relates to PRU 8.1.9 R (2);
- (c) PRU 8.1.11 R (2); and
- (d) PRU 8.1.12 R to PRU 8.1.14 R.
- (2) The rules referred to in (1):
- (a) only apply with respect to a financial conglomerate if it is an FSA regulated EEA financial conglomerate;
- (b) (so far as they apply with respect to a group that is not a financial conglomerate) do not apply with respect to a group for which a competent authority in another EEA state is lead regulator;
- (c) (so far as they apply with respect to a financial conglomerate) do not apply to a firm with respect to a financial conglomerate of which it is a member if the interest of the financial conglomerate in that firm is no more than a participation;
- (d) (so far as they apply with respect to other groups) do not apply to a firm with respect to a group of which it is a member if the only relationship of the kind set out in paragraph (3) of the definition of group between it and the other members of the group is nothing more than a participation; and
- (e) do not apply with respect to a third-country group.
- 01/01/2005
PRU 8.1.6
See Notes
- 01/01/2005
Purpose
PRU 8.1.7
See Notes
- 01/01/2005
PRU 8.1.8
See Notes
- 01/01/2005
General rules
PRU 8.1.9
See Notes
A firm must:
- (1) have adequate, sound and appropriate risk management processes and internal control mechanisms for the purpose of assessing and managing its own exposure to group risk, including sound administrative and accounting procedures; and
- (2) ensure that its group has adequate, sound and appropriate risk management processes and internal control mechanisms at the level of the group, including sound administrative and accounting procedures.
- 01/01/2005
PRU 8.1.10
See Notes
- 01/01/2005
PRU 8.1.11
See Notes
The internal control mechanisms referred to in PRU 8.1.9 R must include:
- (1) mechanisms that are adequate for the purpose of producing any data and information which would be relevant for the purpose of monitoring compliance with any prudential requirements (including any reporting requirements and any requirements relating to capital adequacy, solvency and large exposures):
- (a) to which the firm is subject with respect to its membership of a group; or
- (b) that apply to or with respect to that group or part of it; and
- (2) mechanisms that are adequate to monitor funding within the group.
- 01/01/2005
Financial conglomerates
PRU 8.1.12
See Notes
Where PRU 8.1 applies with respect to a financial conglomerate, the risk management processes referred to in PRU 8.1.9 R (2) must include:
- (1) sound governance and management processes, which must include the approval and periodic review by the appropriate managing bodies within the financial conglomerate of the strategies and policies of the financial conglomerate in respect of all the risks assumed by the financial conglomerate, such review and approval being carried out at the level of the financial conglomerate;
- (2) adequate capital adequacy policies at the level of the financial conglomerate, one of the purposes of which must be to anticipate the impact of the business strategy of the financial conglomerate on its risk profile and on the capital adequacy requirements to which it and its members are subject;
- (3) adequate procedures for the purpose of ensuring that the risk monitoring systems of the financial conglomerate and its members are well integrated into their organisation; and
- (4) adequate procedures for the purpose of ensuring that the systems and controls of the members of the financial conglomerate are consistent and that the risks can be measured, monitored and controlled at the level of the financial conglomerate.
- 01/01/2005
PRU 8.1.13
See Notes
Where PRU 8.1 applies with respect to a financial conglomerate, the internal control mechanisms referred to in PRU 8.1.9 R (2) must include:
- (1) mechanisms that are adequate to identify and measure all material risks incurred by members of the financial conglomerate and appropriately relate capital in the financial conglomerate to risks; and
- (2) sound reporting and accounting procedures for the purpose of identifying, measuring, monitoring and controlling intra-group transactions and risk concentrations.
- 01/01/2005
Credit institutions and investment firms
PRU 8.1.14
See Notes
In the case of a firm that:
- (1) is a credit institution or investment firm; and
- (2) has a mixed-activity holding company as a parent undertaking;
the risk management processes and internal control mechanisms referred to in PRU 8.1.9 R must include sound reporting and accounting procedures and other mechanisms that are adequate to identify, measure, monitor and control transactions between the firm's parent undertaking mixed-activity holding company and any of the mixed-activity holding company's subsidiary undertakings.
- 01/01/2005
Insurance undertakings
PRU 8.1.15
See Notes
- 01/01/2005
PRU 8.1.16
See Notes
- 01/01/2005
Nature and extent of requirements and allocation of responsibilities within the group
PRU 8.1.17
See Notes
- 01/01/2005
PRU 8.1.18
See Notes
- 01/01/2005
PRU 8.1.19
See Notes
- 01/01/2005
PRU 8.1.20
See Notes
- 01/01/2005
PRU 8.1.21
See Notes
- 01/01/2005
PRU 8.2
to follow
- 31/12/2004
PRU 8.3
Group Risk: Insurance Groups
- 31/12/2004
Application
PRU 8.3.1
See Notes
PRU 8.3 applies to an insurer that is:
- (1) a participating insurance undertaking; or
- (2) a member of an insurance group (which is not a participating insurance undertaking).
- 31/12/2004
PRU 8.3.2
See Notes
PRU 8.3 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.
- 31/12/2004
PRU 8.3.3
See Notes
- (1) on a solo basis, as an adjusted solo calculation, where that firm is a participating insurance undertaking; and
- (2) on a group basis where that firm is a member of an insurance group.
- 31/12/2004
PRU 8.3.4
See Notes
- 31/12/2004
Purpose
PRU 8.3.5
See Notes
- 31/12/2004
PRU 8.3.6
See Notes
PRU 8.3 sets out the sectoral rules for insurers for:
- (1) firms that are participating insurance undertakings carrying out an adjusted solo calculation as contemplated by PRU 2.1.9 R (2);
- (2) insurance groups; and
- (3) insurance conglomerates.
- 31/12/2004
PRU 8.3.7
See Notes
- 31/12/2004
Requirement to calculate GCR and GCRR
PRU 8.3.8
See Notes
- 31/12/2004
Requirement to maintain group capital
PRU 8.3.9
See Notes
- 31/12/2004
PRU 8.3.10
See Notes
A firm that is both:
- (1) a composite firm; and
- (2) an undertaking referred to in PRU 8.3.17 R (1)(c) or PRU 8.3.17 R (2);
must comply with PRU 8.3.9 R separately in respect of its long-term insurance business and its general insurance business.
- 31/12/2004
PRU 8.3.11
See Notes
- 31/12/2004
PRU 8.3.12
See Notes
- 31/12/2004
PRU 8.3.13
See Notes
In order to comply with PRU 8.3.10 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.
- 31/12/2004
PRU 8.3.14
See Notes
- 31/12/2004
PRU 8.3.16
See Notes
- 31/12/2004
Scope - undertakings whose group capital is to be calculated and maintained
PRU 8.3.17
See Notes
The undertakings referred to in PRU 8.3.8 R, PRU 8.3.9 R, PRU 8.3.10 R and PRU 8.3.15 Rare:
- (1) for any firm that is not within (2), each of the following:
- (a) its ultimate insurance parent undertaking;
- (b) its ultimate EEA insurance parent undertaking (if different); and
- (c) the firm itself, if it is a participating insurance undertaking; and
- (2) the firm itself, where the firm is a participating insurance undertaking and is:
- (a) a pure reinsurer; or
- (b) a non-EEA insurer; or
- (c) a friendly society.
- 31/12/2004
PRU 8.3.18
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 neglible interest.
- 31/12/2004
PRU 8.3.19
See Notes
- 31/12/2004
PRU 8.3.20
See Notes
- 31/12/2004
PRU 8.3.21
See Notes
- 31/12/2004
PRU 8.3.22
See Notes
- 31/12/2004
Optional alternative method of calculation for firms subject to supplementary supervision by another EEA competent authority
PRU 8.3.23
See Notes
- 31/12/2004
PRU 8.3.24
See Notes
- 31/12/2004
Non-EEA ultimate insurance parent undertakings
PRU 8.3.25
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 PRU 8.3.26 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.
- 31/12/2004
PRU 8.3.26
See Notes
- 31/12/2004
PRU 8.3.27
See Notes
- 31/12/2004
Proportional holdings
PRU 8.3.28
See Notes
Subject to PRU 8.3.30 R and PRU 8.3.31 R, when calculating group capital resources and the group capital resources requirement of an undertaking in PRU 8.3.17 R, a firm must take only the relevant proportion of the following items ("calculation items") into account:
- (1) the solo capital resources of a regulated related undertaking;
- (2) the assets of a regulated related undertaking which are required to be deducted as part of the calculation of group capital resources; and
- (3) the individual capital resources requirement of a regulated related undertaking.
- 31/12/2004
PRU 8.3.29
See Notes
In PRU 8.3.28 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.
- 31/12/2004
PRU 8.3.30
See Notes
- 31/12/2004
PRU 8.3.31
See Notes
- 31/12/2004
PRU 8.3.32
See Notes
For the purposes of PRU 8.3.10 R, where a composite firm that is an undertaking in PRU 8.3.17 R (1)(c) or (2):
- (1) holds directly or indirectly shares in a regulated related undertaking; and
- (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 PRU 8.3.29 R, subject to PRU 8.3.30 R and PRU 8.3.31 R, must be allocated between the long-term and general insurance business in proportion to their respective holdings, directly or indirectly, in the shares in that regulated related undertaking.
- 31/12/2004
Calculation of the GCRR
PRU 8.3.33
See Notes
- 31/12/2004
PRU 8.3.34
See Notes
For the purposes of PRU 8.3, an individual capital resources requirement is:
- (1) in respect of an insurer that is not within (2):
- (a) its capital resources requirement calculated in accordance with PRU 2.1; less
- (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 PRU 8.3.33 R;
- (2) in respect of an insurer that is either a pure reinsurer or whose main business otherwise consists of reinsurance, and whose head office is in the United Kingdom, the capital resources requirement that would apply to the firm in accordance with PRU 2.1 if its insurance business was not restricted to reinsurance;
- (3) in respect of an insurance undertaking that is not within (1) or (2) and whose main business is reinsurance and whose head office is in a designated State or territory, either:
- (a) the proxy capital resources requirement that would apply to it if, in connection with its reinsurance activities, the permissions on the basis of which that proxy capital resources requirement is calculated were permissions to carry on insurance business that is not restricted to reinsurance; or
- (b) the solo capital resources requirement that would apply to it if, in connection with its reinsurance activities, the insurance undertaking were a regulated insurance entity whose insurance business is not restricted to reinsurance for the purposes of calculating the solo capital resources requirement in accordance with the relevant sectoral rules of the designated State or territory;
- (4) in respect of an insurance undertaking that is not within (1) to (3) and whose main business is reinsurance, the proxy capital resources requirement that would apply to it if, in connection with its reinsurance activities, the permissions on the basis of which that proxy capital resources requirement is calculated were permissions to carry on insurance business that is not restricted to reinsurance;
- (5) in respect of an EEA insurer, the equivalent of the capital resources requirement as calculated in accordance with the applicable requirements in its Home State;
- (6) in respect of an insurance undertaking that is not within (1) to (5) and whose head office is in a designated State or territory, either:
- (a) the solo capital resources requirement applicable to it in that designated State or territory; or
- (b) its proxy capital resources requirement;
- (7) in respect of an insurance undertaking that is not within (1) to (6), its proxy capital resources requirement;
- (8) in respect of a regulated entity with its head office in the EEA (excluding an insurance undertaking), its solo capital resources requirement calculated in accordance with the sectoral rules for the financial sector applicable to it in the EEA State in which it has its head office;
- (9) in respect of a regulated entity not within (8) (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 an investment firm for the purposes of calculating the solo capital resources requirement;
- (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; and
- (12) in respect of an insurance holding company, zero.
- 31/12/2004
PRU 8.3.35
See Notes
The Insurance Groups Directive defines reinsurers in terms of the 'main business' they carry on. Under the directive, the individual capital resources requirements for reinsurers (including those whose head office is in the United Kingdom) are to be calculated on the basis of requirements analogous to those applicable to direct insurers (that is, insurers carrying on insurance business that is not restricted to reinsurance). Although insurers that are pure reinsurers are already subject to PRU, there are a number of respects in which the capital regime that applies to them differs from that applicable to insurers who are direct insurers. The effect of PRU 8.3.34 R (2) to (4) is to calculate the individual capital resources requirement for all reinsurers as if they were carrying on direct insurance. This applies to:
- (1) pure reinsurers whose head office is in the United Kingdom;
- (2) insurers whose head office is in the United Kingdom and whose main business is reinsurance (because an insurer that is not a pure reinsurer with their business restricted to reinsurance may nevertheless in principle still have reinsurance as its main business);
- (3) reinsurers whose head office is in another EEA State;
- (4) reinsurers whose head office is in a designated State or territory (other than an EEA State); and
- (5) reinsurers whose head office is outside the EEA.
- 31/12/2004
Calculation of GCR
PRU 8.3.36
See Notes
- 31/12/2004
PRU 8.3.37
See Notes
For the purposes of PRU 8.3, the following expressions when used in relation to either an undertaking in PRU 8.3.17 R or a regulated related undertaking which is not subject to PRU 2.2.14 R, are to be construed as if that undertaking were required to calculate its capital resources in accordance with PRU 2.2.14 R, 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:
- 31/12/2004
PRU 8.3.38
See Notes
For the purposes of PRU 8.3.37 R, the sectoral rules applicable to:
- (1) an insurance holding company are the sectoral rules that would apply to it if, in connection with its activities, it were treated as an insurer;
- (2) 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
- (3) subject to PRU 8.3.39 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.
- 31/12/2004
PRU 8.3.39
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.
- 31/12/2004
PRU 8.3.40
See Notes
For the purposes of PRU 8.3.36 R, the capital resources of a financial institution within PRU 8.3.39 R that can be included in the calculations in PRU 8.3.48 R (2), PRU 8.3.50 R (2), PRU 8.3.53 R (2), PRU 8.3.55 R (2) and PRU 8.3.57 R (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 PRU 8.3.39 R; and
- (2) the lower of:
- (a) the tier one capital or tier two capital issued by the parent undertaking referred to in PRU 8.3.39 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).
- 31/12/2004
PRU 8.3.41
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.
- 31/12/2004
PRU 8.3.42
See Notes
- 31/12/2004
PRU 8.3.43
See Notes
Stage | Related text | |
Total group tier one capital | A | PRU 8.3.48 R |
Total group tier two capital | B | PRU 8.3.50 R |
Group capital resources before deductions | C=(A+B) | |
Total deductions of inadmissible assets | D | PRU 8.3.59 R |
Total deductions under the requirement deduction method from group capital resources | E | PRU 8.3.62 R |
Total deductions of ineligible surplus capital* | F | PRU 8.3.65 R |
Deduction of assets in excess of market risk and counterparty exposure limits* | G | PRU 8.3.70 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 PRU 8.3.17 R that is a participating insurance undertaking. |
- 31/12/2004
Calculation of GCR - Limits on the use of different forms of capital
PRU 8.3.44
See Notes
- 31/12/2004
PRU 8.3.45
See Notes
- (1) For the purposes of PRU 8.3.9 R, PRU 8.3.10 R and PRU 8.3.15 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 PRU 8.3.17 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 PRU 8.3.9 R and PRU 8.3.10 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:
- (P - Q + T) > 1/3 X + (R - S - U - X).
- (3) For the purposes of (1) and (2):
- (a) P is the total group tier one capital of the undertaking in PRU 8.3.17 R;
- (b) Q is the sum of the innovative tier one capital resources calculated in accordance with PRU 8.3.53 R;
- (c) R is the group capital resources requirement of the undertaking in PRU 8.3.17 R;
- (d) S is the sum of all the with-profits insurance capital components of an undertaking in PRU 8.3.17 R that is an insurer and each of its regulated related undertakings that is an insurer;
- (e) T is the total group tier two capital of the undertaking in PRU 8.3.17 R;
- (f) U is the sum of all the resilience capital requirements of an undertaking in PRU 8.3.17 R that is an insurer and each of its regulated related undertakings that is an insurer;
- (g) V is the sum of all the core tier one capital calculated in accordance with PRU 8.3.55 R;
- (h) W is the sum of the lower tier two capital resources calculated in accordance with PRU 8.3.57 R; and
- (i) X is the MCR of the firm less its resilience capital requirement, if any.
- 31/12/2004
PRU 8.3.46
See Notes
- 31/12/2004
PRU 8.3.47
See Notes
- 31/12/2004
Calculation of GCR - Total group tier one capital
PRU 8.3.48
See Notes
For the purposes of PRU 8.3.43 R, the total group tier one capital of an undertaking in PRU 8.3.17 R is the sum of:
- (1) the tier one capital resources of the undertaking in PRU 8.3.17 R; and
- (2) subject to PRU 8.3.40 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 PRU 8.3.49 R.
- 31/12/2004
PRU 8.3.49
See Notes
The deduction referred to in PRU 8.3.48 R is the sum of:
- (1) the book value of the investment by the undertaking in PRU 8.3.17 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 PRU 8.3.17 R in the tier one capital resources of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2004
Calculation of GCR - Total group tier two capital
PRU 8.3.50
See Notes
For the purposes of PRU 8.3.43 R, the total group tier two capital of an undertaking in PRU 8.3.17 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 PRU 8.3.40 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 PRU 8.3.51 R.
- 31/12/2004
PRU 8.3.51
See Notes
The deduction referred to in PRU 8.3.50 R is the sum of:
- (1) the book value of the investments by the undertaking in PRU 8.3.17 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 PRU 8.3.17 R in the upper tier two capital resources and the lower tier two capital resources of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2004
PRU 8.3.52
See Notes
- 31/12/2004
Calculation of GCR - Innovative tier one capital resources, lower tier two capital resources and core tier one capital
PRU 8.3.53
See Notes
For the purposes of PRU 8.3.45R (3)(b), the innovative tier one capital resources is the sum of:
- (1) the innovative tier one capital resources of the undertaking in PRU 8.3.17 R; and
- (2) subject to PRU 8.3.40 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 PRU 8.3.54 R.
- 31/12/2004
PRU 8.3.54
See Notes
The deduction referred to in PRU 8.3.53 R is the sum of:
- (1) the book value of the investments by the undertaking in PRU 8.3.17 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 PRU 8.3.17 R in the innovative tier one capital resources of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2004
PRU 8.3.55
See Notes
For the purposes of PRU 8.3.45R (3)(g), the core tier one capital is the sum of:
- (1) the core tier one capital of the undertaking of PRU 8.3.17 R; and
- (2) subject to PRU 8.3.40 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 PRU 8.3.56 R.
- 31/12/2004
PRU 8.3.56
See Notes
The deduction referred to in PRU 8.3.55 R is the sum of:
- (1) the book value of the investments by the undertaking in PRU 8.3.17 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 PRU 8.3.17 R in the core tier one capital of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2004
PRU 8.3.57
See Notes
For the purposes of PRU 8.3.45R (3)(h), the lower tier two capital resources is the sum of:
- (1) the lower tier two capital resources of the undertaking in PRU 8.3.17 R; and
- (2) subject to PRU 8.3.40 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 PRU 8.3.58 R.
- 31/12/2004
PRU 8.3.58
See Notes
The deduction referred to in PRU 8.3.57 R is the sum of:
- (1) the book value of the investments by the undertaking in PRU 8.3.17 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 PRU 8.3.17 R in the lower tier two capital resources of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
- 31/12/2004
Calculation of GCR - Inadmissible assets
PRU 8.3.59
See Notes
- 31/12/2004
PRU 8.3.60
See Notes
For the purposes of PRU 8.3.59 R, an asset is not an admissible asset if:
- (1) in respect of a regulated related undertaking or undertaking in PRU 8.3.17 R that is an insurer, it is not an admissible asset as listed in PRU 2 Annex 1R;
- (2) in respect of a regulated related undertaking or undertaking in PRU 8.3.17 R that is not an insurer, it is an asset of the undertaking that is not admissible for the purpose of calculating that undertaking's solo capital resources in accordance with the sectoral rules applicable to it.
- 31/12/2004
PRU 8.3.61
See Notes
For the purposes of PRU 8.3.60 R (2), 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.
- 31/12/2004
Calculation of GCR - Deductions under requirement deduction method from group capital resources
PRU 8.3.62
See Notes
- 31/12/2004
PRU 8.3.63
See Notes
- 31/12/2004
PRU 8.3.64
See Notes
For the purposes of PRU 8.3.63 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.
- 31/12/2004
Calculation of GCR - Deductions of ineligible surplus capital
PRU 8.3.65
See Notes
- 31/12/2004
PRU 8.3.66
See Notes
The purpose of PRU 8.3.65 R is to ensure that, where the undertaking in PRU 8.3.17 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 PRU 8.3.41 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.
- 31/12/2004
PRU 8.3.67
See Notes
- (1) For the purposes of PRU 8.3.65 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 PRU 8.3.41 R; and
- (b) B is the transferable capital of that undertaking.
- (2) If A minus B is negative, the ineligible surplus capital is zero.
- 31/12/2004
PRU 8.3.68
See Notes
For the purposes of PRU 8.3.67 R (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 PRU 8.3.41 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:
- (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.
- 31/12/2004
PRU 8.3.69
See Notes
Examples of transferable and ineligible surplus capital:
Example 1
Share capital | Audited reserves | FFA | Tier two | Requirement |
30 | 20 | 0 | 40 | 50 |
- (i) Under PRU 8.3.68 R, transferable capital = tier one capital resources of 50, less the sum of:
- (1) restricted assets excluded under PRU 8.3.41 R = (none);
- (2) tier one capital resources allocated to the long-term insurance business = (none); and
- (3) higher of (50% of 50 = 25 and 50 - 40 = 10) = (25) = (50 - 25) = 25
- (2) Under PRU 8.3.67 R, ineligible surplus capital = regulatory surplus value (40) less restricted assets excluded under PRU 8.3.41 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 PRU 8.3.68 R, transferable capital = tier one capital resources of 60, less the sum of:
- (1) restricted assets excluded under PRU 8.3.41 R = (5);
- (2) tier one capital resources allocated to the long-term insurance business = (5); and
- (3) the higher of (50% of 45 = 22.5; and 45 - 40 = 5) = (22.5)= 60 - 32.5 = 27.5
- (ii) Under PRU 8.3.67 R, ineligible surplus capital = regulatory surplus value (50) - restricted assets excluded under PRU 8.3.41 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 PRU 8.3.68 R, transferable capital = tier one capital resources of 50, less the sum of:
- (1) restricted assets excluded under PRU 8.3.41 R = (none);
- (2) tier one capital resources allocated to the long-term insurance business = (20); and
- (3) the higher of (50% of 25 = 12.5; and 25 - (35 - 5) = -5) = (12.5)= 50 - 32.5 = 17.5.
- (ii) Under PRU 8.3.67 R, ineligible surplus capital = regulatory surplus value (35) - restricted assets excluded under PRU 8.3.41 R of (0) - transferable capital (17.5) = 17.5.
- 31/12/2004
Calculation of GCR - Assets in excess of market risk and counterparty exposure limits
PRU 8.3.70
See Notes
- 31/12/2004
PRU 8.3.71
See Notes
- 31/12/2004
PRU 8.3.72
See Notes
The firm (A) must, subject to PRU 8.3.73 R, include in the calculation in PRU 8.3.74 R each related undertaking (B) that is:
- (1) a regulated related undertaking that is a subsidiary undertaking; or
- (2) a related undertaking where the firm has elected to value the shares held in that undertaking by the firm in accordance with PRU 1.3.35 R for the purposes of calculating the tier one capital resources of the firm.
- 31/12/2004
PRU 8.3.73
See Notes
The related undertakings in PRU 8.3.72 R need only be included in the calculation in PRU 8.3.74 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 PRU 8.3.72 R (2), its assets that fall within one or more of the categories in PRU 2 Annex 1R exceed its accounting liabilities.
- 31/12/2004
PRU 8.3.74
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 PRU 3.2.22 R (3) to:
- (a) where B is an insurer, the admissible assets of B;
- (b) where B is a regulated related undertaking that is not an insurer, the assets of that undertaking less those assets identified in PRU 8.3.60 R (2) as not being admissible assets.
- (2) The market risk and counterparty exposure limits do not need to be applied to an undertaking in PRU 8.3.72 R (2).
- (3) Where the assets of B in PRU 8.3.74 R (1) exceed the limits in PRU 3.2.22 R (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 PRU 8.3.30 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, the admissible assets of B that represent the amount by which the capital resources of B exceed its capital resources requirement, subject to PRU 8.3.77 R, and limited to the amount of transferable capital calculated in accordance with PRU 8.3.68 R;
- (b) where B is a regulated related undertaking that is not a firm, the assets of the undertaking in PRU 8.3.74 R (1)(b) 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 a firm, limited to the amount of transferable capital calculated in accordance with PRU 8.3.68 R; and
- (c) where B is an undertaking in PRU 8.3.72 R (2), the assets of the undertaking which represent those assets that fall within one or more of the categories in PRU 2 Annex 1R 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 PRU 8.3.74 R (4).
- 31/12/2004
PRU 8.3.75
See Notes
- 31/12/2004
PRU 8.3.76
See Notes
In relation to any of its regulated related undertakings that is not an insurer, A may modify the calculation in PRU 8.3.74 R by:
- (1) omitting the calculation in PRU 8.3.74 R (1) and (3); and
- (2) aggregating all of the assets of B identified in PRU 8.3.74 R (1)(b) as admissible assets with the admissible assets of A in PRU 8.3.74 R (4).
- 31/12/2004
PRU 8.3.77
See Notes
- 31/12/2004
PRU 8.3.78
See Notes
- 31/12/2004
PRU 8.4
Cross sector groups
- 01/12/2004
Application
PRU 8.4.1
See Notes
- (1) PRU 8.4 applies to every firm that is a member of a financial conglomerate other than:
- (a) an incoming EEA firm;
- (b) an incoming Treaty firm;
- (c) a UCITS qualifier; and
- (d) an ICVC.
- (2) PRU 8.4 does not apply to a firm with respect to a financial conglomerate of which it is a member if the interest of the financial conglomerate in that firm is no more than a participation.
- (3) PRU 8.4.25 R (Capital adequacy requirements: high level requirement), PRU 8.4.26 R (Capital adequacy requirements: application of Method 4 from Annex I of the Financial Groups Directive), PRU 8.4.29 R (Capital adequacy requirements: application of Methods 1, 2 or 3 from Annex I of the Financial Groups Directive) and PRU 8.4.35 R (Risk concentration and intra group transactions: the main rule) do not apply with respect to a third-country financial conglomerate.
- 11/08/2004
Purpose
PRU 8.4.2
See Notes
PRU 8.4 implements the Financial Groups Directive. However, material on the following topics is to be found elsewhere in the Handbook as follows:
- (1) further material on third-country financial conglomerates can be found in PRU 8.5;
- (2) SUP 15.9 contains notification rules for members of financial conglomerates;
- (3) material on reporting obligations can be found in SUP 16.7.73 R and SUP 16.7.74 R; and
- (4) material on systems and controls in financial conglomerates can be found in PRU 8.1.
- 11/08/2004
Introduction: identifying a financial conglomerate
PRU 8.4.3
See Notes
- (1) In general the process in (2) to (8) applies for identifying financial conglomerates.
- (2) Competent authorities that have authorised regulated entities should try to identify any consolidation group that is a financial conglomerate. If a competent authority is of the opinion that a regulated entity authorised by that competent authority is a member of a consolidation group which may be a financial conglomerate it should communicate its view to the other competent authorities concerned.
- (3) A competent authority may start (as described in (2)) the process of deciding whether a group is a financial conglomerate even if it would not be the coordinator.
- (4) A member of a group may also start that process by notifying one of the competent authorities that have authorised group members that its group may be a financial conglomerate, for example by notification under SUP 15.9.
- (5) If a group member gives a notification in accordance with (4), that does not automatically mean that the group should be treated as a financial conglomerate. The process described in (6) to (9) still applies.
- (6) The competent authority that would be coordinator will take the lead in establishing whether a group is a financial conglomerate once the process has been started as described in (2) and (3).
- (7) The process of establishing whether a group is a financial conglomerate will normally involve discussions between the financial conglomerate and the competent authorities concerned.
- (8) A financial conglomerate should be notified by its coordinator that it has been identified as a financial conglomerate and of the appointment of the coordinator. The notification should be given to the parent undertaking at the head of the group or, in the absence of a parent undertaking, the regulated entity with the largest balance sheet total in the most important financial sector. That notification does not of itself make a group into a financial conglomerate; whether or not a group is a financial conglomerate is governed by the definition of financial conglomerate as set out in PRU 8.4.
- (9) PRU 8 Ann 4R is a questionnaire (together with its explanatory notes) that the FSA asks groups that may be financial conglomerates to fill out in order to decide whether or not they are.
- 11/08/2004
Introduction: The role of other competent authorities
PRU 8.4.4
See Notes
- 11/08/2004
Definition of financial conglomerate: basic definition
PRU 8.4.5
See Notes
- 31/12/2004
Definition of financial conglomerate: sub-groups
PRU 8.4.6
See Notes
A consolidation group is not prevented from being a financial conglomerate because it is part of a wider:
- (1) consolidation group; or
- (2) financial conglomerate; or
- (3) group of persons linked in some other way.
- 11/08/2004
Definition of financial conglomerate: the financial sectors: general
PRU 8.4.7
See Notes
For the purpose of the definition of financial conglomerate, there are two financial sectors as follows:
- (1) the banking sector and the investment services sector, taken together; and
- (2) the insurance sector.
- 11/08/2004
PRU 8.4.8
See Notes
- (1) This rule applies for the purpose of the definition of financial conglomerate and the financial conglomerate definition decision tree.
- (2) Any mixed financial holding company is considered to be outside the overall financial sector for the purpose of the tests set out in the boxes titled Threshold Test 1, Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree.
- (3) Determining whether the tests set out in the boxes titled Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree are passed is based on considering the consolidated and/or aggregated activities of the members of the consolidation group within the insurance sector and the consolidated and/or aggregated activities of the members of the consolidation group within the banking sector and the investment services sector.
- 11/08/2004
Definition of financial conglomerate: adjustment of the percentages
PRU 8.4.9
See Notes
Once a financial conglomerate has become a financial conglomerate and subject to supervision in accordance with the Financial Groups Directive, the figures in the financial conglomerate definition decision tree are altered as follows:
- (1) the figure of 40% in the box titled Threshold Test 1 is replaced by 35%;
- (2) the figure of 10% in the box titled Threshold Test 2 is replaced by 8%; and
- (3) the figure of six billion Euro in the box titled Threshold Test 3 is replaced by five billion Euro.
- 11/08/2004
PRU 8.4.10
See Notes
The alteration in PRU 8.4.9 R only applies to a financial conglomerate during the period that:
- (1) begins when the financial conglomerate would otherwise have stopped being a financial conglomerate because it does not meet one of the unaltered thresholds referred to in PRU 8.4.9 R; and
- (2) covers the three years following that date.
- 11/08/2004
Definition of financial conglomerate: balance sheet totals
PRU 8.4.11
See Notes
- 11/08/2004
Definition of financial conglomerate: solvency requirement
PRU 8.4.12
See Notes
- 11/08/2004
Definition of financial conglomerate: discretionary changes to the definition
PRU 8.4.13
See Notes
Articles 3(3) to 3(6), Article 5(4) and Article 6(5) of the Financial Groups Directive allow competent authorities, on a case by case basis, to:
- (1) change the definition of financial conglomerate and the obligations applying with respect to a financial conglomerate;
- (2) apply the scheme in the Financial Groups Directive to EEA regulated entities in specified kinds of group structures that do not come within the definition of financial conglomerate; and
- (3) exclude a particular entity in the scope of capital adequacy requirements that apply with respect to a financial conglomerate.
- 11/08/2004
Capital adequacy requirements: introduction
PRU 8.4.14
See Notes
- 11/08/2004
PRU 8.4.15
See Notes
- 11/08/2004
PRU 8.4.16
See Notes
- 11/08/2004
PRU 8.4.17
See Notes
Annex I of the Financial Groups Directive lays down four methods for calculating capital adequacy at the level of a financial conglomerate. Those four methods are implemented as follows:
- (1) Method 1 calculates capital adequacy using accounting consolidation. It is implemented by PRU 8.4.29 R to PRU 8.4.31 R and Part 1 of PRU 8 Ann 1R G.
- (2) Method 2 calculates capital adequacy using a deduction and aggregation approach. It is implemented by PRU 8.4.29 R to PRU 8.4.31 R and Part 2 of PRU 8 Ann 1R 1.
- (3) Method 3 calculates capital adequacy using book values and the deduction of capital requirements. It is implemented by PRU 8.4.29 R to PRU 8.4.31 R and Part 3 of PRU 8 Ann 1R G.
- (4) Method 4 consists of a combination of Methods 1, 2 and 3 from Annex I of the Financial Groups Directive, or a combination of two of those Methods. It is implemented by PRU 8.4.26 R to PRU 8.4.28 R, PRU 8.4.30 R and Part 4 of PRU 8 Ann 1R G.
- 11/08/2004
PRU 8.4.18
See Notes
Part 4 of PRU 8 Ann 1R G (Use of Method 4 from Annex I of the Financial Conglomerates Directive) applies the FSA's sectoral rules with respect to the financial conglomerate as a whole, with some adjustments. Where Part 4 of PRU 8 Ann 1R G applies the FSA's sectoral rules for:
- (1) the insurance sector, that involves a combination of Methods 2 and 3; and
- (2) the banking sector and the investment services sector, that involves a combination of Methods 1 and 3.
- 11/08/2004
PRU 8.4.19
See Notes
- 11/08/2004
PRU 8.4.20
See Notes
- (1) In the following cases, the FSA (acting as coordinator) may choose which of the four methods for calculating capital adequacy laid down in Annex I of the Financial Groups Directive should apply:
- (a) where a financial conglomerate is headed by a regulated entity that has been authorised by the FSA; or
- (b) the only relevant competent authority for the financial conglomerate is the FSA.
- (2) PRU 8.4.28 R automatically applies Method 4 from Annex I of the Financial Groups Directive in these circumstances except in the cases set out in PRU 8.4.28 R (1)(e) and PRU 8.4.28 R (1)(f). The process in PRU 8.4.22 G does not apply.
- 11/08/2004
PRU 8.4.21
See Notes
- 11/08/2004
PRU 8.4.22
See Notes
- 11/08/2004
PRU 8.4.23
See Notes
- 11/08/2004
PRU 8.4.24
See Notes
- 11/08/2004
Capital adequacy requirements: high level requirement
PRU 8.4.25
See Notes
- (1) A firm that is a member of a financial conglomerate must at all times have capital resources of such an amount and type that results in the capital resources of the financial conglomerate taken as a whole being adequate.
- (2) This rule does not apply with respect to any financial conglomerate until notification has been made that it has been identified as a financial conglomerate as contemplated by Article 4(2) of the Financial Groups Directive.
- 01/01/2005
Capital adequacy requirements: application of Method 4 from Annex I of the Financial Groups Directive
PRU 8.4.26
See Notes
If this rule applies under PRU 8.4.27 R to a firm with respect to a financial conglomerate of which it is a member, the firm must at all times have capital resources of an amount and type:
- (1) that ensure that the financial conglomerate has capital resources of an amount and type that comply with the rules applicable with respect to that financial conglomerate under Part 4 of PRU 8 Ann 1R G (as modified by that annex); and
- (2) that as a result ensure that the firm complies with those rules (as so modified) with respect to that financial conglomerate.
- 01/01/2005
PRU 8.4.27
See Notes
PRU 8.4.26 R applies to a firm with respect to a financial conglomerate of which it is a member if one of the following conditions is satisfied:
- (1) the condition in PRU 8.4.28 R is satisfied; or
- (2) this rule is applied to the firm with respect to that financial conglomerate as described in PRU 8.4.30 R.
- 01/01/2005
Capital adequacy requirements: compulsory application of Method 4 from Annex I of the Financial Groups Directive
PRU 8.4.28
See Notes
- (1) The condition in this rule is satisfied for the purpose of PRU 8.4.27 R (1) with respect to a firm and a financial conglomerate of which it is a member (with the result that PRU 8.4.26 R automatically applies to that firm) if:
- (a) notification has been made in accordance with regulation 2 of the Financial Groups Directive Regulations that the financial conglomerate is a financial conglomerate and that the FSA is coordinator of that financial conglomerate;
- (b) the financial conglomerate is not part of a wider FSA regulated EEA financial conglomerate;
- (c) the financial conglomerate is not an FSA regulated EEA financial conglomerate under another rule or under paragraph (b) of the definition of FSA regulated EEA financial conglomerate (application of supplementary supervision through a firm's Part IV permission);
- (d) one of the following conditions is satisfied:
- (i) the financial conglomerate is headed by a regulated entity that is a UK domestic firm; or
- (ii) the only relevant competent authority for that financial conglomerate is the FSA;
- (e) this rule is not disapplied under paragraph 5.5 of PRU 8 Ann 1R G (No capital ties); and
- (f) the financial conglomerate meets the condition set out in the box titled Threshold Test 2 (10% average of balance sheet and solvency requirements) in the financial conglomerate definition decision tree.
- (2) Once PRU 8.4.26 R applies to a firm with respect to a financial conglomerate of which it is a member under PRU 8.4.27 R (1), (1)(f) ceases to apply with respect to that financial conglomerate. Therefore the fact that the financial conglomerate subsequently ceases to meet the condition in (1)(f) does not mean that the condition in this rule is not satisfied.
- 01/01/2005
Capital adequacy requirements: application of Methods 1, 2 or 3 from Annex I of the Financial Groups Directive
PRU 8.4.29
See Notes
- 01/01/2005
Capital adequacy requirements: use of Part IV permission to apply Annex I of the Financial Groups Directive
PRU 8.4.30
See Notes
With respect to a firm and a financial conglomerate of which it is a member:
- (1) PRU 8.4.26 R (Method 4 from Annex I of the Financial Groups Directive) is applied to the firm with respect to that financial conglomerate for the purposes of PRU 8.4.27 R (2); or
- (2) PRU 8.4.29 R (Methods 1 to 3 from Annex I of the Financial Groups Directive) is applied to the firm with respect to that financial conglomerate;
if the firm's Part IV permission contains a requirement obliging the firm to comply with PRU 8.4.26 R or, as the case may be, PRU 8.4.29 R.
- 01/01/2005
PRU 8.4.31
See Notes
- 01/01/2005
Risk concentration and intra-group transactions: introduction
PRU 8.4.32
See Notes
- 11/08/2004
PRU 8.4.33
See Notes
- 11/08/2004
Risk concentration and intra-group transactions: application
PRU 8.4.34
See Notes
PRU 8.4.35 R applies to a firm with respect to a financial conglomerate of which it is a member if:
- (1) the condition in Articles 7(4) and 8(4) of the Financial Groups Directive is satisfied (the financial conglomerate is headed by a mixed financial holding company); and
- (2) that financial conglomerate is an FSA regulated EEA financial conglomerate.
- 01/01/2005
Risk concentration and intra group transactions: the main rule
PRU 8.4.35
See Notes
- 01/01/2005
Risk concentration and intra-group transactions: Table of applicable sectoral rules
PRU 8.4.36
See Notes
Application of sectoral rules
This table belongs to PRU 8.4.35 R
The most important financial sector | Applicable sectoral rules | |
Risk concentration | Intra-group transactions | |
Banking sector | Rules 3.3.13, 3.3.19 and 3.3.21 of chapter GN of IPRU(BANK) (as they apply to large exposures on a consolidated basis) | Rules 3.3.13, 3.3.19 and 3.3.21 of chapter GN of IPRU(BANK) (as they apply to large exposures on a solo basis) |
Insurance sector | None | Rule 9.39 of IPRU(INS) |
Investment services sector | Rule 14.3.2 in Chapter 14 of IPRU(INV) | Rule 10-190 in Chapter 10 of IPRU(INV) as it applies on a solo basis |
Note: | The rules as applied in column three apply without any concession or exemption for exposures to other group members. | |
Note | The decision tree in paragraph 4.5 of PRU 8 Ann 1R G applies for the purpose of identifying the most important financial sector. |
- 01/01/2005
PRU 8.4.37
See Notes
The material in IPRU(BANK) that has particular application to the rules in IPRU(BANK) referred to in the table in PRU 8.4.36 R is:
- (1) (in the case of column 2) Chapter LE as it applies on a consolidated basis;
- (2) (in the case of column 3) Chapter LE as it applies on a solo basis.
- 01/01/2005
PRU 8.4.38
See Notes
- 01/01/2005
The financial sectors: asset management companies
PRU 8.4.39
See Notes
- (1) In accordance with Article 30 of the Financial Groups Directive (Asset management companies), this rule deals with the inclusion of an asset management company that is a member of a financial conglomerate in the scope of regulation of financial conglomerates. This rule does not apply to the definition of financial conglomerate.
- (2) An asset management company is in the overall financial sector and is a regulated entity for the purpose of:
- (a) PRU 8.4.26 R to PRU 8.4.36 R;
- (b) PRU 8 Ann 1R G (Capital adequacy calculations for financial conglomerates) and PRU 8 Ann 2R (Prudential rules for third country groups); and
- (c) any other provision of the Handbook relating to the supervision of financial conglomerates.
- (3) In the case of a financial conglomerate for which the FSA is the coordinator, all asset management companies must be allocated to one financial sector for the purposes in (2), being either the investment services sector or the insurance sector. But if that choice has not been made in accordance with (4) and notified to the FSA in accordance with (4)(d), an asset management company must be allocated to the investment services sector.
- (4) The choice in (3):
- (a) must be made by the undertaking in the financial conglomerate holding the position referred to in Article 4(2) of the Financial Groups Directive (group member to whom notice must be given that the group has been found to be a financial conglomerate);
- (b) applies to all asset management companies that are members of the financial conglomerate from time to time;
- (c) cannot be changed; and
- (d) must be notified to the FSA as soon as reasonably practicable after the notification in (4)(a).
- 11/08/2004
PRU 8.5
Third-country groups
- 31/12/2004
Application
PRU 8.5.1
See Notes
PRU 8.5 applies to every firm that is a member of a third-country group. But it does not apply to:
- (1) an incoming EEA firm; or
- (2) an incoming Treaty firm; or
- (3) a UCITS qualifier; or
- (4) an ICVC.
- 11/08/2004
Purpose
PRU 8.5.2
See Notes
- 11/08/2004
Equivalence
PRU 8.5.3
See Notes
- 11/08/2004
Other methods: General
PRU 8.5.4
See Notes
- 11/08/2004
Supervision by analogy: introduction
PRU 8.5.5
See Notes
- 11/08/2004
PRU 8.5.6
See Notes
- 11/08/2004
PRU 8.5.7
See Notes
- 11/08/2004
Supervision by analogy: rules for third-country conglomerates
PRU 8.5.8
See Notes
- 01/01/2005
Supervision by analogy: rules for third-country banking and investment groups
PRU 8.5.9
See Notes
- 01/01/2005
PRU 8 Ann 1R
PRU 8 Ann 1R
- 31/12/2004
- 31/12/2004
PRU 8 Ann 1R 1
Capital resources | 1.1 | The conglomerate capital resources of a financial conglomerate calculated in accordance with this Part are the capital of that financial conglomerate, calculated on an accounting consolidation basis, that qualifies under paragraph 1.2. | |
1.2 | The elements of capital that qualify for the purposes of paragraph 1.1 are those that qualify in accordance with the applicable sectoral rules, in accordance with the following: | ||
(1) | the conglomerate capital resources requirement is divided up in accordance with the contribution of each financial sector to it; and | ||
(2) | the portion of the conglomerate capital resources requirement attributable to a particular financial sector must be met by capital resources that are eligible in accordance with the applicable sectoral rules for that financial sector. | ||
Capital resources requirement | 1.3 | The conglomerate capital resources requirement of a financial conglomerate calculated in accordance with this Part is equal to the sum of the capital adequacy and solvency requirements for each financial sector calculated in accordance with the applicable sectoral rules for that financial sector. | |
Consolidation | 1.4 | The information required for the purpose of establishing whether or not a firm is complying with PRU 8.4.29 R (insofar as the definitions in this Part are applied for the purpose of that rule) must be based on the consolidated accounts of the financial conglomerate, together with such other sources of information as appropriate. | |
1.5 | The applicable sectoral rules that are applied under this Part are the applicable sectoral consolidation rules. Other applicable sectoral rules must be applied if required. |
- 31/12/2004
PRU 8 Ann 1R 2
Capital resources | 2.1 | The conglomerate capital resources of a financial conglomerate calculated in accordance with this Part are equal to the sum of the following amounts (so far as they qualify under paragraph 2.3) for each member of the overall financial sector: | ||
(1) | (for the person at the head of the financial conglomerate) its solo capital resources; | |||
(2) | (for any other member): | |||
(a) | its solo capital resources; less | |||
(b) | the book value of the financial conglomerate's investment in that member. | |||
2.2 | The deduction in paragraph 2.1(2) must be carried out separately for each type of capital represented by the financial conglomerate's investment in the member concerned. | |||
2.3 | The elements of capital that qualify for the purposes of paragraph 2.1 are those that qualify in accordance with the applicable sectoral rules. In particular, the portion of the conglomerate capital resources requirement attributable to a particular member of a financial sector must be met by capital resources that would be eligible under the sectoral rules that apply to the calculation of its solo capital resources. | |||
Capital resources requirement | 2.4 | The conglomerate capital resources requirement of a financial conglomerate calculated in accordance with this Part is equal to the sum of the solo capital resources requirement for each member of the financial conglomerate that is in the overall financial sector. | ||
Partial inclusion | 2.5 | The capital resources and capital resources requirements of a member of the financial conglomerate in the overall financial sector must be included proportionally. If however the member is a subsidiary undertaking and it has a solvency deficit, they must be included in full. | ||
Accounts | 2.6 | The information required for the purpose of establishing whether or not a firm is complying with PRU 8.4.29 R (insofar as the definitions in this Part are applied for the purpose of that rule) must be based on the individual accounts of members of the financial conglomerate, together with such other sources of information as appropriate. |
- 31/12/2004
PRU 8 Ann 1R 3
Capital resources | 3.1 | The conglomerate capital resources of a financial conglomerate calculated in accordance with this Part are equal to the capital resources of the person at the head of the financial conglomerate that qualify under paragraph 3.2. | ||
3.2 | The elements of capital that qualify for the purposes of paragraph 3.1 are those that qualify in accordance with the applicable sectoral rules. In particular, the portion of the conglomerate capital resources requirement attributable to a particular member of a financial sector must be met by capital resources that would be eligible under the sectoral rules that apply to the calculation of its solo capital resources. | |||
Capital resources requirement | 3.3 | The conglomerate capital resources requirement of a financial conglomerate calculated in accordance with this Part is equal to the sum of the following amounts for each member of the overall financial sector: | ||
(1) | (in the case of the person at the head of the financial conglomerate) its solo capital resources requirement; | |||
(2) | (in the case of any other member) the higher of the following two amounts: | |||
(a) | its solo capital resources requirement; and | |||
(b) | the book value of the interest of the person at the head of the financial conglomerate in that member. | |||
3.4 | A participation may be valued using the equity method of accounting. | |||
Partial inclusion | 3.5 | The capital resources requirement of a member of the financial conglomerate in the overall financial sector must be included proportionally. If however the member has a solvency deficit and is a subsidiary undertaking, it must be included in full. | ||
Accounts | 3.6 | The information required for the purpose of establishing whether or not a firm is complying with PRU 8.4.29 R (insofar as the definitions in this Part are applied for the purpose of that rule) must be based on the individual accounts of members of the financial conglomerate, together with such other sources of information as appropriate. |
- 31/12/2004
PRU 8 Ann 1R 4
Applicable sectoral rules | 4.1 | The rules that apply with respect to a particular financial conglomerate under PRU 8.4.26 R are those relating to capital adequacy and solvency set out in the table in paragraph 4.2. |
- 31/12/2004
PRU 8 Ann 1R 5
Type of financial conglomerate | Applicable sectoral consolidation rules |
Banking conglomerate | IPRU(BANK) Chapter GN rule 3.3.13 (as it applies on a consolidated basis), subject to paragraph 4.7. |
Insurance conglomerate | PRU 8.3 amended in accordance with Part 5. |
Building society conglomerate | IPRU(BSOC) (Volume 1) Chapter 1, rule 1.2.1 (as it applies on a consolidated basis). |
Investment services conglomerate | Chapter 14 of IPRU(INV). |
- 31/12/2004
PRU 8 Ann 1G 6
How to apply chapter 14 of IPRU(INV) | 4.3 | Where chapter 14 of IPRU(INV) applies: | ||
(1) | the main investment services undertaking is treated as being the main firm for the purpose of rule 14.4.2 of chapter 14 of IPRU(INV); | |||
(2) | if the main investment services undertaking is not subject to any of the FSA's sectoral rules applied by chapter 14 of IPRU(INV), then the FSA's sectoral rules that are applied are those that would do so if: | |||
(a) | it were a UK domestic firm; and | |||
(b) | it had a permission that includes all the regulated activities that it would need to have in its Part IV permission if it carried on all its activities in the United Kingdom. | |||
The different types of financial conglomerate | 4.4 | (1) | The decision tree in paragraph 4.5: | |
(a) | decides into which of the categories listed in the table in paragraph 4.2 a financial conglomerate falls; and | |||
(b) | modifies the definition of the most important financial sector for the purposes of PRU 8 Ann 1R G and for the purposes of any other provision in PRU 8 (Group risk) that applies that decision tree. | |||
(2) | Paragraph 6.1(2) (financial institution allocated to the banking sector) and paragraph 6.1(3) (allocation of asset management companies) apply for the purpose of 4.4 and the table in paragraph 4.5. |
- 31/12/2004
PRU 8 Ann 1.7
See Notes
- 31/12/2004
PRU 8 Ann 1.8
See Notes
A mixed financial holding company | 4.6 | A mixed financial holding company must be treated in the same way as: | |
(1) | a financial holding company (if the rules in IPRU(BANK) or IPRU(INV)) are applied; or | ||
(2) | an insurance holding company (if the rules in PRU 8.3 are applied). | ||
E-money | 4.7 | If there are no full credit institutions or investment firms in a banking conglomerate but there are one or more e-money issuers, the sectoral rules in IPRU(BANK) are amended as follows : | |
(1) | the rules in ELM that apply on a solo basis must be used to establish the capital requirement for the e-money issuers; and | ||
(2) | for the purpose of (1), those rules in ELM shall be amended by calculating the amount of the deductions in respect of ownership shares and capital falling into ELM 2.4.17 R (6) in accordance with paragraph 3.3(2). |
- 31/12/2004
PRU 8 Ann 1R 9
See Notes
Transferability of capital | 5.1 | Capital may not be included in: | ||
(1) | a firm's conglomerate capital resources under PRU 8.4.29 R; or | |||
(2) | in the capital resources of the financial conglomerate for the purposes of PRU 8.4.26 R; | |||
if the effectiveness of the transferability and availability of the capital across the different members of the financial conglomerate is insufficient, given the objectives (as referred to in the third unnumbered sub-paragraph of paragraph 2(ii) of Annex I of the Financial Groups Directive (Technical principles)) of the capital adequacy rules for financial conglomerates. | ||||
Double counting | 5.2 | Capital must not be included in: | ||
(1) | a firm's conglomerate capital resources under PRU 8.4.29 R; or | |||
(2) | the capital resources of the financial conglomerate for the purposes of PRU 8.4.26 R; | |||
if: | ||||
(3) | it would involve double counting or multiple use of the same capital; or | |||
(4) | it results from any inappropriate intra-group creation of capital. | |||
Cross sectoral capital | 5.3 | In accordance with the second sub-paragraph of paragraph 2(ii) of Section I of Annex I of the Financial Groups Directive (Other technical principles and insofar as not already required in Parts 1-3): | ||
(1) | the solvency requirements for each different financial sector represented in a financial conglomerate required by PRU 8.4.26 R or, as the case may be, PRU 8.4.29 R must be covered by own funds elements in accordance with the corresponding applicable sectoral rules; and | |||
(2) | if there is a deficit of own funds at the financial conglomerate level, only cross sectoral capital (as referred to in that sub-paragraph) shall qualify for verification of compliance with the additional solvency requirement required by PRU 8.4.26 R or, as the case may be, PRU 8.4.29 R. | |||
Application of sectoral rules | 5.4 | The following adjustments apply to the applicable sectoral rules as they are applied by the rules in this annex. | ||
(1) | The scope of those rules will be extended to cover any mixed financial holding company and each other member of the overall financial sector. | |||
(2) | If any of those rules would otherwise not apply to a situation in which they are applied by PRU 8 Ann 1R G, those rules nevertheless still apply (and in particular, any of those rules that would otherwise have the effect of disapplying consolidated supervision (or, in the case of the insurance sector, supplementary supervision) do not apply). | |||
(3) | (If it would not otherwise have been included) an ancillary investment services undertaking is included in the investment services sector. | |||
(4) | (If it would not otherwise have been included) an ancillary insurance services undertaking is included in the insurance sector. | |||
(5) | (In relation to the insurance sector) to the extent that: | |||
(a) | those rules merely require a report on whether or not a specified level of solvency is met (a soft limit); or | |||
(b) | the requirements in those rules concern having certain net assets of an amount at or above certain levels; | |||
those requirements are restated so as to include an obligation at all times actually to have capital at or above that level (a hard limit), thereby turning a soft limit drafted by reference to assets and liabilities into a hard limit requiring capital to be held at or above specified levels. If those rules apply both a hard and a soft limit, and the level of the soft limit is higher, that soft limit is applied under this annex, but translated into a hard limit in accordance with the earlier provisions of (5). | ||||
(6) | The scope of the those rules is amended so as to remove restrictions relating to where members of the financial conglomerate are incorporated or have their head office, so that the scope covers every member of the financial conglomerate that would have been included in the scope of those rules if those members had their head offices in an EEA State. | |||
(7) | (For the purposes of Parts 1 to 3) those rules must be adjusted, if necessary, when calculating the capital resources, capital resources requirements or solvency requirements for a particular financial sector to exclude those for a member of another financial sector. | |||
No capital ties | 5.5 | (1) | This rule deals with a financial conglomerate in which some of the members are not linked by capital ties at the time of the notification referred to in PRU 8.4.28 R (1) (Capital adequacy requirements: Compulsory application of Method 4 from Annex I of the Financial Groups Directive). | |
(2) | If: | |||
(a) | PRU 8.4.26 R (Capital adequacy requirements: Application of Method 4 from Annex I of the Financial Groups Directive) would otherwise apply with respect to a financial conglomerate under PRU 8.4.28 R; and | |||
(b) | all members of that financial conglomerate are linked directly or indirectly with each other by capital ties except for members that collectively are of negligible interest with respect to the objectives of supplementary supervision of regulated entities in a financial conglomerate (the "peripheral members"); | |||
PRU 8.4.28 R continues to apply. Otherwise PRU 8.4.28 R does not apply with respect to a financial conglomerate falling into (1). | ||||
(3) | If PRU 8.4.28 R applies with respect to a financial conglomerate in accordance with (2) the peripheral members must be excluded from the calculations under PRU 8.4.26 R. | |||
(4) | If: | |||
(a) | PRU 8.4.26 R applies with respect to a financial conglomerate falling into (1) under PRU 8.4.27 R (2) (Use of Part IV permission to apply Annex I of the Financial Groups Directive); or | |||
(b) | PRU 8.4.49 (Capital adequacy requirements: Application of Methods 1, 2 or 3 from Annex I of the Financial Groups Directive) applies with respect to a financial conglomerate falling into (1); | |||
then: | ||||
(c) | the treatment of the links in (1) (including the treatment of any solvency deficit) is as provided for in the requirement referred to in PRU 8.4.30 R; and | |||
(d) | PRU 8.4.26 R or PRU 8.4.29 R, as the case may be, apply even if the applicable sectoral rules do not deal with how undertakings not linked by capital ties are to be dealt with for the purposes of consolidated supervision (or, in the case of the insurance sector, supplementary supervision). | |||
(5) | Once PRU 8.4.26 R applies to a firm with respect to a financial conglomerate of which it is a member under PRU 8.4.27 R (1) (automatic application of Method 4 from Annex I of the Financial Groups Directive on satisfaction of the condition in PRU 8.4.28 R), the disapplication of PRU 8.4.28 R under (2) ceases to apply with respect to that financial conglomerate. |
- 31/12/2004
PRU 8 Ann 1R 10
See Notes
Defining the financial sectors | 6.1 | For the purposes of Parts 1 to 3 of this annex (but, unless specified otherwise in paragraph 4.4, not for the purposes of the definition of most important financial sector): | ||
(1) | the banking sector and the investment services sector are considered separately; | |||
(2) | if a financial institution could otherwise fall into both the banking sector and the investment services sector, it must be allocated to the banking sector; | |||
(3) | an asset management company is allocated in accordance with PRU 8.4.39 R; and | |||
(4) | a mixed financial holding company must be treated as being a member of the most important financial sector. | |||
Solo capital resources requirement: UK domestic firms | 6.2 | The solo capital resources requirement for a regulated entity that is a UK domestic firm is its solo regulatory capital requirement under the FSA's sectoral rules for its financial sector applicable to it. | ||
Solo capital resources requirement: EEA firms | 6.3 | The solo capital resources requirement for an EEA regulated entity that is subject to the solo capital adequacy sectoral rules for its financial sector of the competent authority that authorised it is equal to the amount of capital resources it is obliged to hold under those sectoral rules. | ||
Solo capital resources requirement: mixed financial holding company | 6.4 | The solo capital resources requirement for a mixed financial holding company is a notional capital requirement. It is the capital adequacy requirement that applies to regulated entities in the most important financial sector under the table in paragraph 6.8. | ||
Solo capital resources requirement: non-EEA firms subject to equivalent regimes | 6.5 | The solo capital resources requirement for a regulated entity that: | ||
(1) | does not fall into paragraphs 6.2 to 6.4; | |||
(2) | is subject to any of the sectoral rules referred to in paragraph 6.6 applicable to its financial sector; and | |||
(3) | is incorporated in and has its head office in: | |||
(a) | (where the sectoral rules in (2) are for the banking sector or the investment services sector) the same state or territory as the regulator for those sectoral rules, as referred to in paragraph 6.6(1) or 6.6(2)); or | |||
(b) | (where the sectoral rules in (2) are for the insurance sector) the designated state or territory in question, as referred to in 6.6(3); | |||
is equal to the amount of capital resources it is obliged to hold under those sectoral rules. However, where 3(b) would otherwise apply, paragraph 6.7 may be applied instead. | ||||
6.6 | The sectoral rules referred to in paragraph 6.5 are: | |||
(1) | (for the banking sector) the sectoral rules of or administered by one of the regulators listed in Appendix D of chapter CS of IPRU(BANK); | |||
(2) | (for the investment services sector) the sectoral rules of or administered by one of the regulators listed in Appendix 59 of chapter 10 of IPRU(INV); and | |||
(3) | (for the insurance sector) the sectoral rules of the designated States or territories excluding EEA States. | |||
Solo capital resources requirement: other members | 6.7 | The solo capital resources requirement for any member of a financial conglomerate in the overall financial sector not treated under paragraphs 6.2 to 6.6 is a notional capital requirement. It is the capital resources requirement that would apply to it under the following rules: | ||
(1) | (in the case of an asset management company) the rules in Chapter 7 of IPRU(INV); and |
- 31/12/2004
PRU 8 Ann 1R 11
See Notes
Financial sector | FSA's sectoral rules |
Banking sector | The FSA's sectoral rules for banks, except that e-money issuers are subject to ELM. |
Insurance sector | The FSA's sectoral rules for insurance undertakings. |
Investment services sector | (1) The rules in IPRU(INV) that would apply on the assumptions in paragraph 4.3(2). |
(2) (If (1) does not result in the application of any rules in IPRU(INV)) the rules in IPRU(INV) that would be applied to it under rule 14.5.2 of Chapter 14 of IPRU(INV) (Group financial resources requirement). |
- 31/12/2004
PRU 8 Ann 1R 12
See Notes
Solo capital resources requirement: the insurance sector | 6.9 | References to capital requirements in the provisions of PRU 8 Ann 1R G defining solo capital resources requirement must be interpreted in accordance with paragraph 5.4(5). |
Applicable sectoral consolidation rules | 6.10 | The applicable sectoral consolidation rules for a financial sector are the FSA's sectoral rules about capital adequacy and solvency on a consolidated basis that are applied in the table in paragraph 6.11. |
- 31/12/2004
PRU 8 Ann 1R 13
See Notes
Financial sector | Type of financial conglomerate | FSA's sectoral rules |
Banking sector | Building society conglomerate | The rules for building societies. |
Any other type | The rules for banks. | |
Insurance sector | N/A | The rules for insurance undertakings. |
Investment services sector | N/A | The rules for investment firms. |
Note 1: Paragraph 4.6 applies for the purposes of those rules. |
- 31/12/2004
PRU 8 Ann 1R 14
See Notes
Applicable sectoral consolidation rules (contd.) | 6.12 | The rules referred to in the third column of the table in paragraph 6.11 are as follows: | |
(1) | the rules for building societies are the ones for building society conglomerates listed in the table in paragraph 4.2; | ||
(2) | the rules for banks are the ones for banking conglomerates listed in the table in paragraph 4.2 as adjusted under paragraph 4.7; | ||
(3) | the rules for insurance undertakings are whichever of the ones for insurance conglomerates that are applied by the table in paragraph 4.2; and | ||
(4) | the rules for investment firms are the ones for investment services conglomerates listed in the table in paragraph 4.2 as applied under paragraph 4.3 (How to apply chapter 14 of IPRU(INV)). |
- 31/12/2004
PRU 8 Ann 2R
PRU 8 Ann 2R
- 01/12/2004
- 11/08/2004
PRU 8 Ann 2R 1
1.1 | This Part of this annex sets out the rules with which a firm must comply under PRU 8.5.8 R with respect to a financial conglomerate of which it is a member. |
1.2 | A firm must comply, with respect to the financial conglomerate referred to in paragraph 1.1, with whichever of PRU 8.4.26 R and PRU 8.4.29 R is applied under paragraph 1.3. |
1.3 | For the purposes of paragraph 1.2:
(1) the rule in PRU 8.4 that applies as referred to in paragraph 1.2 is the one that is specified by the requirement referred to in PRU 8.5.8 R;
(2) (where PRU 8.4.29 R is applied) the definitions of conglomerate capital resources and conglomerate capital resources requirement that apply for the purposes of that rule are the ones from whichever of Part 1, Part 2 or Part 3 of PRU 8 Ann 1R G is specified in that requirement; and (3) the rules so applied (including those in PRU 8 Ann 1R G) are adjusted in accordance with paragraph 3.1. |
1.4 | If the condition in Articles 7(4) and 8(4) of the Financial Groups Directive is satisfied (the financial conglomerate is headed by a mixed financial holding company) with respect to the financial conglomerate referred to in paragraph 1.1 the firm must also comply with PRU 8.4.35 R (as adjusted in accordance with paragraph 3.1) with respect to that financial conglomerate. |
1.5 | A firm must comply with the following with respect to the financial conglomerate referred to in paragraph 1.1:
(1) PRU 8.1 (as it applies to financial conglomerates and as adjusted under paragraph 3.1); and
(2) PRU 8.4.25 R. |
- 11/08/2004
PRU 8 Ann 2R 2
See Notes
2.1 | This Part of this annex sets out the rules with which a firm must comply under PRU 8.5.9 R with respect to a third-country banking and investment group of which it is a member. |
2.2 | A firm must comply with one of the sets of rules specified in paragraph 2.3 as adjusted under paragraph 3.1 with respect to the third-country banking and investment group referred to in paragraph 2.1. |
2.3 | The rules referred to in paragraph 2.2 are as follows:
(1) the applicable sectoral consolidation rules in IPRU(BANK); or
(2) the applicable sectoral consolidation rules for the investment services sector; or (3) the rules in ELM 7. |
2.4 | The set of rules from paragraph 2.3 that apply with respect to a particular third-country banking and investment group (as referred to in paragraph 2.1) are those that would apply if they were adjusted in accordance with paragraph 3.1. |
2.5 | The sectoral rules applied by Part 2 of this annex cover all prudential rules applying on a consolidated basis including those relating to large exposures. |
2.6 | A firm must comply with PRU 8.1 (as it applies to banking and investment groups and as adjusted under paragraph 3.1) with respect to the third-country banking and investment group referred to in paragraph 2.1. |
- 11/08/2004
PRU 8 Ann 2R 3
See Notes
3.1 | The adjustments that must be carried out under this paragraph are that the scope of the rules referred in Part 1 or Part 2 of this annex, as the case may be, are amended:
(1) so as to remove any provisions disapplying those rules for third-country groups;
(2) so as to remove all limitations relating to where a member of the third-country group is incorporated or has its head office; and (3) so that the scope covers every member of the third-country group that would have been included in the scope of those rules if those members had their head offices in, and were incorporated in, an EEA State. |
- 11/08/2004
PRU 8 Ann 3G
Guidance Notes for Classification of Groups
- 01/12/2004
See Notes
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- (a) are managed on a unified basis; or
- (b) have common management.
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- (a) Branches should be included as part of the parent entity.
- (b) Include in the calculations overseas entities owned by the relevant group or sub-group.
- (c) There are only two sectors for this purpose: banking/investment and insurance.
- (d) You will need to assign non-regulated financial entities to one of these sectors:
- • banking/investment activities are listed in - IPRU Banks CS 10 Appendix A
- • insurance activities are listed in - IPRU Insurers Annex 11.1 and 11.2 p 163-168.
- • Any operator of a UCITS scheme, insurance intermediary, mortgage broker and mixed financial holding company does not fall into the directive definitions of either financial sector or insurance sector.
- They should therefore be ignored for the purposes of these calculations.
- 11/08/2004
- 11/08/2004
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- 11/08/2004
- (i) Off-balance-sheet items should be excluded.
- (ii) Where off-balance sheet treatment of funds under management and on-balance sheet treatment of policy holders' funds may distort the threshold calculation, groups should consult the FSA on the appropriateness of using other measures under article 3.5 of the Financial Groups Directive.
- (iii) If consolidated accounts exist for a sub-group consisting of financial entities from only one of the two sectors, these consolidated accounts should be used to measure the balance-sheet total of the sub-group (i.e. total assets less investments in entities in the other sector). If consolidated accounts do not exist, intra-group balances should be netted out when calculating the balance sheet total of a single sector (but cross-sector intra-group balances should not be netted out).
- (iv) Where consolidated accounts are used, minority interests should be excluded and goodwill should be included.
- (v) Where accounting standards differ between entities, groups should consult the FSA if they believe this is likely materially to affect the threshold calculation.
- (vi) Where there is a subsidiary or participation in the opposite sector from its parent (i.e. insurance sector for a banking/investment firm parent and vice versa), the balance sheet amount of the subsidiary or participation should be allocated to its sector using its individual accounts.
- (vii) The balance-sheet total of the parent entity/sub-group is measured as total assets of the parent/sub-group less the book value of its subsidiaries or participations in the other sector (i.e. the value of the subsidiary or participation in the parent's consolidated accounts is deducted from the parent's consolidated assets).
- (viii) The cross-sector subsidiaries or participations referred to above, valued according to their own accounts, are allocated pro-rata, according to the aggregated share owned by the parent/sub-group, to their own sector.
- (ix) If the cross-sector entities above themselves own group entities in the first sector (i.e. that of the top parent/sub-group) these should (in accordance with the methods above) be excluded from the second sector and added to the first sector using individual accounts.
- 11/08/2004
- 11/08/2004
- 11/08/2004
- (i) If you complete a solvency return for a sub-group consisting of financial entities from only one of the two sectors, the total solvency requirement for the sub-group should be used.
- (ii) Solvency requirements taken must include any deductions from available capital so as to allow the appropriate aggregation of requirements.
- (iii) Where there is a regulated subsidiary or participation in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be from its individual regulatory return. If there is an identifiable contribution to the parent's solvency requirement in respect of the cross-sector subsidiary or participation, the parent's solvency requirement may be adjusted to exclude this.
- (iv) Where there is an unregulated financial undertaking in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be one of the following:
- (a) (a) as if the entity were regulated by the FSA under the appropriate sectoral rules;
- (b) (b) using EU minimum requirements for the appropriate sector; or
- (c) (c) using non-EU local requirements* for the appropriate sector.
- Please note on the form which of these options you have used, according to the country and sector, and whether this is the same treatment as in your latest overall group solvency calculation.
- (v) For banking/investment requirements, use the total amount of capital required.
- (vi) For insurance requirements, use the Required Minimum Margin:
- (a) (a) UK firms, Form 9: for general insurance business = capital resources requirement [line 29]; for long-term insurance business = capital resources requirement (higher of Minimum Capital Requirement and Enhanced Capital Resources Requirement) [line 52].
- (b) (b) Overseas firms, either:
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
- 11/08/2004
PRU 8 Ann 4R
PRU 8 Ann 4 (see PRU 8.4.5 R)
- 01/12/2004
PRU 8 Ann 4.1R
- 11/08/2004
- 11/08/2004
PRU 9
Insurance
mediation & mortgage mediation, lending and administration
PRU 9.1
Responsibility for insurance mediation activity
- 01/12/2004
Application
PRU 9.1.1
See Notes
- 31/10/2004
Purpose
PRU 9.1.2
See Notes
- 31/10/2004
Responsibility for insurance mediation activity
PRU 9.1.3
See Notes
- 31/10/2004
PRU 9.1.4
See Notes
The firm may allocate the responsibility for its insurance mediation activity under PRU 9.1.3 R to an approved person (or persons) performing:
- (1) a governing function (other than the non-executive director function); or
- (2) the apportionment and oversight function; or
- (3) the significant management (other business operations) function.
- 14/01/2005
PRU 9.1.5
See Notes
- (1) Typically an insurance intermediary will appoint a person performing a governing function (other than the non-executive director function) to direct its insurance mediation activity. Where this responsibility is allocated to a person performing another function, the person performing the apportionment and oversight function with responsibility for the apportionment of responsibilities under SYSC 2.1.1 R must ensure that the firm's insurance mediation activity under PRU 9.1.3 R is appropriately allocated.
- (2) The descriptions of significant influence functions, other than the required functions, do not extend to activities carried on by an insurance intermediary with permission only to carry on insurance mediation activity and whose principal purpose is to carry on activities other than regulated activities (see SUP 10.1.21 R). In this case, the firm may allocate the responsibility for the firm's insurance mediation activity under PRU 9.1.3 R to one or more of the persons performing the apportionment and oversight function who will be required to be an approved person.
- (3) In the case of a sole trader, the sole trader will be responsible for the firm's insurance mediation activity, whether or not he is himself a person approved to perform the sole trader function.
- 14/01/2005
PRU 9.1.6
See Notes
- 31/10/2004
PRU 9.1.7
See Notes
- 14/01/2005
Knowledge, ability and good repute
PRU 9.1.8
See Notes
An insurance intermediary must establish on reasonable grounds that:
- (1) a reasonable proportion of the persons within its management structure who are responsible for insurance mediation activity; and
- (2) all other persons directly involved in its insurance mediation activity;
- (3) all the persons in its management structure and any staff directly involved in insurance mediation activity are of good repute.
- 31/10/2004
PRU 9.1.9
See Notes
In determining a person's knowledge and ability under PRU 9.1.8 R (1) and PRU 9.1.8 R (2), the firm should have regard to matters including, but not limited to, whether the person:
- (1) has demonstrated by experience and training to be able, or that he will be able, to perform his duties related to the firm's insurance mediation activity; and
- (2) satisfies the relevant requirements of the FSA's Training and Competence sourcebook (TC).
- 31/10/2004
PRU 9.1.10
See Notes
In considering a person's repute under PRU 9.1.8 R (3), the firm must ensure that the person:
- (1) has not been convicted of any serious criminal offences linked to crimes against property or other crimes related to financial activities (other than spent convictions under the Rehabilitation of Offenders Act 1974 or any other national equivalent); and
- (2) has not been adjudged bankrupt (unless the bankruptcy has been discharged);
- 31/10/2004
PRU 9.1.11
See Notes
- 31/10/2004
PRU 9.1.12
See Notes
- 31/10/2004
PRU 9.1.13
See Notes
- 31/10/2004
PRU 9.2
Professional indemnity insurance requirements for insurance and mortgage mediation activities
- 01/12/2004
Application
PRU 9.2.1
See Notes
- (1) This section applies to a firm with Part IV permission to carry on any of the activities in (2) unless (3), (4), (5) or (6) applies.
- (2) The activities are:
- (3)
- (a) In relation to insurance mediation activity, this section does not apply to a firm if another authorised person which has net tangible assets of more than ?10 million provides a comparable guarantee.
- (b) If the firm is a member of a group in which there is an authorised person with net tangible assets of more than ?10 million, the comparable guarantee must be from that person.
- (c) A 'comparable guarantee' means a written agreement on terms at least equal to those in PRU 9.2.10 R to finance the claims that might arise as a result of a breach by the firm of its duties under the regulatory system or civil law.
- (4) In relation to mortgage mediation activity, this section does not apply to a firm if:
- (a) it has net tangible assets of more than ?1 million; or
- (b) the comparable guarantee provisions of (3) apply (as if the firm was carrying on insurance mediation activity) but substituting ?1 million for ?10 million in (a) and (b).
- (5) In relation to all the activities in (2), this section does not apply to:
- (a) an insurer; or
- (b) a managing agent; or
- (c) a firm to which IPRU(INV) 13.1.4(1) (Financial resource requirements for personal investment firms: requirement to hold professional indemnity insurance) applies.
- (6) In relation to mortgage mediation activity, this section does not apply to an authorised professional firm:
- (a) which is subject to IPRU(INV) 2.3.1 (Professional indemnity insurance requirements for authorised professional firms); and
- (b) whose mortgage mediation activity is incidental to its main business.
- 31/10/2004
PRU 9.2.2
See Notes
- 31/10/2004
Purpose
PRU 9.2.3
See Notes
The purposes of this section are to:
- (1) implement article 4.3 of the Insurance Mediation Directive in so far as it requires insurance intermediaries to hold professional indemnity insurance, or some other comparable guarantee, against any liability that might arise from professional negligence; and
- (2) meet the regulatory objectives of consumer protection and maintaining market confidence by ensuring that firms have adequate resources to protect themselves, and their customers, against losses arising from breaches in its duties under the regulatory system or civil law.
- 31/10/2004
PRU 9.2.4
See Notes
- 31/10/2004
PRU 9.2.5
See Notes
- 31/10/2004
PRU 9.2.6
See Notes
- 31/10/2004
Requirement to hold professional indemnity insurance
PRU 9.2.7
See Notes
A firm must take out and maintain professional indemnity insurance that is at least equal to the requirements of PRU 9.2.10 R from:
- (1) an insurance undertaking authorised to transact professional indemnity insurance in the EEA; or
- (2) a person of equivalent status in:
- (i) a Zone A country; or
- (ii) the Channel Islands, Gibraltar, Bermuda or the Isle of Man.
- 31/10/2004
PRU 9.2.8
See Notes
- 14/01/2005
PRU 9.2.9
See Notes
- 31/10/2004
Terms to be incorporated in the insurance
PRU 9.2.10
See Notes
In relation to the activities referred to in PRU 9.2.1 R (2), the contract of professional indemnity insurance must incorporate terms which make provision for:
- (1) cover in respect of claims for which a firm may be liable as a result of the conduct of itself, its employees and its appointed representatives (acting within the scope of their appointment);
- (2) the minimum limits of indemnity as set out in PRU 9.2.13 R (in relation to insurance mediation activity) and PRU 9.2.15 R (in relation to mortgage mediation activity);
- (3) an excess as set out in PRU 9.2.17 R to PRU 9.2.22 R;
- (4) appropriate cover in respect of legal defence costs;
- (5) continuous cover in respect of claims arising from work carried out from the date on which the firm was given Part IV permission in relation to any of the activities referred to in (2); and
- (6) cover in respect of Ombudsman awards made against the firm.
- 31/10/2004
PRU 9.2.11
See Notes
- 31/10/2004
PRU 9.2.12
See Notes
- 31/10/2004
Minimum limits of indemnity: insurance intermediary
PRU 9.2.13
See Notes
If the firm is an insurance intermediary, then the minimum limits of indemnity referred to in PRU 9.2.10 R (2) are:
- (1) for a single claim, ?1 million; and
- (2) in aggregate, ?1.5 million or, if higher, 10% of annual income (see PRU 9.3.42 R) up to ?30 million.
- 14/01/2005
PRU 9.2.14
See Notes
- 31/10/2004
Minimum limits of indemnity: mortgage intermediary
PRU 9.2.15
See Notes
If the firm is a mortgage intermediary, then the minimum limit of indemnity referred to in PRU 9.2.10 R (2) is the higher of 10% of annual income (see PRU 9.3.42 R) up to ?1 million, and:
- (1) for a single claim, ?100,000; or
- (2) in aggregate, ?500,000.
- 14/01/2005
Excess
PRU 9.2.16
See Notes
- 31/10/2004
PRU 9.2.17
See Notes
For a firm which does not hold client money or other client assets, the excess referred to in PRU 9.2.10 R (3) is not more than the higher of:
- (1) ?2,500; and
- (2) 1.5% of annual income (see PRU 9.3.42 R).
- 31/10/2004
PRU 9.2.18
See Notes
For a firm which holds client money or other client assets, the excess referred to in PRU 9.2.10 R (3) is not more than the higher of:
- (1) ?5,000; and
- (2) 3% of annual income (see PRU 9.3.42 R).
- 31/10/2004
Policies covering more than one firm
PRU 9.2.19
See Notes
If a policy provides cover to more than one firm, then in relation to PRU 9.2.13 R, PRU 9.2.14 R and PRU 9.2.15 R:
- (1) the limits of indemnity must be calculated on the combined annual income (see PRU 9.3.42 R) of all the firms named in the policy; and
- (2) each firm named in the policy must have the benefit of the minimum limits of indemnity as required in PRU 9.2.13 R or PRU 9.2.15 R.
- 31/10/2004
Additional capital
PRU 9.2.20
See Notes
- 31/10/2004
PRU 9.2.21
See Notes
Income | Excess obtained up to and including: | |||||||||||||
More than | Up to | 2.5 | 5 | 10 | 15 | 20 | 25 | 30 | 40 | 50 | 75 | 100 | 150 | 200+ |
0 | 100 | 0 | 5 | 9 | 12 | 14 | 17 | 19 | 23 | 26 | 33 | 39 | 50 | 59 |
100 | 200 | 0 | 7 | 12 | 16 | 19 | 22 | 25 | 30 | 34 | 43 | 51 | 64 | 75 |
200 | 300 | 0 | 7 | 12 | 16 | 20 | 24 | 27 | 32 | 37 | 47 | 56 | 71 | 84 |
300 | 400 | 0 | 0 | 12 | 16 | 21 | 24 | 28 | 34 | 39 | 50 | 60 | 77 | 91 |
400 | 500 | 0 | 0 | 11 | 16 | 21 | 24 | 28 | 34 | 40 | 53 | 63 | 81 | 96 |
500 | 600 | 0 | 0 | 10 | 16 | 20 | 24 | 28 | 35 | 41 | 54 | 65 | 84 | 100 |
600 | 700 | 0 | 0 | 0 | 15 | 20 | 24 | 28 | 35 | 41 | 55 | 67 | 87 | 104 |
700 | 800 | 0 | 0 | 0 | 14 | 19 | 24 | 28 | 35 | 42 | 56 | 68 | 89 | 107 |
800 | 900 | 0 | 0 | 0 | 13 | 18 | 23 | 27 | 35 | 42 | 56 | 69 | 91 | 109 |
900 | 1,000 | 0 | 0 | 0 | 0 | 17 | 22 | 27 | 34 | 41 | 57 | 70 | 92 | 111 |
1,000 | 1,500 | 0 | 0 | 0 | 0 | 0 | 21 | 26 | 34 | 41 | 57 | 71 | 97 | 118 |
1,500 | 2,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 30 | 38 | 56 | 71 | 98 | 121 |
2,000 | 2,500 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 24 | 33 | 53 | 69 | 99 | 126 |
2,500 | 3,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 28 | 50 | 68 | 101 | 130 |
3,000 | 3,500 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 47 | 67 | 101 | 132 |
3,500 | 4,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 43 | 65 | 101 | 133 |
4,000 | 4,500 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 39 | 62 | 101 | 134 |
4,500 | 5,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 58 | 99 | 134 |
5,000 | 6,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 54 | 97 | 133 |
6,000 | 7,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 91 | 131 |
7,000 | 8,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 84 | 126 |
8,000 | 9,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 75 | 120 |
9,000 | 10,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 113 |
10,000 | 100,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
100,000 | n/a | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
- 31/10/2004
PRU 9.2.22
See Notes
Income | Excess obtained up to and including: | ||||||||||||
More than | Up to | 5 | 10 | 15 | 20 | 25 | 30 | 40 | 50 | 75 | 100 | 150 | 200+ |
0 | 100 | 0 | 4 | 7 | 9 | 12 | 14 | 18 | 21 | 28 | 34 | 45 | 54 |
100 | 200 | 0 | 7 | 11 | 14 | 17 | 20 | 25 | 29 | 38 | 46 | 59 | 70 |
200 | 300 | 0 | 7 | 11 | 14 | 17 | 20 | 25 | 30 | 40 | 49 | 64 | 77 |
300 | 400 | 0 | 0 | 9 | 13 | 16 | 19 | 25 | 30 | 40 | 50 | 67 | 81 |
400 | 500 | 0 | 0 | 0 | 11 | 14 | 18 | 24 | 29 | 40 | 51 | 68 | 83 |
500 | 600 | 0 | 0 | 0 | 8 | 12 | 15 | 22 | 28 | 40 | 51 | 69 | 85 |
600 | 700 | 0 | 0 | 0 | 0 | 9 | 13 | 20 | 26 | 39 | 50 | 69 | 86 |
700 | 800 | 0 | 0 | 0 | 0 | 6 | 10 | 17 | 24 | 38 | 49 | 69 | 87 |
800 | 900 | 0 | 0 | 0 | 0 | 0 | 7 | 15 | 22 | 36 | 48 | 69 | 87 |
900 | 1,000 | 0 | 0 | 0 | 0 | 0 | 0 | 12 | 19 | 34 | 47 | 68 | 87 |
1,000 | 1,500 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 16 | 32 | 45 | 67 | 86 |
1,500 | 2,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 18 | 34 | 59 | 81 |
2,000 | 2,500 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 19 | 48 | 71 |
2,500 | 3,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 6 | 37 | 64 |
3,000 | 3,500 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 26 | 55 |
3,500 | 4,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 14 | 45 |
4,000 | 4,500 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 33 |
4,500 | 5,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 21 |
5,000 | 6,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 8 |
6,000 | 7,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
7,000 | 8,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
8,000 | 9,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
9,000 | 10,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
10,000 | 100,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
100,000 | n/a | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
- 31/10/2004
PRU 9.2.23
See Notes
- 31/10/2004
PRU 9.3
Capital resources for insurance and mortgage mediation activity and mortgage lending and administration
- 01/12/2004
Application
PRU 9.3.1
See Notes
- (1) This section applies to a firm with Part IV permission to carry on any of the activities in (2) unless any of PRU 9.3.4 R to PRU 9.3.11 R applies.
- (2) The activities are:
- (a) insurance mediation activity;
- (b) mortgage mediation activity;
- (c) entering into a regulated mortgage contract (that is, mortgage lending);
- (d) administering a regulated mortgage contract (that is, mortgage administration).
- 31/10/2004
PRU 9.3.2
See Notes
- 31/10/2004
PRU 9.3.3
See Notes
- 31/10/2004
Application: banks, building societies, insurers and friendly societies
PRU 9.3.4
See Notes
This section does not apply to:
- (1) a bank; or
- (2) a building society; or
- (3) a solo consolidated subsidiary of a bank or a building society; or
- (4) an insurer; or
- (5) a friendly society.
- 31/10/2004
PRU 9.3.5
See Notes
- 31/10/2004
Application: firms carrying on designated investment business only
PRU 9.3.6
See Notes
- 31/10/2004
PRU 9.3.7
See Notes
- 31/10/2004
Application: credit unions
PRU 9.3.8
See Notes
This section does not apply to:
- (1) a 'small credit union', that is one with:
- (a) assets of ?5 million or less; and
- (b) a total number of members of 5,000 or less (see CRED 8.3.14 R); or
- (2) a credit union whose Part IV permission includes mortgage lending or mortgage administration (or both) and no other activities in PRU 9.3.1 R (2).
- 31/10/2004
PRU 9.3.9
See Notes
- (1) For credit unions to which this section applies and which are not CTF providers, the capital requirements will be the higher of the requirements in this section and in CRED (see PRU 9.3.25 R).
- (2) For credit unions to which this section applies and which are CTF providers with permission to carry on designated investment business, the capital requirements will be the highest of the requirements in this section, those in CRED and of IPRU(INV) Chapter 8 (see PRU 9.3.25 R).
- 01/12/2004
Application: professional firms
PRU 9.3.10
See Notes
- (1) This section does not apply to an authorised professional firm:
- (a) whose main business is the practice of its profession; and
- (b) whose regulated activities in PRU 9.3.1 R (2) are incidental to its main business.
- (2) A firm's main business is the practice of its profession if the proportion of income it derives from professional fees is, during its annual accounting period, at least 50% of the firm's total income (a temporary variation of not more than 5% may be disregarded for this purpose).
- (3) Professional fees are fees, commissions and other receipts receivable in respect of legal, accountancy or actuarial services provided to clients but excluding any items receivable in respect of regulated activities.
- 31/10/2004
Application: Lloyd's managing agents
PRU 9.3.11
See Notes
- 31/10/2004
PRU 9.3.12
See Notes
- 31/10/2004
Application: social housing firms
PRU 9.3.13
See Notes
- 31/10/2004
Purpose
PRU 9.3.14
See Notes
- 31/10/2004
PRU 9.3.15
See Notes
- 31/10/2004
PRU 9.3.16
See Notes
- 31/10/2004
PRU 9.3.17
See Notes
- 31/10/2004
Purpose: social housing firms
PRU 9.3.18
See Notes
- 31/10/2004
PRU 9.3.19
See Notes
- 31/10/2004
Capital resources: general rules
PRU 9.3.20
See Notes
- 31/10/2004
PRU 9.3.21
See Notes
- 31/10/2004
Capital resources: UK GAAP
PRU 9.3.22
See Notes
- 31/10/2004
Capital resources: client assets
PRU 9.3.23
See Notes
- 31/10/2004
Capital resources requirement: firms carrying on regulated activities including designated investment business
PRU 9.3.24
See Notes
The capital resources requirement for a firm (other than a credit union) carrying on regulated activities, including designated investment business, is the higher of:
- (1) the requirement which is applied by this section according to the activity or activities of the firm (treating the relevant rules as applying to the firm by disregarding its designated investment business); and
- (2) the financial resource requirement which is applied by IPRU(INV).
- 01/12/2004
Capital resources requirement: credit unions
PRU 9.3.25
See Notes
The capital resources requirement for a credit union to which this section applies (see PRU 9.3.8 R) is the highest of:
- (1) the requirement which is applied by PRU 9.3.30 R (Capital resources requirement: mediation activity only) treating that rule as applying to the credit union by disregarding activities which are not insurance mediation activity or mortgage mediation activity;
- (2) the amount which is applied by CRED 8 (Capital requirements); and
- (3) if the credit union is a CTF provider that has a permission to carry on designated investment business, the amount which is applied by IPRU(INV) Chapter 8.
- 01/12/2004
Capital resources requirement: social housing firms
PRU 9.3.26
See Notes
The capital resources requirement for a social housing firm whose Part IV permission is limited to carrying on the regulated activities of:
- (1) mortgage lender; or
- (2) mortgage administration (or both);
is that the firm's net tangible assets must be greater than zero.
- 31/10/2004
PRU 9.3.27
See Notes
- 31/10/2004
Capital resources requirement: application according to regulated activities
PRU 9.3.28
See Notes
- 31/10/2004
PRU 9.3.29
See Notes
Regulated activities | Provisions | |
1. | and no other regulated activity. | PRU 9.3.30 R |
2. | and no other regulated activity. | PRU 9.3.31 R to PRU 9.3.36 E |
3. | mortgage administration; and no other regulated activity. |
PRU 9.3.37 R to PRU 9.3.38 R |
4. | insurance mediation activity; and | PRU 9.3.39 R |
5. | mortgage mediation activity; and | PRU 9.3.40 R |
6. | Any combination of regulated activities not within rows 1 to 5. | PRU 9.3.41 R |
- 31/10/2004
Capital resources requirement: mediation activity only
PRU 9.3.30
See Notes
- (1) If a firm (carrying on the activities in row 1 of the table in PRU 9.3.29 R) does not hold client money or other client assets in relation to its insurance mediation activity or mortgage mediation activity, its capital resources requirement is the higher of:
- (a) ?5,000; and
- (b) 2.5% of the annual income (see PRU 9.3.42 R) from its insurance mediation activity or mortgage mediation activity (or both).
- (2) If a firm (carrying on the activities in row 1 of the table in PRU 9.3.29 R) holds client money or other client assets in relation to its insurance mediation activity or mortgage mediation activity, its capital resources requirement is the higher of:
- (a) ?10,000; and
- (b) 5% of the annual income (see PRU 9.3.42 R) from its insurance mediation activity or mortgage mediation activity (or both).
- 31/10/2004
Capital resources requirement: mortgage lending and administration (but not mortgage administration only)
PRU 9.3.31
See Notes
- (1) The capital resources requirement of a firm (carrying on the activities in row 2 of the table at PRU 9.3.29 R) is the higher of:
- (a) ?100,000; and
- (b) 1% of:
- (i) its total assets plus total undrawn commitments; less:
- (ii) loans excluded by PRU 9.3.33 R plus intangible assets (see Note 1 in the table in PRU 9.3.53 R).
- (2) Undrawn commitments in (1)(b)(i) means the total of those amounts which a borrower has the right to draw down from the firm but which have not yet been drawn down, excluding those under an agreement:
- (a) which has an original maturity of up to one year; or
- (b) which can be unconditionally cancelled at any time by the lender.
- 31/10/2004
PRU 9.3.32
See Notes
- 31/10/2004
PRU 9.3.33
See Notes
When calculating total assets for the purposes of PRU 9.3.31 R, the firm may exclude a loan which has been transferred to a third party only if it meets the following conditions:
- (1) the loan must have been transferred in a legally effective manner by one of the following means:
- (a) novation; or
- (b) legal or equitable assignment; or
- (c) sub-participation; or
- (d) declaration of trust; and
- (2) the lender:
- (a) retains no material economic interest in the loan; and
- (b) has no material exposure to losses arising from it.
- 31/10/2004
PRU 9.3.34
See Notes
- (1) When seeking to rely on the condition in PRU 9.3.33 R (2), a firm should ensure that the loan qualifies for the 'linked presentation' accounting treatment under Financial Reporting Standard 5 (Reporting the substance of transactions) issued in April 1994, and amended in December 1994 and September 1998 (if applicable to the firm).
- (2) Compliance with (1) may be relied upon as tending to establish compliance with PRU 9.3.33 R (2).
- 31/10/2004
PRU 9.3.35
See Notes
- 31/10/2004
PRU 9.3.36
See Notes
- (1) When seeking to rely on the condition in PRU 9.3.33 R (2), a firm should not provide material credit enhancement in respect of the loan unless it deducts the amount of the credit enhancement from its capital resources before meeting its capital resources requirement.
- (2) Credit enhancement includes:
- (a) any holding of subordinated loans or notes in a transferee that is a special purpose vehicle; or
- (b) over collateralisation by transferring loans to a larger aggregate value than the securities to be issued; or
- (c) any other arrangement with the transferee to cover a part of any subsequent losses arising from the transferred loan.
- (3) Contravention of (1) may be relied upon as tending to establish contravention of PRU 9.3.33 R (2).
- 31/10/2004
Capital resources requirement: mortgage administration only
PRU 9.3.37
See Notes
- 31/10/2004
PRU 9.3.38
See Notes
The capital resources requirement of a firm (carrying on the activities in row 3 of the table in PRU 9.3.29 R), which has all the regulated mortgage contracts that it administers off its balance sheet, is the higher of:
- (1) £100,000; and
- (2) 10% of its annual income (see PRU 9.3.42 R and PRU 9.3.48 R).
- 31/10/2004
Capital resources requirement: insurance mediation activity and mortgage lending or mortgage administration
PRU 9.3.39
See Notes
The capital resources requirement for a firm (carrying on the activities in row 4 of the table in PRU 9.3.29 R) is the sum of the requirements which are applied to the firm by:
- (1) PRU 9.3.30 R; and
- (2)
- (a) PRU 9.3.31 R; or
- (b) if, in addition to its insurance mediation activity, the firm carries on only mortgage administration and has all the assets that it administers off balance sheet, PRU 9.3.38 R.
- 31/10/2004
Capital resources requirement: mortgage mediation activity and mortgage lending or mortgage administration
PRU 9.3.40
See Notes
- (1) If a firm (carrying on the activities in row 5 of the table in PRU 9.3.29 R) does not hold client money or other client assets in relation to its mortgage mediation activity, the capital requirement is the amount applied to a firm, according to the activities carried on by the firm, by:
- (a) PRU 9.3.31 R; or
- (b) if, in addition to its mortgage mediation activity, the firm carries on only mortgage administration and has all the assets that it administers off balance sheet, PRU 9.3.38 R.
- (2) If a firm (carrying on the activities in row 5 of the table in PRU 9.3.29 R) holds client money or other client assets in relation to its mortgage mediation activity, the capital resources requirement is:
- (a) the amount calculated under (1); plus
- (b) the amount which is applied to a firm by PRU 9.3.30 R (2).
- 31/10/2004
Capital resources requirement: other combinations of activities
PRU 9.3.41
See Notes
- 31/10/2004
Annual income
PRU 9.3.42
See Notes
PRU 9.3.43 R to PRU 9.3.50 R contain provisions relating to the calculation of annual income for the purposes of:
- (1) PRU 9.2.13 R (2), PRU 9.2.15 R, PRU 9.2.17 R (2) and PRU 9.2.18 R (2) (all concerning the limits of indemnity for professional indemnity insurance); and
- (2) PRU 9.3.30 R (1)(b) and PRU 9.3.30 R (2)(b), and PRU 9.3.38 R (2).
- 31/10/2004
PRU 9.3.43
See Notes
- 31/10/2004
PRU 9.3.44
See Notes
- 31/10/2004
PRU 9.3.45
See Notes
- (1) The purpose of PRU 9.3.44 R is to ensure that the capital resources requirement is calculated on the basis only of brokerage and other amounts earned by a firm which are its own income.
- (2) For the purposes of PRU 9.3.43 R and PRU 9.3.44 R, a firm's annual income includes commissions and other amounts the firm may have agreed to pay to other persons involved in a transaction, such as sub-agents or other intermediaries.
- (3) A firm's annual income does not, however, include any amounts due to another person (for example, the product provider) which the firm has collected on behalf of that other person.
- 14/01/2005
PRU 9.3.46
See Notes
- 31/10/2004
PRU 9.3.47
See Notes
- 31/10/2004
Annual income for mortgage administration
PRU 9.3.48
See Notes
For the purposes of PRU 9.3.38 R (2) (Mortgage administration only) annual income is the sum of:
- (1) revenue (that is, commissions, fees, net interest income, dividends, royalties and rent); and
- (2) gains;
- (3) arising in the course of the ordinary activities of the firm, less profit:
- (a) on the sale or termination of an operation;
- (b) arising from a fundamental reorganisation or restructuring having a material effect on the nature and focus of the firm's operation; and
- (c) on the disposal of fixed assets, including investments held in a long-term portfolio.
- 31/10/2004
Annual income: periods of less than 12 months
PRU 9.3.49
See Notes
- 31/10/2004
Annual income: no financial statement
PRU 9.3.50
See Notes
- 31/10/2004
The calculation of a firm's capital resources
PRU 9.3.51
See Notes
- (1) A firm must calculate its capital resources only from the items in PRU 9.3.52 R from which it must deduct the items in PRU 9.3.53 R.
- (2) If the firm is subject to IPRU(INV) or CRED, the capital resources are the higher of:
- 31/10/2004
PRU 9.3.52
See Notes
Item | Additional explanation | ||||
1. | Share capital | This must be fully paid and may include: | |||
(1) | ordinary share capital; or | ||||
(2) | preference share capital (excluding preference shares redeemable by shareholders within two years). | ||||
2. | Capital other than share capital (for example, the capital of a sole trader, partnership or limited liability partnership) | The capital of a sole trader is the net balance on the firm's capital account and current account. The capital of a partnership is the capital made up of the partners': |
|||
(1) | capital account, that is the account: | ||||
(a) | into which capital contributed by the partners is paid; and | ||||
(b) | from which, under the terms of the partnership agreement, an amount representing capital may be withdrawn by a partner only if: | ||||
(i) | he ceases to be a partner and an equal amount is transferred to another such account by his former partners or any person replacing him as their partner; or | ||||
(ii) | the partnership is otherwise dissolved or wound up; and | ||||
(2) | current accounts according to the most recent financial statement. | ||||
3. | Audited reserves | These are the audited accumulated profits retained by the firm (after deduction of tax, dividends and proprietors' or partners' drawings) and other reserves created by appropriations of share premiums and similar realised appropriations. Reserves also include gifts of capital, for example, from a parent undertaking. | |||
4. | Interim net profits | If a firm seeks to include interim net profits in the calculation of its capital resources, the profits have to be verified by the firm's external auditor, net of tax, anticipated dividends or proprietors' drawings and other appropriations. | |||
5. | Revaluation reserves | ||||
6. | General provisions | These are provisions that a firm carrying on mortgage lending or mortgage administration holds against potential losses that have not yet been identified but which experience indicates are present in the firm's portfolio of assets. Such provisions must be freely available to meet these unidentified losses wherever they arise. General provisions must be verified by external auditors and disclosed in the firm's annual report and accounts. |
- 31/10/2004
PRU 9.3.53
See Notes
1 | Investments in own shares |
2 | Intangible assets (Note 1) |
3 | Interim net losses (Note 2) |
4 | Excess of drawings over profits for a sole trader or a partnership (Note 2) |
Notes 1. Intangible assets are the full balance sheet value of goodwill (but not until 14 January 2008 - see transitional provision 2), capitalised development costs, brand names, trademarks and similar rights and licences. 2. The interim net losses in row 3, and the excess of drawings in row 4, are in relation to the period following the date as at which the capital resources are being computed. |
- 31/10/2004
Personal assets
PRU 9.3.54
See Notes
In relation to a sole trader's firm or a firm which is a partnership, the sole trader or a partner in the firm may use personal assets to meet the requirements of PRU 9.3.20 R or PRU 9.3.21 R, or both, to the extent necessary to make up any shortfall in meeting those requirements, unless:
- (1) those assets are needed to meet other liabilities arising from:
- (a) personal activities; or
- (b) another business activity not regulated by the FSA; or
- (2) the firm holds client money or other client assets.
- 31/10/2004
PRU 9.3.55
See Notes
- 31/10/2004
Subordinated loans
PRU 9.3.56
See Notes
In row 7 in the table at PRU 9.3.52 R, subordinated debt must not form part of the capital resources of the firm unless it meets the following conditions:
- (1) (for a firm which carries on insurance mediation activity or mortgage mediation activity (or both) but not mortgage lending or mortgage administration) it has an original maturity of:
- (a) at least two years; or
- (b) it is subject to two years' notice of repayment;
- (2) (for all other firms) it has an original maturity of:
- (a) at least five years; or
- (b) it is subject to five years' notice of repayment;
- (3) the claims of the subordinated creditors must rank behind those of all unsubordinated creditors;
- (4) the only events of default must be non-payment of any interest or principal under the debt agreement or the winding up of the firm;
- (5) the remedies available to the subordinated creditor in the event of non-payment or other default in respect of the subordinated debt must be limited to petitioning for the winding up of the firm or proving the debt and claiming in the liquidation of the firm;
- (6) the subordinated debt must not become due and payable before its stated final maturity date except on an event of default complying with (4);
- (7) the agreement and the debt are governed by the law of England and Wales, or of Scotland or of Northern Ireland;
- (8) to the fullest extent permitted under the rules of the relevant jurisdiction, creditors must waive their right to set off amounts they owe the firm against subordinated amounts owed to them by the firm;
- (9) the terms of the subordinated debt must be set out in a written agreement or instrument that contains terms that provide for the conditions set out in (1) to (8); and
- (10) the debt must be unsecured and fully paid up.
- 31/10/2004
PRU 9.3.57
See Notes
- (1) This rule applies to a firm which:
- (a) carries on:
- (i) insurance mediation activity; or
- (ii) mortgage mediation activity (or both); and
- (b) in relation to those activities, holds client money or other client assets;
- but is not carrying on mortgage lending or mortgage administration.
- (2) In calculating its capital resources under PRU 9.3.51 R (1), the firm must exclude any amount by which the aggregate amount of its subordinated loans and its redeemable preference shares exceeds the amount calculated under (3).
- (3) The calculation for (2) is:
four times (a - b - c);
where
a = items 1 to 5 in the Table at PRU 9.3.52 R
b = the firm's redeemable preference shares; and
c = the amount of its intangible assets (but not goodwill until 14 January 2008 - see transitional provision 2).
- 31/10/2004
PRU 9.3.58
See Notes
- 31/10/2004
PRU 9.4
Insurance undertakings and mortgage lenders using insurance or mortgage mediation services
- 01/12/2004
Application
PRU 9.4.1
See Notes
This section applies to a firm with a Part IV permission to carry on:
- (1) insurance business; or
- (2) mortgage lending;
- (3) and which uses, or proposes to use, the services of another person consisting of:
- (a) insurance mediation; or
- (b) insurance mediation activity; or
- (c) mortgage mediation activity.
- 31/10/2004
Purpose
PRU 9.4.2
See Notes
- 31/10/2004
PRU 9.4.3
See Notes
- 31/10/2004
Use of intermediaries
PRU 9.4.4
See Notes
A firm must not use, or propose to use, the services of another person consisting of:
- (1) insurance mediation; or
- (2) insurance mediation activity; or
- (3) mortgage mediation activity;
unless the conditions in PRU 9.4.5 R and PRU 9.4.7 R are satisfied.
- 31/10/2004
PRU 9.4.5
See Notes
The first condition in PRU 9.4.4 R is that the person, in relation to the activity:
- (1) has permission; or
- (2) is an exempt person; or
- (3) is an exempt professional firm; or
- (4) is registered in another EEA State for the purposes of the IMD; or
- (5) in relation to insurance mediation activity, is not carrying this activity on in the EEA; or
- (6) in relation to mortgage mediation activity, is not carrying this activity on in the United Kingdom.
- 31/10/2004
PRU 9.4.6
See Notes
- (1) A firm should:
- (a) before using the services of the intermediary, check:
- (i) the FSA Register; or
- (ii) in relation to insurance mediation carried on by an EEA firm, the register of its Home State regulator;
- for the status of the person; and
- (b) use the services of that person only if the relevant register indicates that the person is registered for that purpose.
- (2)
- (a) Compliance with (1)(a)(i) and (b) may be relied on as tending to establish compliance with:
- (i) PRU 9.4.5 R (1); or
- (ii) in relation to insurance mediation activity, also PRU 9.4.5 R (2) and PRU 9.4.5R (3).
- (b) Compliance with (1)(a)(ii) and (b) may be relied on as tending to establish compliance with PRU 9.4.5 R (4).
- 31/10/2004
PRU 9.4.7
See Notes
The second condition in PRU 9.4.4 R is that the firm takes all reasonable steps to ensure that the person in PRU 9.4.5 R in relation to the activity, is not, directly or indirectly, carrying out the activity as a consequence of the activities of another person which:
- 14/01/2005
PRU 9.4.8
See Notes
In order to comply with PRU 9.4.7 R, a firm may rely on a confirmation provided by the other person in writing if:
- (1) the confirmation is provided by a person within PRU 9.4.5 R;
- (2) the firm checked that this is the case; and
- (3) the firm is not aware that the confirmation is inaccurate and has no grounds for reasonably being aware that the confirmation is inaccurate.
- 31/10/2004
PRU 9.4.9
See Notes
- 31/10/2004
PRU 9 Annex 1
Example of the application of PRU 9.1.3 R, PRU 9.1.4 R, PRU 9.1.8 R and PRU 9.1.10 R
- 01/12/2004
See Notes
- 31/10/2004
Transitional Provisions and Schedules
PRU TP 1
Transitional Provisions
Transitional Provisions
(1) | (2) | (3) | (4) | (5) | (6) |
Material to which the transitional provision applies | Transitional provision | Transitional provision: dates in force | Handbook provision: coming into force | ||
1 | PRU 9.2.7 R | PRU 9.2.7 R (Requirement to hold professional indemnity insurance) does not apply in respect of acts or omissions occurring before: (1) 31 October 2004 (in relation to mortgage mediation activity); and (2) 14 January 2005 (in relation to insurance mediation activity). |
From 31 October 2004 | 31 October 2004 | |
2 | PRU 9.3.53 R and PRU 9.3.57R (3) | A firm is not required to include goodwill in its intangible assets until 14 January 2008. | From 31 October 2004 until 14 January 2008 | 31 October 2004 | |
3 | [deleted] | ||||
4 | [deleted] | ||||
5 | Rules in PRU listed in the Table at PRU TR Table 10R | R | (1) A rule listed in column (2) is disapplied, or is modified in its application, to a firm; (a) in order to produce the same effect, including any conditions, as a waiver had on the corresponding rule in IPRU(INS); (b) for the same period as the waiver would have lasted, if shorter than the period in column (5); provided the conditions set out in (2) are satisfied. (2) The conditions referred to in (1) are: (a) the rule is shown in the Table at PRU TR Table 10R as corresponding with the rule in IPRU(INS) in relation to which the waiver was granted to the firm; (b) the waiver was current as respects the firm immediately before the date specified in column (6); and (c) there is no specific transitional rule relating to the waiver. (3) (1) does not have effect if, and to the extent that, it would be inconsistent with any community obligation of the United Kingdom. |
From 31 December 2004 until the relevant rule is revoked | 31 December 2004 |
5A | PRU 9.4.5 R and PRU 9.4.7 R | R | PRU 9.4.5 R and PRU 9.4.7 R have effect in respect of the use by a firm of the services of another person consisting of insurance mediation and provided from an establishment in an EEA State that has not implemented Article 3 (Registration) of the IMD, as if the condition in paragraph (4) of PRU 9.4.5 R and the condition in paragraph (2) of PRU 9.4.7 R were a condition that the firm has no reason to doubt the good repute, competence and financial standing of that person. | 14 January 2005 to 14 January 2006 | 14 January 2005 |
6 | Rules in PRU not listed in the Table at PRU TR Table 10R | R | (1) A rule listed in column (2) is disapplied, or is modified in its application, to a firm: (a) in order to produce the same effect, including any conditions, as a waiver had on a rule in IPRU(INS) or IPRU(FSOC), or a written concession had on a pre-commencement provision listed in PRU TR 7R; (b) for the same period as the waiver or written concession would have lasted, if shorter than the period in column (5); provided the conditions set out in (2) are satisfied. (2) The conditions referred to in (1) are: (a) the rule in PRU is substantially similar to the rule in IPRU(INS), IPRU(FSOC), or the pre-commencement provision, as the case may be, with which the waiver or written concession was concerned; (b) the waiver or written concession was current as respects the firm immediately before the date specified in column (6); (c) there is no specific transitional rule relating to the waiver or written concession; and (d) in the case of a written concession, it has not been superseded by a waiver from the FSA. (3) (1) does not have effect if, and to the extent that, it would be inconsistent with any community obligation of the United Kingdom. |
From 31 December 2004 until 30 June 2005 | 31 December 2004 |
7 | As PRU TR 6R | R | The pre-commencement provisions referred to in these transitional provisions are those contained in: (1) the Insurance Companies Act 1982 and relevant secondary legislation; (2) the Friendly Societies Act 1992 and relevant secondary legislation. |
As PRU TR 6R | As PRU TR 6R |
8 | As PRU TR 5R to PRU TR 7R | R | A firm which has the benefit of a waiver to which PRU TR 5R applies, or a waiver or written concession to which PRU TR 6R 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 or written concession; (2) maintain a written record of the rule in PRU to which it considers the waiver or written concession applies; and (3) make the record available to the FSA on request. |
As PRU TR 5R or PRU TR 6R | As PRU TR 6R |
9 | PRU TR 5R to PRU TR 25R | R | In these transitional provisions: (1) "substantially similar" means substantially similar in purpose and effect; (2) "written concession" means a waiver, exemption, concession, modification, consent, approval, determination or similar exercise of discretion which: (a) disapplied, or tended to reduce the burden of complying with, a pre-commencement provision (with or without conditions); and (b) was evidenced in writing. |
As PRU TR 5R or PRU TR 6R | 31 December 2004 |
This Table belongs to PRU TR 5R to PRU TR 9R
Rules in PRU | Corresponding rules in IPRU(INS) |
1.3.35R | 4.2 (3) |
2.1.9R | 2.9 (3) |
2.1.21R | 2.9 |
2.1.22R | 2.9 |
2.1.30R | 2.4 (6) |
2.2.80R | 2.10 (7) |
2.2.81R | 2.10 (7) |
2.2.86R | 4.14 |
4.5 (7) | |
3.2.22R | 4.14 (1) |
4.2.34R | 5.11 |
4.2.39R | 5.11 |
5.11 (4) | |
5.11 (5) | |
5.11 (9) | |
5.11 (11) | |
4.2.58R | 2.3 (2) |
7.2.51R | 2.4 (6) |
7.2.56R | 2.4 (1) |
7.2.66R | Appendix 2.1 2.4(1)(b) |
Appendix 2.2 2.4(1)(b) | |
5.9 (1) | |
7.3.40R | 5.9 (2) |
7.3.41R | 5.9 (2) |
7.3.43R | 5.10 |
7.3.74R | 5.16 |
8.3.17R(1)(a)-(b) | 10.1 |
10.2 | |
10.2 (1) | |
10.2 (2) | |
10.2 (3) | |
8.3.23R | 10.2 |
10.2 (1) | |
10.2 (2) | |
10.2 (3) |
(1) | (2) | (3) | (4) | (5) | (6) |
Material to which the transitional provision applies | Transitional provision | Transitional provision: dates in force | Handbook provision: coming into force | ||
11 | PRU 1.2 PRU 5.1 |
R | If a firm, as at 31 December 2004, has the benefit of a waiver of: (1) SUP 16.7.10 R ; or (2) SUP 16.7.12 R ; under which the firm does not have to supply adequate information on mismatch liquidity, the provisions referred to in column (2) do not apply. |
From 31 December 2004 until the date the waiver referred to in column (4) ceases to have effect. | 31 December 2004 |
12 | PRU 1.3.5 R PRU 7.4.191 R |
R | (1) This rule applies to a firm which for the period specified in column (5) is required by PRU 1.3.5 R to measure the surplus or deficit in a defined benefits pension scheme, for the purposes of PRU, in accordance with FRS 17 (Retirement Benefits).(2) A firm must derecognise any measure of actuarial gains in respect of a defined benefits pension scheme.(3) A firm may deduct from its liabilities the difference between the measure of actuarial losses in respect of a defined benefits pension scheme which would result from the application of PRU 1.3.5 R and the firm's best estimate of the level of additional funding that it will provide for that defined benefits pension scheme over the next five years, as determined in conjunction with the scheme's actuaries or trustees (or both) as appropriate. | From 31 December 2004 to 30 December 2005 | 31 December 2004 |
13 | PRU 1.3.14R | R | A firm will be treated as complying with the rule listed in column (2) if it marks to market by reference to market value as determined in accordance with generally accepted accounting concepts, bases and policies or other generally accepted methods appropriate to insurers. | From 31 December 2004 to 30 December 2006 | 31 December 2004 |
14 | PRU 1.3.31 R PRU 2.2.90 R | R | (1) A firm may elect to apply PRU 1.3.11 R to shares in a regulated related undertaking that is not an insurance undertaking or an insurance holding company. (2) A firm may apply PRU 1.3.11 R if it has made the election referred to in sub-paragraph (1) by written notice to the FSA in a way which complies with the requirements for written notice in SUP 15.7. (3) Where a firm has made the election referred to in (1): (a) PRU 2.2.90 R is disapplied in respect of the shares in that regulated related undertaking; and (b) the shares in that regulated related undertaking must be valued in accordance with (4). (4) Subject to (5), the shares in the regulated related undertaking within (3) must be valued in accordance with PRU 1.3.11 R. (5) For the purposes of valuing the shares in a regulated related undertaking within (4), the value of those shares determined in accordance with PRU 1.3.11 R must be reduced: (a) by an approximate amount, to the extent that the value of those shares in the regulated related undertaking cannot effectively be realised to meet the capital resources requirement of the firm; and (b) by an approximate amount, to exclude value attributable to goodwill generated from the business of the regulated related undertaking with other members of the insurance group. |
From 31 December 2004 until the first day of the firm's financial year beginning in 2005 | 31 December 2004 |
15 | As PRU TR 14R | G | (1) The application of PRU 1.3.31 R to a regulated related undertaking which is not an insurance undertaking or an insurance holding company implements the amendments to the First Non-Life Directive, the First Life Directive and the Insurance Groups Directive in Articles 22(2), 23(2) and 28(6) of the Financial Groups Directive. (2) PRU TR 14R allows the requirement to treat a regulated related undertaking which is not an insurance undertaking or an insurance holding company in accordance with PRU 1.3.31 R to be postponed until the effective date of the Financial Groups Directive. (3) In the interim, a firm may elect either to apply PRU 1.3.11 R or to value shares in a regulated related undertaking which is not an insurance undertaking or an insurance holding company in accordance with PRU 1.3.31 R. The intention is to allow firms to continue to account for the value of shares held in these regulated related undertakings as they would formerly have done under IPRU(INS) for the purposes of calculating the capital resources of a firm. |
As PRU TR 14R | As PRU TR 14R |
16 | PRU 2.2.93R (3) PRU 2.2.101R (3) PRU 2.2.101R (4) PRU 2.2.102 R PRU 2.2.103 R PRU 2.2.105 R |
R | (1) This paragraph applies to a firm which immediately before the date specified in column (6) had the benefit of a waiver in relation to IPRU(INS) rule 2.10 or 5.2, or a written concession in relation to a pre-commencement provision listed in PRU TR 7R, in either case allowing the firm to exclude from the calculation of its liabilities obligations under a particular capital instrument issued by the firm. (2) Subject to (3) and to compliance with the conditions set out in (4), a firm will be treated as complying with a rule listed in column (2) in relation to the capital instrument to which the waiver or written concession referred to in (1) related so long as the firm is not obliged to pay any interest under the terms of the capital instrument in circumstances where the firm does not have capital resources equal to or in excess of its required margin of solvency under the Insurance Directives. (3) (2) ceases to apply to a firm: (a) once the firm has redeemed the capital instrument; or (b) on or after any date upon which the firm has the option to redeem the capital instrument and may prudently do so. (4) The conditions referred to in (2) are: (a) the firm must notify the FSA immediately if it becomes aware of any matter which is material to the relevance or appropriateness of the waiver or written concession; (b) the firm must maintain a written record of the rule in PRU to which it considers the waiver or written concession applies; and (c) the firm must make the record available to the FSA on request. |
From 31 December 2004 until the relevant rule is revoked | 31 December 2004 |
17 | PRU 2.2.93R (2) | R | (1) This paragraph applies to a firm carrying on with-profits insurance business which immediately before the date specified in column (6) had the benefit of a waiver in relation to IPRU(INS) rule 2.10 or 5.2 or a written concession in relation to a pre-commencement provision listed in PRU TR 7R in either case allowing the firm to exclude from the calculation of its liabilities obligations under a particular capital instrument issued by the firm. (2) Subject to compliance with the conditions set out in (3), PRU 2.2.93R (2) does not apply in relation to the capital instrument to which the waiver or written concession referred to in (1) related provided that capital instrument was issued by the firm on or before 30 December 2004. (3) The conditions referred to in (2) are: (a) the firm must notify the FSA immediately if it becomes aware of any matter which is material to the relevance or appropriateness of the waiver or written concession; (b) the firm must maintain a written record of the rule in PRU to which it considers the waiver or written concession applies; and (c) the firm must make the record available to the FSA on request. |
From 31 December 2004 until 30 December 2005 | 31 December 2004 |
18 | PRU 2.2.108R (5) PRU 2.2.108R (7) |
R | (1) This rule applies to a firm which immediately before the date specified in column (6) had the benefit of a waiver in relation to IPRU(INS) rule 2.10 or 5.2, or a written concession in relation to a pre-commencement provision listed in PRU TR 7R, in either case allowing the firm to exclude from the calculation of its liabilities obligations under a particular capital instrument issued by the firm. (2) Subject to compliance with the conditions set out in (3), a firm will be treated as complying with a rule listed in column (2) in relation to the capital instrument to which the waiver or written concession referred to in (1) related. (3) The conditions referred to in (2) are: (a) the firm must notify the FSA immediately if it becomes aware of any matter which is material to the relevance or appropriateness of the waiver or written concession; (b) the firm must maintain a written record of the rule in PRU to which it considers the waiver or written concession applies; and (c) the firm must make the record available to the FSA on request. |
From 31 December 2004 until 30 June 2005 | 31 December 2004 |
19 | PRU 2.2.108R (6) PRU 2.2.108R (10) PRU 2.2.108R (11) PRU 2.2.111 R |
R | (1) This paragraph applies to a firm which immediately before the date specified in column (6) had the benefit of a waiver in relation to IPRU(INS) rule 2.10 or 5.2, or a written concession in relation to a pre-commencement provision listed in PRU TR 7R, in either case allowing the firm to exclude from the calculation of its liabilities obligations under a particular capital instrument issued by the firm. (2) Subject to compliance with the conditions set out in (3), a firm will be treated as complying with a rule listed in column (2) in relation to the capital instrument to which the waiver or written concession referred to in (1) related. (3) The conditions referred to in (2) are: (a) the firm must notify the FSA immediately if it becomes aware of any matter which is material to the relevance or appropriateness of the waiver or written concession; (b) the firm must maintain a written record of the rule in PRU to which it considers the waiver or written concession applies; and (c) the firm must make the record available to the FSA on request. |
From 31 December 2004 until the relevant rule is revoked | 31 December 2004 |
20 | PRU 2.2.12 R PRU 2.2.14 R (Table) |
R | (1) This rule applies to a firm which immediately before the date specified in column (6) had the benefit of a waiver in relation to IPRU(INS) rule 2.10 (4). (2) For the period specified in column (5) or the same period as the waiver would have lasted if shorter, subject to (3) and to compliance with the conditions set out in (4), for the purposes of calculating its capital resources a firm may include the value of claims against its members by way of calls for supplementary contributions as core tier one capital to the same extent as it was permitted by the waiver to include the value of those claims in the calculation of its margin of solvency. (3) (2) does not apply for the purposes of PRU 2.2.18 R or SUP App 2.4. (4) The conditions referred to in (2) are: (a) the limits specified in the waiver on the extent to which the firm's claim against its members by way of call for supplementary contributions may be brought into account apply as if the reference (if any) in the waiver to the firm's required margin of solvency referred to its general insurance capital requirement and the reference (if any) in the waiver to the firm's margin of solvency referred to its capital resources; and (b) the firm must comply with any further conditions imposed by the waiver. |
From 31 December 2004 until the relevant rule is revoked | 31 December 2004 |
21 | PRU 2.2.12 R PRU 2.2.14 R (Table) |
R | (1) This rule applies to a firm which immediately before the date specified in column (6) had the benefit of a waiver in relation to IPRU(INS) rule 2.10 (5) or IPRU(FSOC) rule 4.7 (3). (2) For the period specified in column (5) or the same period as the waiver would have lasted if shorter, subject to (3) and to compliance with the conditions set out in (4), for the purpose of calculating its capital resources a firm may include the value of implicit items at Stage B of the calculation in PRU 2.2.14 R Table to the same extent to which it was permitted by the waiver to include the value of those implicit items in the calculation of its margin of solvency. (3) (2) does not apply for the purposes of PRU 2.2.17 R. (4) The conditions referred to in (2) are: (a) the limits specified in the waiver on the extent to which the value of implicit items may be brought into account apply as if the reference (if any) in the waiver to the firm's required margin of solvency referred to its minimum capital requirement and the reference (if any) in the waiver to the firm's margin of solvency referred to its capital resources; and (b) the firm must comply with any further conditions imposed by the waiver. |
From 31 December 2004 until the relevant rule is revoked | 31 December 2004 |
22 | PRU 2.1.21 R PRU 2.1.30 R PRU 2.2.18 R PRU 3.2.22 R PRU 7.2.51 R PRU 7.2.85 R |
R | In relation to any financial year starting on or before 30 December 2004, a firm's general insurance capital requirement or a firm's insurance health risk capital component is its margin of solvency calculated in accordance with: (1) IPRU(INS) rule 2.4 (excluding 2.4(1)(a)) and Appendices 2.1 and 2.2, or IPRU(INS) rule 2.4 (excluding 2.4(1)(a)) and Appendices 2.1 and 2.2 (as applied by rule 2.7 to long-term insurance business of class IV); or (2) APER 3.1.4 G (excluding 4.2(1)(a)) and Appendix 2 Parts I and II, or APER 3.1.4 G (excluding 4.2(1)(a)) and Appendix 2 Parts I and II, (as applied by paragraph 3 of Appendix I to long-term insurance business of class IV); as the case may be, as those rules had effect immediately prior to the date in column (6). |
From 31 December 2004 until the relevant rule is revoked | 31 December 2004 |
23 | PRU 4.3.5 R (3)(b) PRU 4.3.34 R PRU 4.3.35 R |
R | (1) PRU 4.3.5 R (3)(b) has effect as if the words "and is capable of valuation" and "to 4.3.35R" were omitted. (2) PRU 4.3.34 R has effect as if it read "For the purpose of PRU 4.3.5 R (3)(b), a transaction is on approved terms only if the firm reasonably believes that it may be readily closed out". (3) PRU 4.3.35 R does not apply. |
From 31 December 2004 until 30 December 2005 | 31 December 2004 |
PRU 7.5.20 R PRU 7.5.45 R |
R | In relation to any financial year starting on or before 30 December 2004: (1) a firm's non-credit equalisation provision is its equalisation reserve in respect of Part II business carried on by the firm calculated in accordance with IPRU(INS) rules 6.4 to 6.10 and Appendix 6.1 as those rules had effect immediately prior to the date in column (6); and (2) a firm's credit equalisation provision is its equalisation reserve in respect of credit insurance business carried on by the firm calculated in accordance with IPRU(INS) rules 6.11 to 6.12 and Appendix 6.2 as those rules had effect immediately prior to the date in column (6). |
From 31 December 2004 until the relevant rule is revoked. | 31 December 2004 | |
25 | PRU 8.3.8 R PRU 8.3.9 R PRU 8.3.10 R PRU 8.3.15 R |
R | (1) For the purpose of the calculation of the group capital resources and group capital resources requirement of an undertaking referred to in PRU 8.3.17 R, a firm may elect not to take a regulated related undertaking, which is not an insurance undertaking or an insurance holding company, into account in accordance with PRU 8.3.33 R and PRU 8.3.36 R. (2) A firm may elect not to take a regulated related undertaking, which is not an insurance undertaking or an insurance holding company into account as referred to in (1), 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 (3) A firm that has made an election referred to in (2) must value that regulated related undertaking in accordance with (4) for the purpose of the calculation of the group capital resources and group capital resources requirement of an undertaking referred to in PRU 8.3.17 R. (4) Subject to (5), a regulated related undertaking within (3) must, for the purposes of the calculations referred to in (1), be valued in accordance with PRU 1.3.11 R. (5) For the purposes of valuing a regulated related undertaking within (3), the value of that regulated related undertaking determined in accordance with PRU 1.3.11 R, must be reduced: (a) by an approximate amount, to the extent that the value of the regulated related undertaking cannot effectively be realised to meet the group capital resources requirement of an undertaking in PRU 8.3.17 R; and (b) by an approximate amount, to the extent needed to exclude value attributable to goodwill generated from the business of the regulated related undertaking with other members of the insurance group. |
From 31 December 2004 until the first day of the firm's financial year beginning in 2005 | 31 December 2004 |
26 | As PRU TR 25R | G | (1) The inclusion of a regulated related undertaking which is not an insurance undertaking or an insurance holding company in the scope of application of PRU 8.3.33 R and PRU 8.3.36 R and implements the amendments to the First Non-Life Directive, the First Life Directive and the Insurance Groups Directive in Articles 22(2), 23(2) and 28(6) of the Financial Groups Directive. (2) PRU TR 25R allows the requirement to include a regulated related undertaking which is not an insurance undertaking or an insurance holding company in the calculations required by Transitional Provisions to be postponed until the effective date of the Financial Groups Directive. (3) In the interim, a firm may apply PRU 8.3, or elect to use the general valuation rules for related undertakings which do not fall within the scope of PRU 8.3, as set out in PRU 1.3.11 R, subject to the adjustments required by PRU TR 25R(5). The intention is to allow firms to continue to take the regulated related undertakings referred to in PRU TR 25R(1) and any other related undertaking not referred to in PRU 8.3 into account as they would formerly have done for the purposes of calculating the group capital resources of an undertaking in PRU 8.3.17 R. |
As PRU TR 25R | As PRU TR 25R |
- 14/01/2005
PRU Sch 1
Record keeping requirements
- 31/12/2004
PRU Sch 1.1
See Notes
- 1 The aim of the guidance in the following table is to give the reader a quick overall view of the relevant record keeping requirements.
- 2 It is not a complete statement of those requirements and should not be relied on as if it were.
- 3 Table
- 31/12/2004
See Notes
Handbook reference | Subject of Record | Contents of record | When record must be made | Retention period |
PRU 1.2.37 R, PRU 1.2.38 R | Firm's assessment of the adequacy of its financial resources | (1) The major sources of risk identified
in accordance with PRU 1.2.31 R (2) How the firm intends to deal with those risks (3) Details of the stress tests and scenario analyses carried out and the resulting financial resources estimated to be required in accordance with PRU 1.2.35 R | Not specified | At least 3 years |
PRU 1.4.53 R | Prudential risk management and systems and controls | Accounting and other records that are
sufficient to enable the firm to
demonstrate to the FSA: (1) that the firm is financially sound and has appropriate systems and controls; (2) the firm's financial position and exposure to risk (to a reasonable degree of accuracy); (3) the firm's compliance with the rules in PRU | Not specified | 3 years, or longer as appropriate |
PRU 7.3.20 R | Mathematical reserves | (1) The methods and assumptions used
in establishing the firm's mathematical 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 |
PRU 7.4.17 R, PRU 7.4.19 R | Calculation of with-profits insurance capital component | (1) The methods and assumptions used
in making any calculation required for the purposes of PRU 7.4 (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 |
PRU 7.6.23 R | Long-term insurance funds | A separate accounting record in respect of each of a firm's long-term insurance funds | Not specified | Not specified |
PRU 7.6.56 R, PRU 7.6.57 R | Branch accounting records in the United Kingdom | A record of the activities carried on
from a non-EEA direct
insurer's United
Kingdom branch 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 PRU 7.2.20 R as available to meet those liabilities | Not specified | Not specified |
- 31/12/2004
PRU Sch 2
Notification requirements
- 01/12/2004
PRU Sch 2.1
See Notes
- 11/08/2004
See Notes
- 11/08/2004
See Notes
- 11/08/2004
See Notes
Handbook reference | Matter to be notified | Contents of notification | Trigger event | Time allowed |
PRU 2.1.38 R | Breach or expected breach of PRU 2.1.9 R | Fact of breach or expectation of breach | Breach or expectation of breach | Immediately |
PRU 2.2.71 R | Intention to include any perpetual non-cumulative preference shares or innovative tier one instruments in the firm's tier one capital resources for the purposes of PRU 2.2 | Fact of intention | Intention to include | At least one month before the firm first includes the relevant items in its tier one capital resources |
PRU 2.2.72 R | Intention to redeem a tier one capital instrument that a firm has included in its tier one capital resources for the purpose of PRU 2.2 | Fact of intention | Intention to redeem | At least one month before the intended redemption |
PRU 2.2.116 R | Proposed amendment to the terms of the debt and the documents referred to in PRU 2.2.108R (8) | Details of the proposed amendment and confirmation that the legal opinions referred to in PRU 2.2.108R (11) and, if applicable, PRU 2.2.105 R and PRU 2.2.111 R, continue in full force and effect in relation to the terms of the debt and the documents notwithstanding any proposed amendment | Proposal to amend | At least one month before the amendment is due to take effect |
PRU 2.2.117 R | Intention to repay a tier two instrument (unless the firm intends to repay an instrument on its contractual repayment date) | Fact of intention and details of how the firm will meet its capital resources requirement after such a repayment | Intention to repay | At least six months before the proposed date of repayment |
PRU 3.2.23 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 PRU 3.2.23 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 if being safely managed (see PRU 3.2.24 R | (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 |
PRU 3.2.29 R | That the firm has exceeded, or anticipates exceeding, the limit expressed in PRU 3.2.28 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 PRU 3.2.29 R the firm must explain to the FSA how, despite the excess reinsurance concentration, the credit risk is being safely managed (see PRU 3.2.30 R) | The limit being exceeded, or an anticipation that the limit will be exceeded | Immediately |
- 11/08/2004
PRU Sch 3
Fees and other required payments
- 31/12/2004
Notification Requirements
PRU PRI Sch 3.1
See Notes
- 31/12/2004
PRU Sch 4
Powers exercised
- 31/12/2004
Powers Exercised
PRU Sch 4.1
See Notes
The following powers and related provisions in the Act have been exercised by the FSA to make the rules in PRU: | |
(1) | section 138 (General rule-making power); |
(2) | section 141 (Insurance business rules); |
(3) | section 149 (Evidential provisions); |
(4) | section 150(2) (Actions for damages); and |
(5) | section 156 (General supplementary powers). |
- 31/12/2004
PRU Sch 4.2
See Notes
- 31/12/2004
PRU Sch 5
Rights of action for damages
- 01/12/2004
Rights of action for damages
PRU Sch 5.1
See Notes
The table below sets out the rules in PRU contravention of which by an authorised person may be actionable under section 150 of the Act (Actions for damages) by a person who suffers loss as a result of the contravention. |
- 11/08/2004
PRU Sch 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. |
- 11/08/2004
PRU Sch 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. |
- 11/08/2004
PRU Sch 5.4
See Notes
Chapter/Appendix | Section/Annex | Rights of action under section 150 | |||
For private person | Removed | For other person | |||
All rules in PRU | No | Yes (PRU 1.8.1 R) | No |
- 11/08/2004
PRU Sch 6
Rules that can be waived
- 31/12/2004
Rules that can be waived
PRU Sch 6.1
See Notes
- 31/12/2004