Prudential Regulation Authority Rulebook

2.1

The PRA does not envisage approving an amount under Own Funds 2.5(1) or a method under Own Funds 2.5(2) unless it is satisfied that the amount approved or determined using the approved method reflects the loss absorbency of the item of ancillary own funds and is based on prudent and realistic assumptions. Therefore, where an item of ancillary own funds has a fixed nominal value the amount of that item that can be included in a firm’s own funds will only be equal to its nominal value where that value appropriately reflects its loss absorbency (see Article 90(2) of the Solvency II Directive). 

2.2

Article 96 of the Solvency II Directive contemplates that:

1. (a) surplus funds will normally be classified as Tier 1 own funds;
2. (b) letters of credit and guarantees which are held on trust for the benefit of policyholders by an independent trustee and are provided by credit institutions authorised in accordance with the Capital Requirements Directive will normally be classified as Tier 2 ancillary own funds;
3. (c) any future claims which a mutual of shipowners with variable contributions solely insuring risks listed in general insurance business class 6 (ships), class 12 (liability of ships) and class 17 (legal expenses), may have against its members by way of a call for supplementary contributions within the next twelve months will normally be classified as Tier 2 ancillary own funds; and
4. (d) any future claims which a mutual with variable contributions may have against its members by way of a call for supplementary contributions within the next twelve months which do not fall within (c) above will normally be classified as Tier 2 ancillary own funds where they substantially possess the characteristics set out in Own Funds 3.2(2) 

2.3

The classification of the items referred to in (a) to (d) will depend on the extent to which they satisfy the requirements in Own Funds 3.1–3.6 and Articles 69 to 78 of the Solvency II Regulations, which set out requirements relating to the classification of own funds.