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Application provision

1.1 Unless otherwise stated, this Part applies to:

1

Application and Definitions

1.1

01/01/2016

Unless otherwise stated, this Part applies to:

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

1.2

01/01/2016

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

1.3

01/01/2016

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

1.4

01/01/2016

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

1.5

01/01/2016

In this Part, the following definitions shall apply:

asset exposure

has the meaning in 3.

business amount

means the sum of:

    1. (1) the firm's total gross technical provisions (that is, calculated gross of reinsurance);
    2. (2) the amount of its other liabilities (except those included in the calculation of capital resources in accordance with the capital resources table); and
    3. (3) 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 capital resources table or if higher:
      1. (i) in the case of a firm carrying on general insurance business, the amount of its general insurance capital requirement; and
      2. (ii) in the case of a firm carrying on long-term insurance business, the amount of its long-term insurance capital requirement.

and for the purposes of (1), 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.

closely related

has the meaning in 10.1.

control

means the relationship between a parent undertaking and a subsidiary where that relationship falls within s1162(2), (4) and (5) of the Companies Act 2006, or a similar relationship between any person and an undertaking.

counterparty exposure

has the meaning in 4.

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.

reinsurance

includes retrocession and analogous non-reinsurance financing agreements.

reinsurer

includes an issuer of an analogous non-reinsurance financing agreement.

reinsurance exposure

has the meaning in 5.

total default

occurs where:

    1. (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
    2. (b) the asset becomes worthless or all of the assets within the identical class become worthless at the same time.

unsecured debt

means any debt in respect of which the conditions in 9.3 or 9.4 are not satisfied or, if satisfied only in relation to part of the debt, that part of the debt which is not covered by collateral or a guarantee, letter of credit or credit derivative in accordance with those rules.

2

Overall Limitation of Credit Risk

2.1

01/01/2016

Taking into account all relevant risks, a firm must restrict its counterparty exposures and asset exposures to prudent levels and ensure that those exposures are adequately diversified.

2.2

01/01/2016

If a firm elects under 9.3 to make a deduction in respect of collateral, the firm must deduct from the loss so much of the value of that collateral as:

  1. (1) would be realised by the firm were it to exercise its rights in relation to the collateral; and
  2. (2) does not exceed any of the relevant limits in 7.4.

2.3

01/01/2016

For the purposes of 2.1 and of determining counterparty exposure, asset exposure and reinsurance exposure, a firm must:

  1. (1) only rely upon a loss mitigation technique where it has good reason to believe that, taking into account the possible circumstances of default, it is likely to be effective; and
  2. (2) not rely upon preferential access to assets unless it has taken into account appropriate professional advice as to its effectiveness.

3

Asset Exposure

3.1

01/01/2016

  1. (1) For the purposes of this Part, 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.
  2. (2) For the purposes of (1), the amount of loss is the amount, if any, by which the firm's capital resources (as calculated in accordance with the capital resources table but without making any deduction for assets in excess of market risk and counterparty limits) would decrease as a result of the counterparty failing to meet its obligations and the securities or assets becoming worthless.
  3. (3) In determining the amount of loss in accordance with (2), the firm must take into account decreases in its capital resources that would result not only from its own direct exposures but also from:
    1. (a) exposures held by any of its subsidiaries; and
    2. (b) synthetic exposures arising from derivatives or quasi-derivatives held or entered into by the firm or any of its subsidiaries.

4

Counterparty Exposure

4.1

01/01/2016

  1. (1) For the purposes of this Part, 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. (2) For the purposes of (1), the amount of loss is the amount, if any, by which the firm's capital resources (as calculated in accordance with the capital resources table but without making any deduction for assets in excess of market risk and counterparty limits) would decrease as a result of the counterparty failing to meet its obligations and the securities or assets becoming worthless.
  3. (3) In determining the amount of loss in accordance with (2), the firm must take into account decreases in its capital resources that would result not only from its own direct exposures but also from:
    1. (a) exposures held by any of its subsidiaries; and
    2. (b) synthetic exposures arising from derivatives or quasi-derivatives held or entered into by the firm or any of its subsidiaries.

5

Reinsurance Exposure

5.1

01/01/2016

  1. (1) For the purposes of this Part, 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. (2) For the purposes of (1), the amount of loss is the amount, if any, by which the firm's capital resources (as calculated in accordance with the capital resources table but without making any deduction for assets in excess of market risk and counterparty limits) would decrease as a result of the reinsurer or group of closely related reinsurers failing to meet its or their obligations under the contracts of reinsurance.

6

Large Exposure Limits

6.1

01/01/2016

This Chapter does not apply to:

  1. (1) a reinsurance exposure; or
  2. (2) a counterparty exposure or asset exposure to an CRD credit institution.

6.2

01/01/2016

A firm must take reasonable steps to limit its counterparty exposure or asset exposure to:

  1. (1) a single counterparty;
  2. (2) each of the counterparties within a group of closely related counterparties; and
  3. (3) 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.

7

Market Risk and Counterparty Limits

7.1

01/01/2016

This Chapter does not apply to a pure reinsurer.

7.2

01/01/2016

A firm must calculate the amount of the deduction from total capital required by stage L in the capital resources table in respect of assets in excess of market risk and counterparty limits as the aggregate amount by which its counterparty exposures and asset exposures exceed the relevant limits set out in 7.4.

7.3

01/01/2016

Except where the contrary is expressly stated, whenever:

  1. (1) a rule 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 7.4; and
  2. (2) 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 7.4

the firm must deduct from the measure of the value of those assets (as determined in accordance with Insurance Company – Overall Resources and Valuation 3 to 8) the amount by which that exposure exceeds the relevant limit in 7.4, or that portion of the deduction that relates to the part of the firm or fund or part of a fund in question.

7.4

01/01/2016

The limits referred to in 7.2 and 7.3 are the following, expressed as a percentage of the firm's business amount:

  1. (1) 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:
    1. (a) 0.25% for that part of the exposure that arises from unsecured debt; and
    2. (b) 1% for the whole exposure (after deduction of the excess arising from the limit in (a));
  2. (2) 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:
    1. (a) 40% for that part of the exposure arising from covered bonds;
    2. (b) (i) subject to (ii), 5% for that part of the exposure not arising from covered bonds or, if the counterparty is an CRD credit institution, from short term deposits; and
      1. (ii) the limit in (i) is increased to 10% if the total of such exposures which are greater than 5% arising from applying a 10% limit, when taken together with any exposures arising from covered bonds which are within the 40% limit in (a), does not exceed 40%;
    3. (c) 20% or £2 million, if larger, for the whole exposure (but excluding any exposure arising from covered bonds and after deduction of the excess arising from the limit in (b));
  3. (3) 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 (1) and (2) apply:
    1. (a) (i) subject to (ii), 1% for that part of the exposure arising from unsecured debt;
      1. (ii) the limit in (i) is increased to 2.5% in the case of an exposure to a regulated institution;
    2. (b) (i) subject to (ii), 1% for that part of the exposure arising from shares and other variable yield participations, 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 a beneficial interest in a collective investment scheme to which 9.5 applies;
      1. (ii) the limit in (i) for that part of the exposure arising from debt securities (other than hybrid securities) issued by the same regulated institution is increased to 5%; and
    3. (c) 5% for the whole exposure (after deduction of the excesses arising from the limits in (a) and (b));
  4. (4) 5% for the aggregate of all counterparty exposures that fall within (3)(a) whether or not they arise from persons who are closely related, but excluding amounts that are in excess of the limit in (3)(a);
  5. (5) 10% for the aggregate of all counterparty exposures and asset exposures that fall within (3)(b) above or (10) below, whether or not they arise from persons who are closely related, but excluding amounts that are in excess of the limit in (3)(b) above or, in the case of an asset exposure, (10) below;
  6. (6) 5% for the aggregate of all counterparty exposures arising from unsecured loans, other than those falling within (2);
  7. (7) 3% for the asset exposure arising from all cash in hand;
  8. (8) 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;
  9. (9) 5% for the asset exposure arising from a beneficial interest in any single non-UCITS retail scheme or recognised scheme which does not fall within the UCITS Directive; and
  10. (10) 1% for the asset exposure arising from a beneficial interest in any single collective investment scheme which does not fall within the UCITS Directive and is not a non-UCITS retail scheme or a recognised scheme.

8

Large Exposure Calculation for Reinsurance Exposures

8.1

01/01/2016

A firm must notify the PRA immediately, in accordance with Notifications 7, as soon as it first becomes aware:

  1. (1) that a reinsurance exposure to a reinsurer or group of closely related reinsurers is reasonably likely to exceed the limit of 100% of its capital resources; or
  2. (2) if (1) does not apply, that it has exceeded the limit referred to in (1).

8.2

01/01/2016

Upon notification under 8.1, 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.

8.3

01/01/2016

If a firm elects under 9.3 to make a deduction in respect of collateral, the firm must deduct from the amount of loss determined in accordance with 5.1(2) so much of the value of that collateral as:

  1. (1) would be realised by the firm were it to exercise its rights in relation to the collateral; and
  2. (2) does not exceed any of the relevant limits in 7.4(3).

8.4

01/01/2016

A firm must, in determining its reinsurance exposures for the purposes of this Part, aggregate any reinsurance exposure where the identity of the reinsurer is not known by the firm with the highest reinsurance exposure where it does know the identity of the reinsurer.

8.5

01/01/2016

A firm must notify the PRA immediately in accordance with Notifications 7 if the gross earned premiums which it pays to a reinsurer or group of closely related reinsurers has exceeded, or is anticipated to exceed, the higher of:

  1. (1) 20% of the firm's projected gross earned premiums for that financial year; or
  2. (2) £4 million.

8.6

01/01/2016

Upon notification under 8.5, a firm must explain to the PRA how, despite exceeding the limits in 8.5, the credit risk is being safely managed.

9

Exposures Excluded from Limits

9.1

01/01/2016

In 6 and 7, references to a counterparty exposure or an asset exposure do not include such an exposure arising from:

  1. (1) premium debts;
  2. (2) advances secured on, and not exceeding the surrender value of, the firm’s contracts of long-term insurance;
  3. (3) rights of salvage or subrogation;
  4. (4) deferred acquisition costs;
  5. (5) 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, 6 and 7 will nevertheless apply to assets held to cover that guaranteed element;
  6. (6) monies due from, or guaranteed by, the government of an approved State;
  7. (7) an approved security; and
  8. (8) a holding in a collective investment scheme falling within the UCITS Directive.

9.2

01/01/2016

In 7, references to a counterparty exposure or an asset exposure do not include such an exposure resulting from debts arising from reinsurance ceded and the reinsurer's share of technical provisions.

9.3

01/01/2016

If:

  1. (1) a firm has a counterparty exposure, an asset exposure or a reinsurance exposure in respect of which it has rights over collateral (except where that collateral is a letter of credit); and
  2. (2) the assets constituting that collateral would, if owned by the firm, be admissible assets;

the firm may, in determining the amount of that exposure, deduct the value of that collateral in accordance with 2.2 or, in the case of a reinsurance exposure, 8.3.

9.4

01/01/2016

  1. (1) If a firm has a counterparty exposure, asset exposure or reinsurance exposure the whole or any part of which is:
    1. (a) guaranteed by a credit institution or an investment firm subject in either case to the CRD or supervision by a third country supervisory authority with a CRD-equivalent regime; or
    2. (b) adequately mitigated by a credit derivative;
  2.       the firm may, for the purposes of 6, 7 and 8.1, 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.
  3. (2) For the purposes of (1), references to an exposure being guaranteed include an exposure secured by a letter of credit, but to fall within (1) the guarantee or letter of credit must be direct, explicit, unconditional and irrevocable.

9.5

01/01/2016

For the purposes of 6 and 7, units in a collective investment scheme that does not fall within the UCITS Directive must be treated as a counterparty exposure to the issuer of the units in that scheme if the issuer and those units are to be regarded as constituting a single risk because they are so interconnected that, if the issuer were to experience financial problems, this would be likely to affect the value of the units.

10

Closely Related

10.1

01/01/2016

In this Part, a group of persons is closely related if it consists solely of two or more persons who, unless it is shown otherwise, constitute a single risk because as between any two of them one or other of the following relationships apply:

  1. (1) one of them, directly or indirectly, has control over the other or they are both controlled by the same third party; or
  2. (2) there is no relationship of control 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.