6

Instruments intended to count towards group own funds

6.1

The PRA recognises that many of the Solvency II provisions at solo level apply with the necessary modifications for the purposes of group solvency calculations. In respect of own funds requirements, the Solvency II Regulations require specific additional features that will be necessary if a capital instrument is to count towards group own funds. The detail of the additional features required by the Solvency II Regulations differs depending on which type of company in the group has issued the instrument. The PRA will consider the inclusion, or not, of these specific features as well as assessing the availability of own group funds.

6.2

Where a UK Solvency II firm has issued the instrument, the PRA expects that instrument to meet the features determining classification for the relevant tier at a solo level. If that same item is to count towards group own funds, then the PRA expects that actions required in relation to the firm’s SCR and minimum capital requirement (MCR) at solo level will also need to be triggered by reference to the group SCR, and the minimum group SCR as proxy (since there is no group MCR) where method 15 applies in whole or part to the group solvency calculation6. The PRA considers that compliance with relevant group features for such an instrument does not obviate the need for the item’s availability to be assessed7. In the absence of evidence regarding availability, the PRA expects to apply the rebuttable assumption that the item is not effectively available to cover the group SCR8.

Footnotes

  • 5. Article 331 of Regulation 2015/35.
  • 6. The PRA’s rules at Group Supervision 11 and 12 lay down two methods by which group solvency can be calculated. It refers to these as ‘Method 1’ and ‘Method 2’. Method 1 (the default method) is an accounting consolidation-based method. The alternative Method 2 is a deduction and aggregation method.
  • 7. Article 331(2)(b) of Regulation 2015/35.
  • 8. Article 330 of Regulation 2015/35.

6.3

In the case of an instrument issued by a third country insurer, the PRA expects groups to classify the item by reference to the solo features determining classification as set out in the Solvency II Regulations. Where method 1 applies in whole or part to the group solvency calculation, the PRA also expects appropriate references to the group SCR, the local capital requirement laid down by the third country supervisor and the minimum group SCR9.

Footnotes

  • 9. Article 332 of Regulation 2015/35.

6.4

The PRA recognises that many groups choose to issue capital instruments from the ultimate holding company, or sometimes from a subsidiary set up for the purpose of issuing capital. In such circumstances, the PRA expects firms to consider the extent to which the instrument satisfies the solo requirements, as if the issuer were an insurance undertaking subject to Solvency II10. This includes making suitable adjustments to the references to SCR to group SCR, and for MCR to the minimum group SCR in relation to method 1, and to the insolvency of the issuer.

Footnotes

  • 10. Article 333 of Regulation 2015/35.

6.5

The PRA expects all instruments classified at the group level to be free from any encumbrances and any connected arrangements which would undermine the quality of the instrument at group level. The PRA draws firms’ attention to the fact that an instrument issued by an insurance holding company or a mixed financial holding company should be deemed to be encumbered, unless the claims relating to the instrument rank after the claims of policyholders and beneficiaries of all group companies11. This is consistent with the detailed requirements for group capital. For example, pursuant to the PRA’s rules on Own Funds 3.5(2)12  the PRA expects groups to consider the development of terms providing that, in the case of winding up proceedings of any firm in the group, repayment of amounts due under that instrument are refused until all obligations by that member of the group to its policyholders and beneficiaries have been met.

Footnotes

  • 11. Recital 127 of Regulation 2015/35.
  • 12. See 3.5(2) of the Own Funds Part of the PRA Rulebook.

6.6

Holding company issues must therefore satisfactorily address the position of all group policyholders and beneficiaries. Instruments will not qualify for classification as own funds at the group level if this consideration is omitted.

6.7

In assessing the availability of own funds at group level where group solvency has been calculated on the basis of method 2, the PRA will apply similar consideration as to whether own-fund items of related undertakings meet the solo requirements and have suitable references to the undertaking’s SCR and the group’s SCR.