Interaction of the surplus funds calculation with the calculation of technical provisions


Article 78 of the Solvency II Directive requires a firm to include, when calculating its technical provisions, all payments to policyholders, including future discretionary bonuses, unless those payments constitute surplus funds that fall within Article 91(2). This is reflected in Technical Provisions 9.1(3) in the Technical Provisions Part of the PRA Rulebook. Article 91 provides that surplus funds are not to be considered insurance and reinsurance liabilities, to the extent that national law permits and where those surplus funds meet the requirements for Tier 1 own funds.


The Surplus Funds Part of the PRA Rulebook is the national law provision, referred to in Article 91(2) of the Solvency II Directive, which prescribes the extent to which surplus funds shall not be treated as insurance or reinsurance liabilities and therefore the extent to which they affect the calculation of a firm’s technical provisions.


The PRA expects that surplus funds will normally meet the criteria for classification as Tier 1 own funds as referred to in paragraph 1.5. While surplus funds within a with-profits fund may satisfy these criteria, firms should be aware of any other restrictions that may apply to such funds by virtue of their being within the with-profits fund, in particular policyholder fairness rules in the FCA Handbook. As a consequence, such surplus funds are likely to be treated as part of a ring-fenced fund under the Solvency II Regulations.


The calculation of surplus funds in the Surplus Funds Part does not refer to or include a risk margin. The risk margin is a Solvency II requirement in respect of technical provisions and does not therefore fall within the scope of domestic requirements for the calculation of surplus funds. However, this does not affect the Solvency II requirements for firms to calculate and recognise the risk margin element of technical provisions in respect of their business as a whole, including with-profits business.