1
Application and Definitions
1.1
Unless otherwise stated, this Part applies to:
- (1) a UK Solvency II firm;
- (2) in accordance with Insurance General Application 3, the Society, as modified by 12; and
- (3) in accordance with Insurance General Application 3, managing agents, as modified by 12.
- 01/01/2016
- Legal Instruments that change this rule 1.1
1.2
In this Part, the following definitions shall apply:
means a syndicate year closed by reinsurance to close, either into another syndicate year or into an insurer approved by the Council for that purpose.
means all risk exposures with a loss potential which is large enough to threaten the solvency or the financial position of a Solvency II undertaking.
[Note: Art. 13(35) of the Solvency II Directive]
means a member that is a body corporate or a Scottish Limited partnership.
explicit maximum loss potential
means the maximum economic risk transferred by the ceding undertaking to the reinsurer under a contract of reinsurance.
external credit assessment institution
means a credit rating agency that is registered or certified in accordance with Regulation (EC) No 1060/2009 or a central bank issuing credit ratings which are exempt from the application of Regulation (EC) No 1060/2009.
[Note: Art. 13(40) of the Solvency II Directive]
means reinsurance:
- (1) under which the explicit maximum loss potential arising from a significant transfer of both underwriting risk and timing risk exceeds the premium payable by the ceding undertaking over the duration of the contract by a limited but significant amount; and
- (2) which possesses at least one of the following characteristics:
- (a) explicit and material consideration of the time value of money;
- (b) contractual provisions to moderate the balance of economic experience between the parties to the reinsurance over time to achieve the target risk transfer.
[Note: Art. 210(3) of the Solvency II Directive]
means the risk that a firm is unable to realise investments and other assets in order to settle its financial obligations when they fall due.
[Note: Art. 13(34) of the Solvency II Directive]
technical provisions transitional measure
means a transitional deduction from a firm’s technical provisions applied in accordance with Transitional Measures 11.1.
Export chapter as
2
General Governance Requirements
2.1
A firm must ensure its governing body is ultimately responsible for the firm’s compliance with the rules and all applicable laws, regulations and administrative provisions adopted in accordance with the Solvency II Directive.
[Note: Art. 40 of the Solvency II Directive]
2.2
- (1) A firm must have in place an effective system of governance which provides for sound and prudent management of its business.
- (2) The system of governance must include at least:
- (a) an adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities; and
- (b) an effective system for ensuring the transmission of information.
- (3) The system of governance must include compliance with the requirements laid down in:
- (a) 2.5;
- (b) 3 to 7;
- (c) Insurance - Fitness and Propriety 2.1 to 2.3, 4.1, 4.3 and 4.4; and
- (d) Insurance – Allocation of Responsibilities 4.
- (4) The system of governance must be subject to regular internal review.
[Note: Art. 41(1) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 2.2
2.3
A firm’s system of governance must be proportionate to the nature, scale and complexity of its operations.
[Note: Art. 41(2) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 2.3
2.4
A firm must:
- (1) have written policies in relation to at least risk management, internal control, internal audit and, where relevant, outsourcing;
- (2) make those policies subject to prior approval of its governing body;
- (3) ensure those policies are implemented;
- (4) review those policies at least annually; and
- (5) adapt those policies in view of any significant change in the system or area concerned.
[Note: Art. 41(3) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 2.4
2.5
The written policy on risk management referred to in 2.4(1) must comprise:
- (1) policies relating to points (i) to (vi) in 3.1(2)(c); and
- (2) where the volatility adjustment is applied, a policy on the criteria for the application of the volatility adjustment.
[Note: Art. 44(2) and (2a) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 2.5
2.6
A firm must take reasonable steps to ensure continuity and regularity in the performance of its activities, including the development of contingency plans. To that end, the firm must employ appropriate and proportionate systems, resources and procedures.
[Note: Art. 41(4) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 2.6
3
Risk Management
3.1
- (1) A firm must have in place an effective risk-management system comprising strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report on a continuous basis the risks, at an individual and at an aggregated level, to which it is or could be exposed, and their interdependencies.
- (2) That risk-management system must:
- (a) be effective and well integrated into the organisational structure and decision-making processes of the firm with proper consideration of the persons who have key functions;
- (b) cover the risks to be included in the calculation of the SCR as set out in Solvency Capital Requirement - General Provisions 3.3(1), as well as the risks which are not, or not fully, included in the calculation thereof; and
- (c) cover at least the following areas:
- (i) underwriting and reserving;
- (ii) asset-liability management;
- (iii) investment, in particular derivatives, quasi-derivatives and similar commitments;
- (iv) liquidity risk and concentration risk management;
- (v) operational risk management;
- (vi) reinsurance and other risk-mitigation techniques.
- (3) Where a firm applies the matching adjustment or the volatility adjustment it must set up a liquidity plan projecting the incoming and outgoing cash-flows in relation to the assets and liabilities subject to those adjustments.
[Note: Art. 44(1)–(2) of the Solvency II Directive]
3.2
As regards asset-liability management, a firm must:
- (1) regularly assess the sensitivity of its technical provisions and eligible own funds to the assumptions underlying the extrapolation of the relevant risk-free interest rate term structure referred to in Technical Provisions 5;
- (2) where the matching adjustment is applied, regularly assess:
- (a) the sensitivity of its technical provisions and eligible own funds to the assumptions underlying the calculation of the matching adjustment, including the calculation of the fundamental spread referred to in Technical Provisions 7.2(2), and the possible effect of a forced sale of assets on its eligible own funds;
- (b) the sensitivity of its technical provisions and eligible own funds to changes in the composition of the assigned portfolio of assets;
- (c) the impact of a reduction of the matching adjustment to zero;
- (3) where the volatility adjustment is applied, regularly assess:
- (a) the sensitivity of its technical provisions and eligible own funds to the assumptions underlying the calculation of the volatility adjustment and the possible effect of a forced sale of assets on its eligible own funds;
- (b) the impact of a reduction of the volatility to zero.
[Note: Art. 44(2a) of the Solvency II Directive]
3.3
A firm must submit the assessments referred to in 3.2 as part of the information reported annually in accordance with Reporting 2. Where the reduction of the matching adjustment or the volatility adjustment to zero would result in non-compliance with the SCR, the firm must also submit an analysis of the measures it could apply in such a situation to re-establish the level of the eligible own funds covering the SCR or to reduce its risk profile to restore compliance with the SCR.
[Note: Art. 44(2a) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 3.3
3.4
As regards investment risk, a firm must demonstrate that it complies with the Investments Part of the PRA Rulebook.
[Note: Art. 44(3) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 3.4
3.5
A firm must provide for a risk-management function that is structured in such a way as to facilitate the implementation of the risk-management system.
[Note: Art. 44(4) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 3.5
3.6
In order to avoid overreliance on external credit assessment institutions when it uses external credit rating assessments in the calculation of technical provisions and the SCR, a firm must assess the appropriateness of those external credit rating assessments as part of its risk management by using additional assessments wherever practicably possible in order to avoid any automatic dependence on external assessments.
[Note: Art. 44(4a) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 3.6
3.7
A firm that has received internal model approval must ensure that its risk-management function covers the following additional tasks:
- (1) to design and implement the internal model;
- (2) to test and validate the internal model;
- (3) to document the internal model and any subsequent changes made to it;
- (4) to analyse the performance of the internal model and to produce summary reports thereof; and
- (5) to inform the governing body about the performance of the internal model, suggesting areas needing improvement, and updating that body on the status of efforts to improve previously identified weaknesses.
[Note: Art. 44(5) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 3.7
3.8
- (1) A firm must conduct an ORSA as part of its risk-management system.
- (2) The ORSA must include at least the following:
- (a) the firm’s overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the firm;
- (b) the compliance, on a continuous basis, with:
- (i) the SCR and MCR; and
- (ii) the requirements regarding technical provisions, as set out in Technical Provisions; and
- (c) the significance with which the risk profile of the firm deviates from the assumptions underlying the SCR.
- (3) For the purposes of 3.8(2)(a), the firm must:
- (a) have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is, or could be, exposed; and
- (b) demonstrate the methods used in that assessment.
- (4) Where a firm applies the matching adjustment, the volatility adjustment, the risk-free interest rate transitional measure or the technical provisions transitional measure, it must perform the assessment of compliance with the capital requirements referred to in 3.8(2)(b) with and without taking into account those adjustments and transitional measures.
- (5) In the case referred to in 3.8(2)(c), when an internal model is used, the assessment must be performed together with the recalibration that transforms the internal risk numbers into the SCR risk measure and calibration.
[Note: Arts. 45(1), (2), (2a), (3) of the Solvency II Directive]
3.9
A firm must make the ORSA an integral part of its business strategy and take the ORSA into account on an ongoing basis in its strategic decisions.
[Note: Art. 45(4) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 3.9
3.10
A firm must perform the ORSA regularly and without delay following any significant change in its risk profile.
[Note: Art. 45(5) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 3.10
3.11
A firm must inform the PRA of the results of each ORSA as part of the information reported under Reporting 2.
[Note: Art. 45(6) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 3.11
4
Internal Control
4.1
- (1) A firm must have in place an effective internal control system.
- (2) That system must include administrative and accounting procedures, an internal control framework, appropriate reporting arrangements at all levels of the firm and a compliance function.
[Note: Art. 46(1) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 4.1
4.2
The compliance function referred to in 4.1(2) must include:
- (1) advising the governing body on compliance with the rules and other laws, regulations and administrative provisions adopted in accordance with the Solvency II Directive; and
- (2) an assessment of the possible impact of any changes in the legal environment on the operations of the firm concerned and the identification and assessment of compliance risk.
[Note: Art. 46(2) of the Solvency II Directive]
4.3
A firm must have internal processes and procedures in place to ensure the appropriateness, completeness and accuracy of the data used in the calculation of its technical provisions.
[Note: Art. 82 of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 4.3
4.4
A firm must have processes and procedures in place to ensure that the best estimate and the assumptions underlying the calculation of the best estimate are regularly compared against experience.
[Note: Art. 83 of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 4.4
5
Internal Audit
5.1
- (1) A firm must provide for an effective internal audit function.
- (2) The internal audit function must:
- (a) include an evaluation of the adequacy and effectiveness of the internal control system and other elements of the system of governance; and
- (b) be objective and independent from the operational functions.
- (3) A firm must ensure that any findings and recommendations of the internal audit function are reported to the firm’s governing body which must:
- (a) determine what actions are to be taken with respect to each of the internal audit findings and recommendations; and
- (b) ensure that those actions are carried out.
[Note: Art. 47 of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 5.1
6
Actuarial Function
6.1
- (1) A firm must provide for an effective actuarial function to:
- (a) coordinate the calculation of technical provisions;
- (b) ensure the appropriateness of the methodologies and underlying models used, as well as the assumptions made in the calculation of technical provisions;
- (c) assess the sufficiency and quality of the data used in the calculation of technical provisions;
- (d) compare the best estimate against experience;
- (e) inform the governing body of the reliability and adequacy of the calculation of technical provisions;
- (f) oversee the calculation of technical provisions in the cases set out in Technical Provisions 12;
- (g) express an opinion on the overall underwriting policy;
- (h) express an opinion on the adequacy of reinsurance arrangements; and
- (i) contribute to the effective implementation of the risk-management system referred to in 3, in particular with respect to the risk modelling underlying the calculation of the SCR and MCR and to the firm’s ORSA.
- (2) The actuarial function must be carried out by persons who have knowledge of actuarial and financial mathematics, commensurate with the nature, scale and complexity of the risks inherent in the firm’s business, and who are able to demonstrate their relevant experience with applicable professional and other standards.
[Note: Art. 48 of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 6.1
7
Outsourcing
7.1
If a firm outsources a function or any insurance or reinsurance activity, it remains fully responsible for discharging all of its obligations under the rules and other laws, regulations and administrative provisions adopted in accordance with the Solvency II Directive.
[Note: Art. 49(1) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 7.1
7.2
A firm must not outsource a critical or important operational function or activity in such a way as to lead to any of the following:
- (1) materially impairing the quality of the firm’s system of governance;
- (2) unduly increasing the operational risk;
- (3) impairing the ability of the supervisory authorities to monitor the firm’s compliance with its obligations;
- (4) undermining continuous and satisfactory service to policyholders.
[Note: Art. 49(2) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 7.2
7.3
A firm must, in a timely manner, notify the PRA prior to the outsourcing of critical or important functions or activities as well as of any subsequent material developments with respect to those functions or activities.
[Note: Art. 49(3) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 7.3
7.4
Without prejudice to 7.1 to 7.3, a firm outsourcing a function or an insurance or reinsurance activity must take the necessary steps to ensure that the following conditions are satisfied:
- (1) the service provider must co-operate with the PRA and, where relevant, any other supervisory authority of the firm in connection with the function or activity that is the subject of the outsourcing;
- (2) the firm, its auditors, the PRA and, where relevant, any other supervisory authority of the firm must have effective access to data related to the functions or activities that are the subject of the outsourcing; and
- (3) the PRA and, where relevant, any other supervisory authority of the firm must have effective access to the business premises of the service provider and must be able to exercise those rights of access.
[Note: Art. 38(1) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 7.4
8
Finite Reinsurance
8.1
A firm must not enter into a contract of finite reinsurance (either as a cedant or a reinsurer) or pursue finite reinsurance activities unless it is able to properly identify, measure, monitor, manage, control and report the risks arising from that contract or those activities.
[Note: Art. 210 of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 8.1
9
Restriction of Business
9.1
- (1) A firm, other than a pure reinsurer, 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 that was on 15 March 1979 carrying on long-term insurance business and savings business from continuing to carry on savings business.
[Note: Arts. 18(1)(a) and 305(3) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 9.1
9.2
A pure reinsurer must not carry on any business other than the business of reinsurance and related operations.
[Note: Art. 18(1)(b) of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 9.2
Export chapter as
10
Premiums for New Business
10.1
A firm must not enter into a contract of long-term insurance unless it is satisfied, on reasonable actuarial assumptions, that the premiums receivable shall be sufficient:
- (1) to enable the firm to meet all of its commitments; and
- (2) in particular, to establish adequate technical provisions as required in the Technical Provisions Part of the PRA Rulebook.
[Note: Art. 209 of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 10.1
10.2
For the purposes of 10.1, all aspects of the financial situation of the firm may be taken into account, provided that input from resources other than premiums and investment income expected to be earned from premiums is not systematic and permanent in a way that may jeopardise the long-term solvency of the firm.
[Note: Art. 209 of the Solvency II Directive]
- 01/01/2016
- Legal Instruments that change this rule 10.2
Export chapter as
11
Statistical Data
11.1
A leading insurer and a relevant insurer must keep statistical data showing the extent of Community co-insurance operations in which they participate and the EEA States concerned.
[Note: Art. 193 of the Solvency II Directive]
12
Lloyd’s
12.1
This Chapter applies to the Society and managing agents.
- 01/01/2016
- Legal Instruments that change this rule 12.1
12.2
For the purpose of;
- (1) 3.1(2)(b), 3.8(2)(c) and 6.1(1)(i), as applied to managing agents, the reference to “SCR” is to be interpreted as a reference to the notional syndicate SCR calculated by managing agents as required by Solvency Capital Requirement - General Provisions 8.2.
- (2) 3.7 and 3.8(5), as applied to managing agents, the reference to “internal model” is to be interpreted as a reference to any internal model used by a managing agents to calculate the notional syndicate SCR as required by Solvency Capital Requirement - General Provisions 8.2; and
- (3) 3.10, as applied to managing agents, the reference to “risk profile” is to be interpreted as a reference to the risk profile of any syndicate managed by the managing agents.
- 01/01/2016
- Legal Instruments that change this rule 12.2
12.3
For the purpose of 3.8 to 3.11, as applied to managing agents, managing agents must conduct an ORSA for each syndicate which they manage.
- 01/01/2016
- Legal Instruments that change this rule 12.3
12.4
Where a provision of this Part requires that a function be established, the Society and managing agents must each separately establish that function.
- 01/01/2016
- Legal Instruments that change this rule 12.4
12.5
[deleted]
12.6
The PRA and the Society must be informed promptly by the managing agent of any concerns about the adequacy of the technical provisions, and any material deficiencies, identified in the annual written report to be submitted by the actuarial function to the governing body of that managing agent.
12.7
For the purpose of 9.1, the Society and managing agents must take all reasonable steps to ensure that:
- (1) a corporate member does not carry on any commercial business other than insurance business and activities arising directly from that business; and
- (2) individual members do not, in their capacity as underwriting members, carry on any commercial business other than insurance business and activities arising directly from that business.
- 01/01/2016
- Legal Instruments that change this rule 12.7