Conditions Governing Business

1.1

Unless otherwise stated, this Part applies to:

1. (1) a UK Solvency II firm;
2. (2) in accordance with Insurance General Application 3, the Society, as modified by 12; and
3. (3) in accordance with Insurance General Application 3, managing agents, as modified by 12.

1.2

In this Part, the following definitions shall apply:

closed year

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.

concentration risk

means all risk exposures with a loss potential which is large enough to threaten the solvency or the financial position of a UK Solvency II firm.

[Note: Art. 13(35) of the Solvency II Directive]

corporate member

means a member that is a body corporate or a Scottish Limited partnership. 

liquidity risk

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]

1A.1

Where a firm makes assumptions about rules relating to the valuation of assets and liabilities, technical provisions, own funds, SCR and MCR and the rules set out in the Investments Part, these assumptions must be based on the expertise of persons with relevant knowledge, experience and understanding of the risks inherent in the firm's insurance and reinsurance business.

1A.2

A firm must, taking due account of the principle of proportionality, ensure that internal users of the relevant assumptions are informed about their relevant content, their degree of reliability and their limitations. For that purpose, service providers to whom functions or activities have been outsourced must be considered to be internal users.

2.1

A firm must ensure its governing body is ultimately responsible for the firm’s compliance with the PRA rules, FSMA and all applicable laws, rules, regulations and administrative provisions deriving from FSMA that apply to UK Solvency II firms.

[Note: Art. 40 of the Solvency II Directive]

2.2

1. (1) A firm must have in place an effective system of governance which provides for sound and prudent management of its business.
2. (2) The system of governance must include at least:
1. (a) an adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities; and
2. (b) an effective system for ensuring the transmission of information.
3. (3) The system of governance must include compliance with at least the following requirements:
1. (a) written policy on risk management in accordance with 2.5;
2. (b) Chapters 2A to 7;
3. (c) Insurance - Fitness and Propriety 2.1 to 2.3, 4.1, 4.3 and 4.4; and
4. (d) Insurance – Allocation of Responsibilities 4;
5. (e) Chapters 11A to 11F;
6. (f) risk management system in accordance with 3.1;
7. (g) compliance function in accordance with 4.1(2);
8. (h) internal audit function in accordance with Chapter 5; and
9. (i) actuarial function in accordance with Chapter 6.

(4) The system of governance must be subject to regular internal review.

[Note: Art. 41(1) of the Solvency II Directive]

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]

2.4

A firm must:

1. (1) establish, implement and maintain written policies and adequate procedures in relation to at least risk management, internal control, internal audit and, where relevant, outsourcing;
2. (2) make those policies subject to prior approval of its governing body;
3. (3) ensure those policies are implemented;
4. (4) review those policies at least annually; and
5. (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]

2.4A

A firm must establish, implement and maintain documented policies and adequate procedures to ensure that all persons who effectively run the firm or have other key functions are at all times fit and proper within the meaning of Insurance - Fitness and Propriety 2.

2.5

The written policies on risk-management referred to in 2.4(1) must include:

1. (1) policies relating to the areas listed in (i) to (vi) in 3.1(2)(c) as set out in further detail in 3.1A and Chapter 2A; and
2. (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]

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]

2.7

A firm must engage a broad set of qualities and competences when recruiting members to the governing body.

2.8

A firm must put in place a policy promoting diversity on the governing body.

2.9

A firm that maintains a website must explain on the website how it complies with the requirements of 2.7 and 2.8.

2A.1

A firm must ensure that:

1. (1) the system of governance referred to at paragraph 2.2(1) establishes, implements and maintains effective cooperation, internal reporting and communication of information at all relevant levels of the firm;
2. (2) the system of governance referred to at paragraph 2.2(1) establishes, implements and maintains effective decision-making procedures and an organisational structure which clearly specifies reporting lines, allocates functions and responsibilities, and takes into account the nature, scale and complexity of the risks inherent in the firm's business;
3. (3) the members of the governing body collectively possess the necessary qualifications, competency, skills and professional experience in the relevant areas of the business in order to effectively manage and oversee the firm in a professional manner;
4. (4) each individual member of the governing body has the necessary qualifications, competency, skills and professional experience to perform the tasks assigned;
5. (5) it employs personnel with the skills, knowledge and expertise necessary to carry out the responsibilities allocated to them properly;
6. (6) all personnel of the firm are aware of the procedures for the proper carrying out of their responsibilities;
7. (7) the assignment of multiple tasks to individuals and organisational units does not or is not likely to prevent the persons concerned from carrying out any particular function in a sound, honest and objective manner;
8. (8) it establishes information systems which produce complete, reliable, clear, consistent, timely and relevant information concerning the business activities, the commitments assumed and the risks to which the firm is exposed;
9. (9) it maintains adequate and orderly records of the firm's business and internal organisation;
10. (10) it safeguards the security, integrity and confidentiality of information, taking into account the nature of the information in question;
11. (11) it introduces clear reporting lines that ensure the prompt transfer of information to all persons who need it in a way that enables them to recognise its importance as regards their respective responsibilities; and
12. (12) it adopts a written remuneration policy in accordance with Chapter 3A.

2A.2

A firm must ensure that its policies on risk-management, internal control, internal audit and, where relevant, outsourcing referred to in 2.4(1) clearly set out the relevant responsibilities, objectives, processes and reporting procedures to be applied, all of which must be consistent with the firm’s overall business strategy.

2A.3

A firm must establish, implement and maintain a business continuity policy aimed at ensuring, in the case of an interruption to its systems and procedures, the preservation of essential data and functions and the maintenance of insurance and reinsurance activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of their insurance or reinsurance activities.

2A.4

A firm must ensure that at least two natural persons effectively run the firm.

2A.5

A firm must ensure that effective processes and procedures are in place to prevent conflicts of interest and that potential sources of conflicts of interest are identified and procedures are established in order to ensure that those involved in the implementation of the firm's strategies and policies understand where conflicts of interest could arise and how such conflicts are to be addressed.

2A.6

A firm must monitor, and on a regular basis evaluate, the adequacy and effectiveness of its system of governance and take appropriate measures to address any deficiencies.

3.1

1. (1) A firm must establish, implement, and maintain 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. (1A) The risk-management system must include the following:
   1. (a) a clearly defined risk-management strategy which is consistent with the firm’s overall business strategy. The objectives and key principles of the risk-management strategy, the approved risk tolerance limits and the assignment of responsibilities across all the activities of the firm must be documented;
   2. (b) a clearly defined procedure on the decision-making process;
   3. (c) written policies which effectively ensure the definition and categorisation of the material risks by type to which the firm is exposed, and the approved risk tolerance limits for each type of risk. Such policies must implement the firm’s risk strategy, facilitate control mechanisms and take into account the nature, scope and time periods of the business and the associated risks; and
   4. (d) reporting procedures and processes which ensure that information on the material risks faced by the firm and the effectiveness of the risk-management system are actively monitored and analysed and that appropriate modifications to the system are made where necessary.
3. (2) That risk-management system must:
   
   1. (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;
   2. (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
   3. (c) cover at least the following areas:
      
      1. (i) underwriting and reserving as set out in 3.1A(1);
      2. (ii) asset-liability management as set out in 3.1A(2);
      3. (iii) investment risk management, in particular derivatives, quasi-derivatives and similar commitments, as set out in 3.1A(3);
      4. (iv) liquidity risk and concentration risk management: as set out in 3.1A(4) and 3.1A(5);
      5. (v) operational risk management as set out in 3.1A(6); and
      6. (vi) reinsurance and other risk-mitigation techniques as set out in 3.1A(7).
4. (2A) A firm must ensure that, where appropriate, the performance of stress tests and scenario analysis with regard to all relevant risks faced by the firm, is included in its risk-management system.
5. (2B) A firm must ensure that it takes into account the information reported as part of the risk-management system in its decision-making process.
6. (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.
7. (4) Where a firm applies the matching adjustment, the firm must manage any risks that are identified in the analysis undertaken in accordance with Matching Adjustment 10.1.

3.1A

A firm must ensure that the areas referred to in 3.1(2)(c) include all of the following policies:

1. (1) Underwriting and reserving:
   1. (a) actions to be taken by the firm to assess and manage the risk of loss or of adverse change in the values of insurance and reinsurance liabilities, resulting from inadequate pricing and provisioning assumptions;
   2. (b) the sufficiency and quality of relevant data to be considered in the underwriting and reserving processes, as set out in Technical Provisions - Further Requirements 4 and their consistency with the standards of sufficiency and quality; and
   3. (c) the adequacy of claims management procedures including the extent to which they cover the overall cycle of claims.
2. (2) Asset-liability management:
   1. (a) the structural mismatch between assets and liabilities and in particular the duration mismatch of those assets and liabilities;
   2. (b) any dependency between risks of different asset and liability classes;
   3. (c) any dependency between the risks of different insurance or reinsurance obligations;
   4. (d) any off-balance sheet exposures of the firm; and
   5. (e) the effect of relevant risk-mitigation techniques on asset-liability management.
3. (3) Investment risk management:
   1. (a) actions to be taken by the firm to ensure that the firm’s investments comply with the Investments Part;
   2. (b) actions to be taken by the firm to ensure that the firm’s investments take into account the nature of the firm’s business, its approved risk tolerance limits, its solvency position, its asset-liability management policy, and its long-term risk exposure;
   3. (c) the firm’s own internal assessment of the credit risk of investment counterparties;
   4. (d) where the firm uses derivatives or any other financial instrument with similar characteristics or effects, the objectives of, and strategy underlying their use and the way in which they facilitate efficient portfolio management or contribute to a reduction of risks, as well as procedures to assess the risk of such financial instruments and the principles of risk-management to be applied to them; and
   5. (e) where appropriate in order to ensure effective risk-management, internal quantitative limits on assets and exposures, including off-balance sheet exposures.
4. (4) Liquidity risk management:
   1. (a) actions to be taken by the firm to take into account both short-term and long-term liquidity risk;
   2. (b) the appropriateness of the composition of the assets in terms of their nature, duration and liquidity in order to meet the firm’s obligations as they fall due; and
   3. (c) a plan to deal with changes in expected cash in-flows and out-flows.
5. (5) Concentration risk management: actions to be taken by the firm to identify relevant sources of concentration risk to ensure that risk concentrations remain within established limits and actions to analyse possible risks of contagion between concentrated exposures.
6. (6) Operational risk management: actions to be taken by the firm to assign clear responsibilities to regularly identify, document and monitor relevant operational risk exposures.
7. (7) Reinsurance and other insurance risk-mitigation techniques:
   1. (a) actions to be taken by the firm to ensure the selection of suitable reinsurance and other risk-mitigation techniques;
   2. (b) actions to be taken by the firm to assess which types of risk-mitigation techniques are appropriate according to the nature of the risks assumed and the capabilities of the firm to manage and control the risks associated with those techniques; and
   3. (c) the firm’s own assessment of the credit risk of the risk-mitigation techniques.
8. (8) Deferred taxes:
   1. (a) actions related to the firm’sselection of methods and assumptions to demonstrate the amount and recoverability of the loss-absorbing capacity of deferred taxes;
   2. (b) involvement of the relevant key functions in the selection and assessment of methods and assumptions to demonstrate the amount and recoverability of the loss-absorbing capacity of deferred taxes, how the outcome of that assessment is reported to the governing body, including the assessment of the underlying assumptions applied for the projection of future taxable profit (for the purposes of recognising and valuing deferred taxes and making an adjustment for the loss-absorbing capacity of deferred taxes), and an explanation of any concerns about those assumptions, which must be carried out in each case by either the actuarial function or the risk-management function; and
   3. (c) risks that the firm is or could be exposed to, taking into account potential future changes in its risk profile due to its business strategy or the economic and financial environment, including operational risks and potential changes in its loss-absorbing capacity of deferred taxes. That assessment must include the overall reliance of the solvency and financial condition on deferred taxes and its consistency with the risk-management policy.

3.2

As regards asset-liability management, a firm must:

1. (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. (2) where the matching adjustment is applied, regularly assess:
1. (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 Matching Adjustment 4, and the possible effect of a forced sale of assets on its eligible own funds;
2. (b) the sensitivity of its technical provisions and eligible own funds to changes in the composition of the assigned portfolio of assets;
3. (c) the impact of a reduction of the matching adjustment to zero;
3. (3) where the volatility adjustment is applied, regularly assess:
1. (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;
2. (b) the impact of a reduction of the volatility adjustment 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]

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]

3.5

1. (1) 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]

1. (2) The risk-management function referred to in 3.5(1) must undertake all of the following tasks:
   1. (a) assisting the governing body and other functions in the effective operation of the risk-management system;
   2. (b) monitoring the risk-management system;
   3. (c) monitoring the general risk profile of the firm as a whole;
   4. (d) detailed reporting on risk exposures and advising the governing body on risk-management matters, including in relation to strategic affairs such as corporate strategy, mergers and acquisitions and major projects and investments; and
   5. (e) identifying and assessing emerging risks.
2. (3) The risk-management function must fulfil all of the following requirements:
   1. (a) fulfil the requirements set out in 3.7;
   2. (b) liaise closely with the users of the outputs of the internal model; and
   3. (c) co-operate closely with the actuarial function referred to in Conditions Governing Business 6.

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]

3.6A

In addition to the requirements referred to in 3.6, for the purposes of the calculation of technical provisions and the SCR, a firm must ensure that its internal risk-management methodologies do not rely solely or automatically on external credit assessments. Where the calculation of technical provisions or of the SCR is based on external credit assessments by an external credit assessment institution or based on the fact that an exposure is unrated, that does not exempt a firm from additionally considering other relevant information.

3.6B

For the purpose of assessing the appropriateness of external credit rating assessments used in the calculation of technical provisions and the SCR by way of additional assessments referred to in 3.6, a firm must include in its policy on risk management the following:

1. (1) the scope and frequency of the additional assessments;
2. (2) the manner in which the additional assessments are carried out, including the assumptions on which they are based; and
3. (3) the frequency of the regular review of the additional assessments and the conditions requiring an ad hoc review of the additional assessments.

3.6C

A firm must ensure that its risk-management function covers the additional assessments in accordance with the risk management policy referred to in 3.6B and duly considers the results of the additional assessments in the calculation of technical provisions and the SCR.

3.6D

When carrying out the additional assessments referred to in 3.6B, a firm must use information that is derived from reliable sources that are up to date.

3.6E

1. (1) In accordance with 2.4, a firm must at least annually review the additional assessments referred to in 3.6B.
2. (2) A firm must review those additional assessments on an ad hoc basis, whenever any of the conditions under 3.6B(3) take place or if the assumptions on which those assessments are based, are no longer valid.

3.6F

A firm must document the following:

1. (1) the manner in which the additional assessments referred to in 3.6B are carried out and the results of those assessments; and
2. (2) the extent to which the results of those additional assessments are taken into account in the calculation of technical provisions and the SCR.

3.7

A firm that has received internal model permission must ensure that its risk-management function covers the following additional tasks:

1. (1) to design and implement the internal model;
2. (2) to test and validate the internal model;
3. (3) to document the internal model and any subsequent changes made to it;
4. (4) to analyse the performance of the internal model and to produce summary reports thereof; and
5. (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]

3.8

1. (1) A firm must conduct an ORSA as part of its risk-management system.
2. (2) The ORSA must include at least the following:
   
   1. (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;
   2. (b) the compliance, on a continuous basis, with:
      
      1. (i) the SCR and MCR; and
      2. (ii) the requirements regarding technical provisions, as set out in the Technical Provisions and Matching Adjustment Parts; and
   3. (c) the significance with which the risk profile of the firm deviates from the assumptions underlying the SCR.
3. (3) For the purposes of 3.8(2)(a), the firm must:
   1. (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
   2. (b) demonstrate the methods used in that assessment.
4. (4) Where a firm applies the matching adjustment, the volatility adjustment, the risk-free interest rate transitional measure or the TMTP, 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. (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]

3.8A

1. (1) A firm must ensure that the ORSA referred to in 3.8(1) is forward-looking and includes all of the following elements:
   1. (a) risks the firm is or could be exposed to, taking into account potential future changes in its risk profile due to its business strategy or the economic and financial environment, including operational risks; and
   2. (b) the nature and quality of own funds items or other resources appropriate to cover the risks identified in 3.8A(1)(a).
2. (2)   The elements referred to at 3.8A(1)(a) and (b) must take the following into account:
   1. (a)  the time periods that are relevant for taking into account the risks the firm faces in the long term;
   2. (b)  valuation and recognition bases that are appropriate for the firm's business and risk profile; and
   3. (c)  the firm's internal control and risk-management systems and approved risk tolerance limits.

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]

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]

3.11

A firm must inform the PRA of the results of each ORSA in the form of an ORSA report in accordance with Reporting 2.5A(2)(a).

[Note: Art. 45(6) of the Solvency II Directive]

3.12

The ORSA report referred to at 3.11 must include all of the following:

1. (1) the qualitative and quantitative results of the ORSA and the conclusions drawn by the firm from those results;
2. (2) the methods and main assumptions used in the ORSA;
3. (3) the information referred to at 3.8(2)(a) and a comparison between those solvency needs, the regulatory capital requirements and the firm's own funds; and
4. (4) qualitative information on, and where significant deviations have been identified a quantification of, the extent to which quantifiable risks of the firm are not reflected in the calculation of the SCR.

3A.1

When establishing and implementing the remuneration policy referred to in 2A.1(12), a firm must comply with all of the following principles:

1. (1) the remuneration policy and remuneration practices must be established, implemented and maintained in line with the firm's business and risk-management strategy, its risk profile, objectives, risk-management practices and the long-term interests and performance of the firm as a whole and must incorporate measures aimed at avoiding conflicts of interest;
2. (2) the remuneration policy must promote sound and effective risk-management and must not encourage risk-taking that exceeds the risk tolerance limits of the firm;
3. (3) the remuneration policy must apply to the firm as a whole, and contain specific arrangements that take into account the tasks and performance of the governing body, persons who effectively run the firm or have other key functions and other categories of employees whose professional activities have a material impact on the firm's risk profile;
4. (4) the firm must ensure that it establishes general principles for the remuneration of those categories of employees whose professional activities have a material impact on the firm's risk profile and that it oversees implementation of those general principles;
5. (5) there must be clear, transparent and effective governance with regard to remuneration, including the oversight of the remuneration policy;
6. (6) an independent remuneration committee must be created, if appropriate in relation to the significance of the firm in terms of size and internal organisation, in order to periodically support the governing body in overseeing the design of the remuneration policy and remuneration practices, their implementation and operation; and
7. (7) the remuneration policy must be disclosed to each of the firm's employees.

3A.2

A firm must ensure that the specific arrangements referred to in 3A.1(3) comply with all of the following principles:

1. (1) where remuneration schemes include both fixed and variable components, such components must be balanced so that the fixed or guaranteed component represents a sufficiently high proportion of the total remuneration to avoid employees being overly dependent on the variable components and to allow the firm to operate a fully flexible bonus policy, including the possibility of paying no variable component;
2. (2) where variable remuneration is performance-related, the total amount of the variable remuneration is based on a combination of the assessment of the performance of the individual and of the business unit concerned and of the overall result of the firm or the group to which the firm belongs;
3. (3) the payment of a substantial portion of the variable remuneration component, irrespective of the form in which it is to be paid, must:
   1. (a) contain a flexible, deferred component that takes account of the nature and time horizon of the firm’s business; and
   2. (b) that deferral period must not be less than three years and the period must be correctly aligned with the nature of the business, its risks, and the activities of the employees in question;
4. (4) financial and also non-financial criteria must be taken into account when assessing an individual’s performance;
5. (5) the measurement of performance, as a basis for variable remuneration, must include a downwards adjustment for exposure to current and future risks, taking into account the firm’s risk profile and the cost of capital;
6. (6) termination payments must be related to performance achieved over the whole period of activity and be designed in a way that does not reward failure;
7. (7) persons subject to the remuneration policy must commit to not using any personal hedging strategies or remuneration and liability-related insurance which would undermine the risk alignment effects embedded in their remuneration arrangement; and
8. (8) the variable part of remuneration of the employees engaged in the internal control, risk-management, compliance, internal audit, and actuarial functions and those business units referred to in 11A to 11F must be independent from the performance of the operational units and areas that are submitted to their control.

3A.3

A firm must ensure that the remuneration policy is designed in such a way as to take into account the internal organisation of the firm, and the nature, scale and complexity of the risks inherent in its business.

4.1

1. (1) A firm must have in place an effective internal control system.
2. (2) That internal control system must include:
   1. (a) administrative and accounting procedure;
   2. (b) an internal control framework
   3. (c) appropriate reporting arrangements at all levels of the firm; and
   4. (d) a compliance function.

[Note: Art. 46(1) of the Solvency II Directive]

1. (3) A firm must ensure that its internal control system ensures:
   1. (a) the firm's compliance with applicable laws, regulations and administrative provisions;
   2. (b) the effectiveness and the efficiency of the firm's operations in light of its objectives; and
   3. (c) the availability and reliability of financial and non-financial information.
      

4.1A

1. (1) A firm must ensure that the compliance function required by 4.1(2)(d) establishes a compliance policy and a compliance plan.
2. (2) That compliance policy must define the responsibilities, competencies and reporting duties of the compliance function.
3. (3) That compliance plan must set out the planned activities of the compliance function which must take into account all relevant areas of the firm’s activities and its exposure to compliance risk.

4.2

The duties of the compliance function referred to in 4.1A(1) must include:

1. (1) advising the governing body on compliance with all of its obligations under PRA rules and FSMA and any other laws, rules, regulations and administrative provisions deriving from FSMA that apply to UK Solvency II firms;
2. (1A) assessing the adequacy of the measures adopted by the firm to prevent non-compliance; and
3. (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]

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]

4A.1

A firm must incorporate the functions and the associated reporting lines into its organisational structure in a way which ensures that each function is free from influences that may compromise the function’s ability to undertake its duties in an objective, fair and independent manner.

4A.2

A firm must ensure that each function operates under the ultimate responsibility of, and reports to the governing body and must, where appropriate, co-operate with the other functions in carrying out their roles.

4A.3

A firm must ensure that any person performing a function is able to communicate at their own initiative with any employee and must have the necessary authority, resources and expertise, as well as unrestricted access to all relevant information necessary to carry out their responsibilities.

4A.4

A firm must ensure that any person performing a function promptly reports any major problem in their area of responsibility to the governing body.

5.1

1. (1) A firm must provide for an effective internal audit function.
2. (2) The internal audit function must:
1. (a) include an evaluation of the adequacy and effectiveness of the internal control system and other elements of the system of governance; and
2. (b) be objective and independent from the operational functions.
3. (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:
1. (a) determine what actions are to be taken with respect to each of the internal audit findings and recommendations; and
2. (b) ensure that those actions are carried out.

[Note: Art. 47 of the Solvency II Directive]

5.2

A firm must ensure that the internal audit function referred to in 5.1 includes all of the following tasks:
(1) establishes, implements and maintains an audit plan setting out the audit work to be undertaken in the upcoming years, taking into account all activities and the complete system of governance of the firm;
(2) takes a risk-based approach in deciding its priorities;
(3) reports the audit plan to the governing body;
(4) issues recommendations based on the result of work carried out in accordance with 5.2(1) and submits a written report on its findings and recommendations to the governing body on at least an annual basis; and
(5) verifies compliance with the decisions taken by the governing body on the basis of those recommendations referred to in 5.2(4).

5.3

A firm must ensure that any person carrying out the internal audit function does not assume responsibility for any other function.

5.4

Notwithstanding 5.3, and in particular by respecting the principle of proportionality, a firm may allow the persons carrying out the internal audit function to carry out other key functions, where all of the following conditions are met:

1. (1) this is appropriate with respect to the nature, scale and complexity of the risks inherent in the firm’s business;
2. (2) no conflict of interest arises for the persons carrying out the internal audit function; and
3. (3) the costs of maintaining persons for the internal audit function that do not carry out other key functions would impose costs on the firm that would be disproportionate with respect to the total administrative expenses.

6.1

1. (1) A firm must provide for an effective actuarial function to:
1. (a) coordinate the calculation of technical provisions;
2. (b) ensure the appropriateness of the methodologies and underlying models used, as well as the assumptions made in the calculation of technical provisions;
3. (c) assess the sufficiency and quality of the data used in the calculation of technical provisions;
4. (d) compare the best estimate against experience;
5. (e) inform the governing body of the reliability and adequacy of the calculation of technical provisions;
6. (f) oversee the calculation of technical provisions in the cases set out in Technical Provisions 12;
7. (g) express an opinion on the overall underwriting policy;
8. (h) express an opinion on the adequacy of reinsurance arrangements; and
9. (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. (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]

6.2

A firm must provide for an actuarial function that, in coordinating the calculation of the technical provisions, includes all of the following tasks:

1. (1) applies methodologies and procedures to assess the sufficiency of technical provisions and to ensure that their calculation is consistent with the requirements set out in the Technical Provisions Part and the Valuation Part;
2. (2) assesses the uncertainty associated with the estimates made in the calculation of technical provisions;
3. (3) ensures that any limitations of data used to calculate technical provisions are properly dealt with;
4. (4) ensures that the most appropriate approximations for the purposes of calculating the best estimate are used in cases referred to in Technical Provisions 12.2;
5. (5) ensure that homogeneous risk groups of insurance and reinsurance obligations are identified for an appropriate assessment of the underlying risks;
6. (6) consider relevant information provided by financial markets and generally available data on underwriting risks and ensure that it is integrated into the assessment of technical provisions;
7. (7) compare and justify any material differences in the calculation of technical provisions from year to year; and
8. (8) ensure that an appropriate assessment is provided of options and guarantees included in contracts of insurance.

6.3

A firm must ensure that the actuarial function assesses whether the methodologies and assumptions used in the calculation of the technical provisions are appropriate for the specific lines of business of the firm and for the way the business of the firm is managed, having regard to the available data.

6.4

A firm must ensure that the actuarial function assesses whether the information technology systems used in the calculation of technical provisions sufficiently support the actuarial and statistical procedures.

6.5

1. (1) A firm must ensure that the actuarial function, when comparing best estimates against experience, reviews the quality of past best estimates and uses the insights gained from this assessment to improve the quality of current calculations.
2. (2) That comparison of best estimates against experience must include comparisons between observed values and the estimates underlying the calculation of the best estimate, in order to draw conclusions on the appropriateness, accuracy and completeness of the data and assumptions used, as well as on the methodologies applied in the firm's calculations.

6.6

A firm must ensure that:

1. (1) information submitted to the governing body on the calculation of the technical provisions includes at least a reasoned analysis on the reliability and adequacy of its calculations and on the sources and the degree of uncertainty of the estimate of the technical provisions;
2. (2) the analysis referred to at 6.6(1) is supported by a sensitivity analysis that includes an investigation of the sensitivity of the technical provisions to each of the major risks underlying the obligations which are covered in the technical provisions; and
3. (3) the actuarial function clearly states and explains any concerns it may have concerning the adequacy of technical provisions.

6.7

A firm must ensure that the opinion on the overall underwriting policy to be expressed by the actuarial function referred to in 6.1(1)(g) at least includes conclusions regarding the following considerations:

1. (1) sufficiency of the premiums to be earned to cover future claims and expenses, notably taking into consideration the underlying risks (including underwriting risks), and the impact of options and guarantees included in contracts of insurance on the sufficiency of premiums ;
2. (2) the effect of inflation, legal risk, change in the composition of the firm's portfolio, and of systems which adjust the premiums that policyholders pay upwards or downwards depending on their claims history (bonus-malus systems) or similar systems, implemented in specific homogeneous risk groups; and
3. (3) the progressive tendency of a portfolio of contracts of insurance to attract or retain policyholders with a higher risk profile (anti-selection).

6.8

A firm must ensure that the opinion on the adequacy of reinsurance arrangements to be expressed by the actuarial function in accordance with 6.1(1)(h) includes analysis on the adequacy of the following:

1. (1) the firm’s risk profile and underwriting policy;
2. (2) reinsurance providers taking into account their credit standing;
3. (3) the expected cover under stress scenarios in relation to the underwriting policy; and
4. (4) the calculation of the amounts recoverable from reinsurance contracts and special purpose vehicles.

6.9

1. (1) A firm must ensure that the actuarial function produces a written report to be submitted to the governing body, at least annually.
2. (2) The report referred to at 6.9(1) must:
   1. (a) document all tasks that have been undertaken by the actuarial function and their results; and
   2. (b) clearly identify any deficiencies and give recommendations as to how such deficiencies should be remedied.

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 PRA rules, FSMA and any other laws, rules, regulations and administrative provisions deriving from FSMA that apply to UK Solvency II firms.

[Note: Art. 49(1) of the Solvency II Directive]

7.1A

A firm which outsources or proposes to outsource a function or an insurance or reinsurance activity to a service provider must establish a written outsourcing policy which takes into account the impact of outsourcing on its business and the reporting and monitoring arrangements to be implemented in cases of outsourcing.

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. (1) materially impairing the quality of the firm’s system of governance;
2. (2) unduly increasing the operational risk;
3. (3) impairing the ability of the supervisory authorities to monitor the firm’s compliance with its obligations; or
4. (4) undermining continuous and satisfactory service to policyholders.

[Note: Art. 49(2) of the Solvency II Directive]

7.2A

Where the firm and the service provider are members of the same group, the firm must, when outsourcing any critical or important operational functions or activities, take into account the extent to which the firm controls the service provider or has the ability to influence its actions.

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]

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. (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. (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. (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]

7.5

When choosing a service provider for any critical or important operational functions or activities, a firm must ensure that:

1. (1) a detailed examination is performed to ensure that the potential service provider has the ability, capacity, and any authorisation required by law to deliver the required functions or activities satisfactorily, taking into account the firm's objectives and needs;
2. (2) the service provider has adopted all means to ensure that no actual or potential conflict of interests jeopardizes the fulfilment of the needs of the firm;
3. (3) a written agreement is entered into between the firm and the service provider which clearly defines the respective rights and obligations of that firm and the service provider;
4. (4) the general terms and conditions of the outsourcing agreement are clearly explained to, and authorised by, the firm's governing body;
5. (5) the outsourcing does not entail the breaching of any applicable laws or regulatory requirements, in particular with regard to data protection; and
6. (6) the service provider is subject to the same conditions on the safety and confidentiality of information relating to the firm or to its policyholders that are applicable to that firm.

7.6

A firm must ensure that the terms and conditions of the written agreement referred to in 7.5(3) are consistent with the firm’s obligations as provided for in 7.1, 7.2 and 7.2A.

7.7

The written agreement referred to in 7.5(3) must clearly state all of the following requirements:

1. (1) the duties and responsibilities of both parties involved;
2. (2) the service provider’s commitment to comply with all applicable laws, regulatory requirements and guidance, as well as policies approved by the firm, and to co-operate with the PRA with regard to the outsourced function or activity;
3. (3) the service provider’s obligation to disclose any development which may have a material impact on its ability to carry out the outsourced functions and activities effectively and in compliance with applicable laws and regulatory requirements;
4. (4) a notice period for the termination of the contract by the service provider which is long enough to enable the firm to find an alternative solution;
5. (5) that the firm is able to terminate the arrangement for outsourcing where necessary without detriment to the continuity and quality of its provision of services to policyholders;
6. (6) that the firm reserves the right to be informed about the outsourced functions and activities and their performance by the services provider as well as a right to issue general guidelines and individual instructions at the address of the service provider, as to what has to be taken into account when performing the outsourced functionsor activities;
7. (7) that the service provider must protect any confidential information relating to the firm and its policyholders, employees, contracting parties and all other persons;
8. (8) that the firm, its external auditor and the PRA have effective access to all information relating to the outsourced functionsand activities including carrying out on-site inspections of the business premises of the service provider;
9. (9) that, where appropriate and necessary for the purposes of supervision, the PRA may address questions directly to the service provider to which the service provider must reply;
10. (10) that the firm may obtain information about the outsourced activities and may issue instructions concerning the outsourced activities and functions;
11. (11) the terms and conditions, where applicable, under which the service provider may sub-outsource any of the outsourced functionsand activities; and
12. (12) that the service provider’s duties and responsibilities deriving from its written agreement with the firm must remain unaffected by any sub-outsourcing taking place.

7.8

A firm that is outsourcing critical or important operational functions or activities must fulfil all of the following requirements:

1. (1) ensure that relevant aspects of the service provider’s risk-management and internal control systems are adequate to ensure compliance with 7.2(1) and (2);
2. (2) adequately take account of the outsourced activities in its risk-management and internal control systems to ensure compliance with 7.2(1) and (2);
3. (3) verify that the service provider has the necessary financial resources to perform the additional tasks in a proper and reliable way, and that all personnel of the service provider who will be involved in providing the outsourced functions or activities are sufficiently qualified and reliable; and
4. (4) ensure that the service provider has adequate contingency plans in place to deal with emergency situations or business disruptions and periodically tests backup facilities where necessary, taking into account the outsourced functions and activities.

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]

9.1

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. (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]

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]

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. (1) to enable the firm to meet all of its commitments; and
2. (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]

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]

11.1

[Deleted.]

11A.1

Where alternative valuation methods are used, a firm must:

1. (1) identify the assets and liabilities to which that valuation approach applies;
2. (2) justify the use of that valuation approach for the assets and liabilities referred to in 11A.1(1);
3. (3) document the assumptions underlying that valuation approach;
4. (4) assess the valuation uncertainty of the assets and liabilities referred to in 11A.1(1); and
5. (5) regularly compare the adequacy of the valuation of the assets and liabilities referred to in 11A.1(1) against experience.

11B.1

1. (1) A firm must validate the calculation of technical provisions, in particular by comparison against experience as referred to in 4.4 and Technical Provisions 13, at least once a year and when there are indications that the data, assumptions or methods used in the calculation or the level of the technical provisions are no longer appropriate.
2. (2) The validation referred to in 11B.1(1) must cover the following:
   1. (a) the appropriateness, completeness and accuracy of data used in the calculation of technical provisions as set out in Technical Provisions - Further Requirements 4;
   2. (b) the appropriateness of any grouping of policies in accordance with Technical Provisions - Further Requirements 19;
   3. (c) the remedies to limitations of the data referred to in Technical Provisions - Further Requirements 5;
   4. (d) the appropriateness of approximations referred to in Technical Provisions - Further Requirements 6 for the purposes of calculating the best estimate;
   5. (e) the adequacy and realism of assumptions used in the calculation of technical provisions for the purposes of meeting the requirements in Technical Provisions - Further Requirements 7 to 11;
   6. (f) the adequacy, applicability and relevance of the actuarial and statistical methods applied in the calculation of technical provisions; and
   7. (g) the appropriateness of the level of the technical provisions as referred to in Chapter 14 of the Technical Provisions Part necessary to comply with the firm’s technical provisions as set out in Technical Provisions 2.1 to 2.3.

11B.2

For the purposes of 11B.1(2)(d), a firm must assess the impact of changes in the assumptions on future management actions on the valuation of the technical provisions. Where changes in an assumption on future management action have a significant impact on the technical provisions, a firm must be able to explain the reasons for this impact and how the impact is taken into account in its decision-making process.

11B.3

A firm must ensure that the validation referred to in 11B.1(1) is:

1. (1) carried out separately for homogeneous risk groups.
2. (2) carried out separately for the best estimate, the risk margin and technical provisions calculated according to the market value of financial instruments which reliably replicate future cash-flows in accordance with Technical Provisions - Further Requirements 22.
3. (3) carried out separately for technical provisions where the matching adjustment is applied.
4. (4) in relation to the best estimate, carried out separately for the gross best estimate and amounts recoverable from reinsurance contracts and special purpose vehicles.
5. (5) in relation to general insurance and reinsurance obligations, carried out separately for premium provisions and provisions for claims outstanding.

11C.1

A firm must ensure that it documents the following processes:

1. (1) the collection of data and analysis of its quality and other information that relates to the calculation of technical provisions;
2. (2) the choice of assumptions used in the calculation of technical provisions, in particular the choice of relevant assumptions about the allocation of expenses;
3. (3) the selection and application of actuarial and statistical methods for the calculation of technical provisions; and
4. (4) the validation of technical provisions.

11C.2

For the purposes of 11C.1(1), the firm must ensure that the documentation includes:

1. (1) a directory of the data used in the calculation of the technical provisions, specifying their source, characteristics and usage;
2. (2) the specification for the collection, processing and application of data referred to in Technical Provisions - Further Requirements 4.3(5); and
3. (3) where data is not used consistently over time in the calculation of technical provisions, a description of the inconsistent use and its justification.

11C.3

For the purposes of 11C.1(2), a firm must ensure that the documentation includes:

1. (1) a directory of all the relevant assumptions that the calculation of technical provisions is based upon; this must include assumptions on future management actions;
2. (2) a justification for the choice of the assumptions underlying the calculation of technical provisions;
3. (3) a description of the inputs on which the choice is based;
4. (4) the objectives of the choice and the criteria used for determining the appropriateness of this choice;
5. (5) any material limitations in the choice made;
6. (6) a description of the processes in place to review the choice of assumptions;
7. (7) a justification for the changes of assumptions from one period to another and an estimation of the impact of material changes; and
8. (8) the relevant deviations from assumptions about future management actions referred to in Technical Provisions - Further Requirements 8.2.

11D.1

A firm must have:

1. (1) effective systems and controls to ensure that valuation estimates of their assets and liabilities are reliable and appropriate to ensure compliance with the Valuation Part; and
2. (2) a process for regularly verifying that market prices or valuation model inputs are appropriate and reliable.

11D.2

A firm must establish, implement, maintain, and document clearly defined policies and procedures for the process of valuation, including the description and definition of roles and responsibilities of the personnel involved with the valuation, the relevant models, and the sources of information to be used.

11D.3

A firm must be able to, upon request by the PRA, undertake an external, independent valuation or verification of the value of material assets and liabilities.

11D.4

A firm must fulfil all of the following requirements:

1. (1) provide sufficient resources, both in terms of quality and quantity, to develop, calibrate, approve and review valuation approaches used for solvency purposes;
2. (2) establish internal control processes which include all of the following:
   1. (a) an independent review and verification on a regular basis of the information, data, and assumptions which are used in the valuation approach, its results, and the suitability of the valuation approach with respect to valuation of the items referred to in 11A.1(1); and
   2. (b) oversight by the persons who effectively run the firm of the internal processes for approval of those valuations and the process in place to take account of any external, independent valuation or verification of the value of material assets or liabilities.

11E.1

Where a firm engages in the activity of providing loans, it must ensure that it has written policies to ensure all of the following:

1. (1) that credit-granting is based on sound and well-defined criteria and that the process for approving, amending, renewing and refinancing credits is clearly established;
2. (2) that the firm has internal methodologies that enables it to assess the credit risk of exposures to individual obligors and at the portfolio level;
3. (3) that the ongoing administration and monitoring of the loan portfolios, including for identifying and managing problematic credits, and for making adequate value adjustments, is operated through effective systems; and
4. (4) that the diversification of the loan portfolios is adequate given the target markets and overall investment strategy of the firm.

11E.2

Where a firm engages in mortgage insurance (including reinsurance), it must base its underwriting on sound and well-defined criteria and comply with the requirements referred to in 11E.1 (2), (3) and (4) with regard to the mortgage loans underlying its insurance and reinsurance obligations.

11F.1

A firm must conduct adequate due diligence prior to making a qualifying infrastructure investment or a qualifying infrastructure corporate investment, including all of the following:

1. (1) a documented assessment of how the infrastructure entity satisfies the criteria set out in Solvency Capital Requirement – Standard Formula 3D2 and 3D3, which has been subject to a validation process, carried out by persons that are free from influence from those persons responsible for the assessment of the criteria, and have no potential conflicts of interest with those persons; and
2. (2) a confirmation that any financial model for the cash-flows of the infrastructure entity has been subject to a validation process carried out by persons that are free from influence from those persons responsible for the development of the financial model and have no potential conflicts of interest with those persons.

11F.2

A firm with a qualifying infrastructure investment or a qualifying infrastructure corporate investment must regularly monitor and perform stress tests on the cash-flows and collateral values supporting the infrastructure entity. Any stress tests must be commensurate with the nature, scale and complexity of the risk inherent in the infrastructure project.

11F.3

A firm should ensure that the stress testing considers risks arising from non-infrastructure activities, but the revenues generated by such activities must not be taken into account when determining whether the infrastructure entity is able to meet its financial obligations.

11F.4

Where a firm holds material qualifying infrastructure investments or qualifying infrastructure corporate investments, it must, when establishing the written procedures referred to in 2.4(1) include provisions for an active monitoring of such investments during the construction phase, and for a maximisation of the amount covered from such investments in case of a work-out scenario.

11F.5

A firm with a qualifying infrastructure investment or a qualifying infrastructure corporate investment in bonds or loans must set up its asset-liability management to ensure that, on an ongoing basis, it is able to hold the investment to maturity.

12.1

This Chapter applies to the Society and managing agents.

12.2

For the purpose of;

1. (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. (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) 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.

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.

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.

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. (1) a corporate member does not carry on any commercial business other than insurance business and activities arising directly from that business; and
2. (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.